Funding GST payable on a commercial property purchase

The GST timing gap

On a taxable sale of commercial property, GST is added to the price and paid at settlement. A buyer registered for GST can usually claim it back as an input tax credit, but only through a business activity statement lodged after settlement. Between the day the GST is paid and the day the credit arrives, the buyer is out of pocket by a substantial sum.

For a buyer whose lender funds only the GST-exclusive price, this creates a cash requirement at settlement that has to be met from somewhere. A short-term secured loan is a common way to meet it.

When GST applies and when it does not

This is a summary only; always get advice on your contract.

Treatment	What it means for the buyer
Taxable supply	GST added to the price, payable at settlement; credit claimable if registered and entitled
Going concern	GST-free if the ATO’s conditions are met, including written agreement and the enterprise continuing to the day of supply
Margin scheme	GST calculated on the margin rather than the full price; the buyer generally cannot claim a credit for GST under the margin scheme
Input-taxed supplies such as some residential premises	Different rules apply

The ATO publishes detailed guidance on property and GST, including the going concern requirements and the margin scheme. Your conveyancer and accountant should confirm the treatment before you exchange.

How a GST loan works

A short-term secured loan provides the GST amount at settlement. It can be secured over:

• another property you own, as a second mortgage or caveat
• the property being bought, behind the main lender, if the main lender agrees

Interest can be prepaid or added to the loan. When the input tax credit is refunded, it repays the loan.

Ask about funding GST at settlement once you know whether GST applies to your contract.

Planning the refund

The timing of the refund depends on your reporting cycle. A business that reports monthly may receive its credit sooner than one reporting quarterly. Some businesses change their reporting period to speed up a large refund; talk to your accountant about whether that suits you. Set the loan term to cover the expected refund date with a buffer for processing and any ATO review of a large claim.

An illustrative GST loan

Illustrative only. A furniture retailer buys a showroom building from an investor. The sale is a taxable supply, so GST is added to the price. The retailer’s bank funds the GST-exclusive price at its standard LVR. The retailer uses a caveat loan over the owners’ investment unit to fund the GST at settlement, with interest prepaid for four months. After lodging its next activity statement and receiving the credit, the retailer repays the loan and the caveat is withdrawn.

GST and duty together

Commercial buyers often face GST and transfer duty at the same settlement. Duty may be calculated on a GST-inclusive amount in some cases, so check with your conveyancer. One secured loan can cover both, with the GST portion repaid from the credit and the duty portion from a refinance or cash flow. See stamp duty funding.

Mistakes to avoid

• assuming a sale is a going concern without the written agreement and conditions in place
• forgetting that a margin scheme purchase may not give rise to a credit
• setting a loan term that ends before the refund realistically arrives
• not registering for GST, or registering too late, where registration is required

Questions to settle before exchange

• Is the seller registered for GST, and is the sale a taxable supply, a going concern or under the margin scheme?
• Is the contract price stated as GST-inclusive, GST-exclusive or plus GST?
• Is the buyer registered for GST and entitled to claim a credit for this acquisition?
• What will the main lender fund, and does it include the GST component?
• When will the next activity statement be lodged, and when is the refund likely?

Clear answers to these five questions tell you whether a GST loan is needed and how long it should run.

When a going concern sale falls over

Sometimes a sale intended to be a going concern does not meet the conditions on the day, for example because a lease ends or the enterprise stops operating before settlement. GST may then become payable unexpectedly, and the buyer has to find it quickly. A short-term secured loan is often the fastest way to cover this and keep the settlement on track. Your adviser should review the position as soon as there is any doubt.

Make GST a timing issue, not a deal-breaker

GST on commercial property is usually temporary money, but it still has to be found on settlement day. Tell us the purchase price, the GST amount, the settlement date and the property you can offer as security, and a specialist will confirm whether a short-term loan fits. There is no credit check when you first enquire, your details are not passed on, and having your adviser’s view of the GST treatment makes the answer quicker. Discuss GST funding.