GST on renting out of a residential property

[smallscale]

I am intending to rent out a residential house to a business that will use it for their business offices. They will not use the place for anyone to live there.

Do I need to charge GST on the rent and, if so, do I need to register for GST?

 

[D.T.]

Firstly is the property zoned appropriately to allow a business to operate from there?

If yes, then there is GST involvement. You're best to seek personal advice on whether you register and how you handle it.

 

[dan c]

How much is the annual rent?

If the turnover of the entity that owns the house is less than $75,000, then you don't need to be registered for GST.

The $75,000 figure does not include wages, interest, dividends or input taxed supplies such as residential rent.

 

[smallscale]

I own the house as an individual taxpayer, and the rent would be less than $75,000 pa. The zoning does allow commercial activity.

 

[Paul@PFI]

Residential rent is NEVER subject to GST (there are some unusual special exceptions where the rents are commercial in nature but lets ignore that as it applies to places like caravan parks, relocatable villages etc).

Residential rents are input taxed. This means you don't charge GST and don't collect it. AND you cant claim any GST incurred. There is no threshold as its not a issue at all.

In your example its the USE of the property that determines if GST applies. Its now commercial rent if its used as a office. Provided rent is under $75K pa you don't need to register and wont charge it. You will need an ABN. You will need to issue invoices that comply with GST rules but will not charge GST.

You may choose to register. In that instance GST will be charged and you can claim any (limited !!) GST on costs you incur.

 

[smallscale]

Hi Paul, thanks. The distinction between residential and commercial property in this instance isn't clear to me. The business that might rent the house for their offices I believe is a limited liability company. I presume that they would be claiming the rent as a business expense. Would this arrangement meet your definition of 'residential rents'? Is it your opinion then that I don't add GST to the rent?

Oops - sorry Paul - somehow I missed your third paragraph. From that I understand then that I'll need to get an ABN (I guess for invoicing the rent), and not charge or collect GST.

 

[Paul@PFI]

Hi Paul, thanks. The distinction between residential and commercial property in this instance isn't clear to me. The business that might rent the house for their offices I believe is a limited liability company. I presume that they would be claiming the rent as a business expense. Would this arrangement meet your definition of 'residential rents'? Is it your opinion then that I don't add GST to the rent?

Ignore who rents it. Company has zip to do with the issue. Its how it is used that determines if GST applies. If its business USE then GST MAY apply if you are either registered voluntarily or required by law. The turnover test is $75K. . If its not used as residential housing accommodation its subject to GST esp if the tenant is registered for GST also. That evidence of business use. I have a client a Dr who owned a house. Rents it to her medical practice. That rent is subject to GST as the house is used as a medical practice. Its still a house and could be renovated back to a normal cottage after her practice ceases.

I believe GST applies however there may be some decisions to make on how you address that. You should seek personal tax advice. Remember if you charge GST you should add that to the "base" rent. In theory GST free residential rent will be 9.09% cheaper (trust me its not 10%). Have you given them a lease and ignored GST ?? You may be obliged to remit 1/11th of the rent yet you aren't charging it. Again depends on amount of rent etc.

 

[smallscale]

Thanks Paul, that's a good explanation.

The place hasn't been leased yet, it's all still early stages. If I've understood it all it appears that I would need to:

1. Get and ABN
2. Add GST to the rent
3. Remit the GST collected to the ATO (I would be providing the 'service', GST would charged on that service and sent to the ATO by me, and the tenant (company) would include the GST paid in their BAS.).

Thanks for your contribution.

 

[dan c]

Thanks Paul, that's a good explanation.

The place hasn't been leased yet, it's all still early stages. If I've understood it all it appears that I would need to:

1. Get and ABN
2. Add GST to the rent
3. Remit the GST collected to the ATO (I would be providing the 'service', GST would charged on that service and sent to the ATO by me, and the tenant (company) would include the GST paid in their BAS.).

Thanks for your contribution.

Not quite. The main thing to remember is that if the rent is less than $75,000, you don't need to register for GST.

Make sure the lease states that there is no GST on the rent, and you will save yourself the hassle of filling out a BAS form every three months and sending money to the ATO.

 

[smallscale]

Well the 'not quite' is important, because the rent would be less than $75k. So GST would not be applicable to the transaction.

It's all a bit much for an old lay person!

Thanks again.

 

[Scott No Mates]

2. Add GST to the rent

Not going to happen unless the rent + gst = the same rent payable on a similar property.

A tenant is not going to cough up more just because you have to pay GST (PS you're already absorbing it in what you are paying anyway as some but not all your expenses include gst eg maintenance but not rates/water).

 

[smallscale]

Based on the comments so far the crux of it seems to be that it is a commercial rental, but because in this case the rent would be below $75k then GST would not be charged on the rental.

However, I read elsewhere that seemed to imply that the $75k test in this case would apply to my personal taxable income - and not the rent charged. That is, if my personal taxable income was more than $75k then I should be registered for GST, and GST should be charged on the rent. Alternatively, if my personal taxable income was less than $75k then GST should not be charged on the rent.

 

[Paul@PFI]

Based on the comments so far the crux of it seems to be that it is a commercial rental, but because in this case the rent would be below $75k then GST would not be charged on the rental.

However, I read elsewhere that seemed to imply that the $75k test in this case would apply to my personal taxable income - and not the rent charged. That is, if my personal taxable income was more than $75k then I should be registered for GST, and GST should be charged on the rent. Alternatively, if my personal taxable income was less than $75k then GST should not be charged on the rent.

Incorrect. Just the income from taxable supplies made in the course on an enterprise are considered. ie the rent. eg So don't sell the tenant some plant & equipment as that might add to the turnover test. And if they damage something make them pay rather than invoicing them for the cost.

 

[smallscale]

Thanks again Paul for your valuable input - I could easily blunder walking through this minefield - and I'd be unlikely to get a second chance with the ATO.

 

[dan c]

Thanks again Paul for your valuable input - I could easily blunder walking through this minefield - and I'd be unlikely to get a second chance with the ATO.

That's why it's so crucial to get good advice before, for example, signing a lease. Many people think they'll save a few bucks and not bother the accountant / lawyer, but in many cases it ends up costing them more money and creates more headaches in the long run.

 

[Paul@PFI]

Thanks again Paul for your valuable input - I could easily blunder walking through this minefield - and I'd be unlikely to get a second chance with the ATO.

I hope it demonstrates the benefit of a adviser who you can call on when these issues arise. DIY mistakes avoided.

 

[smallscale]

Paul & Dan - Yes & Yes - Thanks

 

[Rob G.]

Hope you are not relying on the 6 year absence rule to access the CGT main residence exemption.

 

[smallscale]

Interesting Rob - what would be the problem if I was? In any event, it is a pre 1985 purchase.

 

[D.T.]

Interesting Rob - what would be the problem if I was? In any event, it is a pre 1985 purchase.

Commercial use of property may ruin your eligibility