David Busoli, principal of SMSF Alliance, stated that SMSFs holding commercial property with rental income of at least $75,000 must register for GST. Additionally, funds purchasing commercial property and wishing to recover the embedded GST instead of adding it to the property’s cost base must also register.
“SMSFs that aren’t registered for GST do not receive income which includes GST. They merely receive income,” Busoli said.
“Once registered, some income, notably rental income on commercial property, will include GST, which must be remitted to the ATO. The net effect is zero as what is collected is remitted. Expenses are different.”
He continued that most SMSF expenses contain GST, and if the SMSF is not registered, the GST merely forms part of the expense item that is tax-deductible to the fund to the same extent of an expense item.
However, he added that after registration, the treatment of GST varies with the expense type.
“GST on commercial property acquisition and expenses is 100 per cent refundable, while other expenses are either 75 per cent GST refundable, such as brokerage fees, or non-refundable, such as audit fees,” he said.
“Any refunds will affect the tax deductibility of the expense. In general, however, there is no advantage for an expense level of $2,300 including GST. Over this, there is a wealth advantage of about $65 per $1,100 expense including GST for an accumulation fund and $75 for a pension fund.”
He said that if an SMSF wishes to register, the ATO has advised that registration must occur within 21 days of the operative date to avoid penalties.
“A side issue that could arise for a fund holding commercial property that has not previously registered is that GST must now be paid on the rent. This provision should have been included in the lease agreement but may have been missed,” he said.
“The SMSF will require the tenant to increase their payment by 10 per cent, and though the tenant will be able to offset this against their BAS bill, it could involve an interesting conversation.”
Busoli concluded that it is important to note that the ATO will regard GST to be embedded in the rental the fund receives, irrespective of whether the tenant pays the additional payment or not.
“If this scenario applies, the details need to be worked out with the tenant before the SMSF registers,” he said.
