GST or not?

[Glen]

I currently have an offer on a small commercial property, and was wondering whether it is necessary to purchase this property under a GST registered company, or not?

It is 9 x storage units, concrete prefab, alarmed, security fenced, secure tidy location returning $18,500 to $25,000 pa.

The current owner doesn't have it under GST, and we were going to do the same(if our offer is accepted), either under own own name or set up another LAQC.

We have another GST registered company which was set up a while back, but have yet to purchase any property through it. What would be the advantages in using this?

So,...is GST involved here or not?

I'd ask my accountant, but can't get hold of him.

Cheers, Glen.

[learner]

Hi Glen

I think you will find that:

1. If the income from the units is over $40,000 then the entity that buys it has to be GST registered; if it is less then it is voluntary

2. If the purchasing entity is GST registered then it can claim one-nineth of the purchase price from IRD, even if the vendor is not GST-registered

3. Your GST entity may then charge GST for its sales/services, and also claim back GST on its purchases and expenses

If it were me, I would purchase it under a GST-registered entity.

[[email protected]]

If you intend to treat it as commercial then you want it in a registered entity as everything is plus GST including rents. You will have to decide whether you are purchasing it as a going concern or whether your offer is plus GST or inclusive. There is a lot to be said for buying it and subsequently selling it in the future as a going concern as you won't have any GST on your profit.

I'd defintiely talk to your accountant before going unconditional.

[Julian]

Agree that you should get advice from your accountant.

If you are chose not to buy the property in a GST registered entity there may be some advantage, particularly if your customers are not businesses and not claiming the GST. If you are renting out to private individuals for storing their boat or whatever (rather than renting to companies who are storing their concrete mixers) you will have a price advantage over your GST registered competitors. ie If you charge $40 per week (no GST) and your opposition charge $40 p/w plus GST you will be at a $5.00 per week advantage to private end users. If some of your customers are GST registered they just won't be able to claim one ninth of the payment - make sure you tell them you're not GST registered - but in any case there will be no GST number on any invoices.

If you decide to buy another property and the combined rent of both companies exceeds $40,000 p/a you have the option of buying the second property into a different entity. In fact if all you did was buy storage units, and each group of storage units had an earning capacity below $40,000 p/a you could have a billion dollars worth of storage units and not charge a dollar of GST for any of them. Paperwork for hundreds of companies could prove to be a nightmare though!

Julian

[Glen]

Thanks for the replies guys! Great!

The reason I ask the question is that the agent is meeting with us tonight to discuss our offer.
The vendor had asked the question of how the offer was structured(GST or not?), which I guess will affect his acceptance of the offer or not?!

I think that if the vendor has accepted our offer, then I will just put it under my name or start a new LAQC.

Looking forward to any more suggestions,..thanks!

[spurner]

My advice would be to stay away from anything to do with GST, if at all possible. It can be expensive, time consuming and cause real problems. For what sounds like such a simple kind of tax, GST creates an abnormally high amount of confusion, incorrect claims, and hassles.

If you can buy it without needing to become GST registered, obtain GST documentation to obtain any refund due, account for GST on all rents, etc etc then that's what I'd do.

[Glen]

Anyone care to offer an opinion on this property then, with an average return pa of 22,000(could be 18k - 25k), with end purchase price of $245,000max.

Pretty neutral I know,....but worth a punt?? What ya think!

Come on,....let me have it!!

[OllyN]

Another View

I once tried to buy storage units such as you described and found one problem that I hadn't counted on.

The problem arose because as storage units with casual leases, getting a customary mortgage of 60-70% proved difficult.

The lenders took the view that the causal leases were not as secure as standard leases and in theory the returns could be far less in reality.

As a consequence the mortgage offers came in at 40% of notional value and I let the deal go.

Let us know how you get on in that regard.

[Perry]

Damn! My computer crashed. Whether or not it's a good deal
may depend upon just how you treat your proposed invest-
ment for GST purposes.

I don't agree that GST registration isn't worth the hassle.
Without making a too finer point of it, if a PI can't properly
manage GST matters, then I'd question why s/he was a PI.

My view is that if an asset depreciates (car) or if it appreciates
(building on land) has some influence on whether or not it should
be in a GST registered entity. Even if you would be 'competitive'
because of lower fees, because the property was in a non-GST-
registered entity, there remains the 'problem' of not being able
to claim the GST component of rates, insurance, R & M and so on.

There may well be no simple, one-size-fits-all answer. 'Stand back'
and appraise how it fits within the concept of your overall invest-
ment strategy. Having a mix of non-GST and GST registered prop-
erties does appear to allow choices. Choices which may well be
important to your personal wealth creation plan.

[tricky]

Hi Glen,
Are you going to make money by buying under the market value or the anticipated increase in rents?
Or another way to look at it is how long do you anticipate the figures being neutral and what will nudge them into your favour?

If there's strong tenant demand for these units over the next few years and no developer is building new ones then I'd say it's worth a punt.

[Julian]

If you hold the property in a non GST entity the GST you pay out for expenses is not claimed back, but the GST inclusive cost of your expenses is claimed against your income.

As the purpose of business is to make a profit you generally end up paying GST (loan costs are not subject to GST).

Regular GST returns are burdensome, and there is the temptation for some to spend the GST money in the account, especially if some emergency arises.

But I stand by my previous comment that the primary advantage is the competitive edge that it may give you in your pricing. Alternatively, if storage units are in demand in your area, and say the going rate was $40 + GST ($45) you might be able to get away with charging $45 and you would not have to give the last $5 to the tax woman. End user customers will not notice any difference in your pricing compared with your GST-registered competitor.

If all your tax affairs are handled by an accountant, you will reduce your accountancy costs, and you will incur less stress. As such your life will be happier, your wife will start to like you again, and the kids might even start calling you Dad once more. Doctors visits will be less, you will live longer, become a vegetarian, discover a cure for cancer, and be immortalised.

If I ever buy storage units, due to the nature of the end user, I will seriously consider setting up a separate non-GST company to own them in, assuming I'm not expecting earnings of more than $40,000 p/a.

Julian

[Perry]

Regular GST returns are burdensome, and there is the temptation for some to spend the GST money in the account, especially if some emergency arises.

At the risk of sounding like I'm speaking in
double-talk (which I'm not!) if a regular
GST return netted you $6k a year, would
it be regarded as burdensome?

Structures - an oft-covered matter on
PT Forums - are paramount. Looking at
this, that or the other thing in isolation,
can give skewed impressions.

[spurner]

Let's not forget that (if GST registered) 1/8th of all your income is automatically 'lost'.

If you were really getting $6k pa back from the IRD, it would mean you are losing a lot of money!

At the risk of sounding like I'm speaking in
double-talk (which I'm not!) if a regular
GST return netted you $6k a year, would
it be regarded as burdensome?

[Julian]

Glen can't claim GST on interest, because it's exempt (and as such he didn't pay any GST on his interest payments) and he can't claim it on depreciation because it's not money he has actually spent.

Perhaps there is something I'm missing, Perry, but can you explain how, in the above storage shed example, Glen might be better off (assuming most of his customers are private individuals as opposed to businesses).

For mathmatical ease lets say the gross income is $18,000pa. Lets also assume his gross (GST inclusive) business expenses are $9,000.

As I see it with the non GST route Glen pays income tax on $9,000 and that's it. At 33c in the dollar his total tax bill is $2970.

Being GST registered he pays $1000 of GST ($2,000 paid and $1,000 claimed back) then income tax on $8000 (33c in the dollar again) of $2640.

By my reckoning he is $670 better off not being GST registered. I'm no accountant so can you please tell me where I have got it so terribly wrong.

Julian

[Glenn]

Anyone care to offer an opinion on this property then, with an average return pa of 22,000(could be 18k - 25k), with end purchase price of $245,000max.

Pretty neutral I know,....but worth a punt?? What ya think!

Come on,....let me have it!!

There are heaps of these storage developments.
They all sound wonderful with 10% return which is a very common asking price. I suspect the actual development price is something like half to a third of the selling price.
The return is never anything like 10%.
Lots of new bees think that the income is the weekly rent on each unit multiplied by the number of units.
I have a few rats and mice storage units.
When you are dealing with small numbers of units it is hard to get marketing traction.
The return is reduced by long vacancy times between paid occupancies, hi defaults that can become anightmare to sort out, and the issue of what to do with abandoned goods.
I once had a shipping container full to the brim of shredded paper.
It took me weeks to empty it. After a run in at the transfer station about how much I had to pay to dump it there I burnt it all in a 44 gal drum on site. I just kept throwing bales of the stuff on the burning heap for weeks. The car factory next door would have loved it.
Then you have to learn to live with car do it uppers and idiots who want to live in the place.