When a buyer intends to buy a non-residential property, he needs to know about the various taxes that he is required to pay (this has been covered in earlier articles). In this article, we will focus on the comparison of the purchase of non-residential property in the name of an individual vs in the name of a company.
1. Basic Stamp Duty
The Basic Stamp Duty payable is the same regardless of the status of the owner. It ranges from 1% to 4% depending on the value of the property.
2. Goods and Services Tax (GST)
If the seller of the property is GST registered, the buyer will have to pay GST on the purchase. Quite often, the buyer will register for GST before he purchases the property. This is to ensure that the buyer can claim the GST paid on the purchase of the property. When the buyer is an individual, registration of GST is often overlooked due to lack of advice. Furthermore, if the individual is registered for GST, he will have to charge GST on his other income, in addition to the rental income.
If the buyer is a company, the accountant of the company will advise accordingly.
The purpose of registering for GST is to claim back the GST paid on the purchase. This amount can be substantial as the rate of GST is currently 7%. If the property is valued at $1 million, the GST applicable will be $70,000.
3. Income Tax on Rental Income
If the buyer is an individual, the net rental income is taxable on him depending on his tax status. If the individual is a resident individual, the net rental income is added on to his other income and taxes will be imposed based on a progressive rate of 0% to 22%. If the individual is a non-resident individual, the net rental income is taxable based on flat 22%. If the buyer is a Private Limited company, then the net rental income is taxed at a maximum corporate tax rate of 17%. As a Private Limited company, there is usually partial exemption of part of the assessable income from tax as well as tax rebate on the tax payable.
4. Sale of Property vs Sale of Shares
When the owner is an individual, he can only sell the property that he owned. But if the owner is a Private Limited company, he can either sell the property or sell the shares in the company.
To the buyer, he may prefer to buy the shares in the Private Limited company than to purchase the property. Several reasons contribute to this approach. First, the stamp duty payable for the purchase of shares is only 0.2% whereas the stamp duty payable for purchase of property is 1% to 4%. Secondly, the time taken is much shorter to purchase the shares than to purchase the property. The usual time taken is about one month for purchase of shares whilst it takes about 12 weeks for purchase of property. Thirdly, GST can apply for sale of property whereas GST is not applicable for sale of shares.
5. Seller Stamp Duty
If the property is non-residential and non industrial, then there is no Seller Stamp Duty. But if the property is a residential or industrial property, Seller Stamp Duty is payable by the seller of the property if he sells within three years of purchase. If the owner of the industrial property is a Private Limited company and if he sells the shares in the company, there will be no Seller Stamp Duty.
In conclusion, it may be more feasible to explore buying a non-residential property in the name of a company.
I hope this has been a useful read and can help you to better advise your clients about their real estate and financial planning needs.