Insurance – Do I need it?

One of the most frequently asked questions I get from prospective shop owners is around the owner’s responsibility regarding building and public liability insurance. They include:

 

  • Should I insure a property the moment I sign the contract?
  • Should I wait until settlement, in case the vendor already has it insured?
  • What are my legal obligations?

 

The Engines of Wealth team are pleased to provide answers to these burning questions from an industry expert, Sean Bemrose, Managing Director of Tony Bemrose Insurance Brokers (TBIB). As current or future owners of commercial retail shops you need to be aware of your rights and potential risk exposure when it comes to building and public liability insurance.

 

Let us start with the buyer’s responsibility for building insurance on a new shop purchase. Most understand that building insurance is needed after settlement, but what about pre-settlement? For Queensland properties the buyer assumes legal liability and responsibility for the property from 5pm on the next business day after signing the Contract of Sale for a property. This is defined in QLD Property law (Act 1974) and outlined in the standard terms of the REIQ Contract of Sale. Note, this timing differs in other states, so you need to check the contract. This timing indicates the start of the buyer’s risk and the reduction of the seller’s responsibility for the property.

 

Now the area of contention comes if the property is damaged between the date the contract goes unconditional and final settlement. Many are surprised to know that in this period the seller is not liable to damages, it is the buyer! Note, in this situation the buyer cannot pull out of the purchase of the property nor can they seek to reduce the contract price. Furthermore, the buyer is potentially liable to pay compensation to an injured third party should they be injured on the property.

 

Shaun Bemrose shared a few experiences where the property being purchased was damaged by a fire or storm event before settlement of the contract. In these cases, his clients had arranged building insurance on the signing of the contract, thus providing risk coverage for the buyers to cover the property repairs and legal costs. Given settlement can take months to finalise, this is a reassuring policy to have.

 

The next item of potential risk for the buyer is relating to public liability claims. Your risk and exposure begins from the day you sign the contract of sale until you sell the property, many years later. Now most of us assume that the tenant has their own public liability insurance, in most cases this is mandated in their lease. The buyer during the contracting period and after settlement is also exposed to public liability claims where a tenant or occupant of the property is injured at the property. Note such liability could be greater than the value of the property to be purchased, so insurance is highly recommended.

 

Digging deeper into the nuances of liability, some may feel at ease given their commercial shops are part of a strata. They believe the Body Corporate insurance plus the tenant’s liability insurance policy provides them with full insurance protection against liability claims. However, the law indicates that an injured third party can seek compensation from any party which may be connected to the property and injury event. That is the tenant, seller or buyer.

 

 

The Body Corporate would as a rule have in place property and public liability insurance that covers the building and all common areas of the property, eg. walkways and toilets. It is a standard commercial leasing requirement for the tenant to take out public liability insurance and glass insurance for the shop’s internal areas. The landlord should sight this insurance policy and have on file the tenant’s insurance certificate of currency. Also, the owner should be listed on the tenant’s policy as an interested party to maximise their coverage. For most situations of injury, the buyer is covered, but there are cases where the buyer is not coverage and should therefore have his or her own policy.

 

If a circumstance arises where a third party is injured in the shop and that injury arose from flooring, plumbing, air conditioner or an electrical connection supplied by the owner, then the current landlord or buyer may be the subject of a legal lawsuit for damages – not the tenant. Landlord’s public liability insurance would cover any legal costs incurred responding to a claim, payment of a legal defence and potentially cover the payment of any compensation awarded to the injured party.

 

Another situation is if the shop becomes vacant, obviously the landlord loses the protection of a tenant’s liability insurance cover after they depart. The only way for a shop owner to mitigate this risk is to take out a liability insurance policy in their name.

 

Most REIQ leases provide a legal obligation that the tenant takeout public liability insurance, this may have lapsed or not be present when you settle. As the shop purchaser and future owner, it is wise to take out insurance to protect your interest from the date you sign the Contract of Sale. Remember, in most cases the owner’s insurance costs become an outgoing and can be passed onto the tenant, so why wouldn’t you have it?

 

With all of this in mind, the most important takeaways are;

  • Under Queensland Law, from the date you sign the contract you have a legal liability for that property and,
  • Insurance for the property should be taken out on the date you sign the contract
  • You need your own Public Liability Insurance regardless of the fact the tenant also has a public liability policy

 

Personally, I use Tony Bemrose Insurance Brokers (TBIB) to cover my properties and can thoroughly recommend them, if you need advice on your insurance needs contact Tony Bemrose Insurance Brokers on:

 

Phone:  07 3252 5254

Email:    www.tbib.com.au

 

 

Special thanks to Sean Bemrose Managing Director TBIB for his insights on this subject and for the outstanding support he has provided our Engines of Wealth customers.

 

 

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TO BE OR NOT TO BE, GST REGISTERED?

There are several questions I am often asked as a long-term owner of retail shops:

 

  1. Will GST be applied to the purchase of a commercial property?
  2. Should I be registered for GST?
  3. Will I need to charge my tenant GST on their rent and outgoings?

 

The source of my reply comes from many conversations I have had with my accountant, Ian Marsh[1]. I have summarised our discussions on the requirement to be registered for GST for a particular transaction:

 

The application of GST is dependent upon the vendor selling the shop. If the owner is currently registered for GST and has been charging the tenant GST in the monthly invoices, then GST is applicable on the sale of the shop. In this case you, as the buyer, are required to be registered for GST. Now there is a twist, hypothetically the owner selling the property to you would charge you GST, you would pay the GST on settlement and then claim it back on your BAS statement, sort of pointless right? Well the Government acknowledges this pointless transaction and hence allows an asset to be sold as “The Supply of A Going Concern”, thus negating the need to charge and claim back GST on the sale.

 

The indicator that the current owner is registered and charging GST is in the Contract of Sale, the seller will have ticked the box “Sold as a Going Concern”. If the seller has ticked this box they are declaring that they are registered for GST and have been charging GST to the tenant. Another idea is to check with the tenant directly, call them and ask if they have been paying GST on their monthly invoice. Your solicitor will also tell you if GST is applicable to the transaction and what GST status the seller has indicated on the contract of sale.

 

For you to avoid paying GST on the sale of the property and benefit from the Government’s GST exemption on the “The Supply of a Going Concern”, you also need to be registered for GST. To do that you will need to have an Australian Business Number (ABN) and ensure that ABN is registered for GST. My advice here is to contact your accountant and review the purchase with them, if you don’t already have an ABN your accountant can easily request one and register it for GST.

 

Like most things tax related, there is another twist. You may have heard that if the rent collected from all your commercial properties is less than $75,000 per year, then you are not required to register for GST. Thus, saving you the hassle of preparing and submitting a quarterly BAS statement. Well, unfortunately this threshold doesn’t apply if the seller you are buying the property from is already registered for GST and has been charging GST. In that situation you need to also be registered for GST to avoid paying GST on the sale, unfortunately once you are registered for GST there’s no going back, you need to charge GST to the tenant and submit a quarterly BAS statement moving forward.

 

The other point to understand is the $75,000 threshold is cumulative, it’s not per shop. If the sum of the annual rents from all of your properties is less than $75,000 per year, then you may not be required to be registered for GST in the situation where the seller is not GST registered. In the case where the seller and buyer are not required to be registered for GST and the rent collected is less than $75,000 per year, the transaction is deemed to be GST free and this should be noted on the Contract of Sale.

 

It is also important to note that the Australian Tax Act requires you to have a formal agreement in place between the Seller and Purchaser, signed by both parties clearly stating that the transaction is the supply of a going concern and GST free. This agreement is required in addition to the Contract of Sale.

 

Now as we mention in our book, Engines of Wealth -Commercial Retail Shops, we do not like buying properties that are vacant. If one was to buy a vacant property then under the Governments definitions it would not be considered “The Supply of a Going Concern” and GST would be applicable to the sale. The reason for this is that there is no current lease in place for the property.

 

The key message here is that It is critical to check with your solicitor on the GST status of the seller and what they have marked in relation to GST in the Contract of Sale, then review that advice with your accountant. At present the GST rate is 10%, so on a $500,000 property this equates to $50,000, a sizeable amount for an investor. You need to be extremely diligent and ensure your accountant and solicitor advise you on the GST status of a property transaction, it could save you thousands of dollars.

 

[1] It should be noted that the purpose of this article is not to provide you financial advice but merely to highlight the key points you should discuss with your solicitor and accountant in relation to GST and purchasing a property.

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