There are many fundamental differences between investing in residential properties versus any other property segments.  Some of the common key differences are:
  • Goods and Services Tax (GST) and company ownership
  • CPF can only be used for residential projects
  • Higher loan interests imply higher risks
  • Difficult to get comparable data
  • Lease contracts and tenancy agreements
  • Interior design and furnishings
  • Tenants are 'Trouble-free' corporations
GST company ownership
This is pretty straight forward: if you purchase a non-residential property from a seller that is GST-registered, you have to pay GST to the seller such that the seller can pass the GST on to the inland Revenue Authority of Singapore (IRAS). As a buyer, if you were GST-registered (yes, even individuals can be GST-registered if you choose to be), you can settle your GST expenses against your GST collection and claim the excess back from the IRAS. Residential properties are exempted from GST, so even if the seller were GST-registered, like most developers are, there would be no need for buyers to pay GST to the seller.

Hence, as a buyer or as a buyer's representative agent, it would be important to enquire if the seller is GST-registered. If so, does the price quoted include GST? In general, the quoted asking prices exclude GST. Furthermore, if there were existing tenants, do ask if the rentals are being quoted with or without GST. This will help us under cash-on-cash returns better. If a company held the property, and the buyer is buying the company's shares, then there will be no GST on the transaction as share are also exempted from GST.

Things start to get complicated in situations such as the resale of 2-storey Housing & Development Board (HDB) shops or conservation shops with residential component. If the seller is GST-registered, then the buyer has to pay GST on the value of the commercial space (ground floor) but is exempted from paying GST on the second floor Living Quarters (LQ) even if a change of use has been approved. 

And then we have the perennial question of, should I set up a company to invest in this property? The standard reply to this usually leans towards a YES but it is dependent on each investor's current financial situation. Investors should consider whether the small additional costs of maintaining an investment holding company as well as the regulatory compliance required of company directors would be more than made up for by savings in their personal income taxes. The investment properties already attract a 10% property tax and then any surpluses from rental income add to the personal income tax, which could go up to 20% for those at the top tax bracket. There are pros and cons to each decision and the details go into the nitty-gritty such as tax exemptions for new companies, whether the new company should be GST-registered, the GST impact on the rentals of the SMEs tenant or start-up tenant, term loans with director's personal guarantees.

For more information on prudent investment in commercial properties, be sure to check regular updates from Rent Office Singapore.