Access advice to guide your steps
Since the 2026–27 Federal Budget quarantined negative gearing losses on established residential properties, a narrative has started circulating in property investor circles: just buy commercial instead.
On the surface, it sounds logical. Commercial property is explicitly excluded from the new rules. Your losses still offset your wages. The tax benefit is intact. Problem solved.
Before you redirect your investment strategy based on a headline, here’s what you actually need to understand about how commercial property works, and why the rules that make it attractive on paper can quietly destroy your returns in practice.
This is the one that catches people out most often, and it deserves to go first.
The GST treatment of a commercial property purchase depends entirely on what you’re buying, and the difference is significant.
If the property is already leased and being sold as a going concern, meaning it’s a functioning rental business being transferred to you, the sale can be GST-free, provided both parties are registered for GST and the going concern conditions are properly documented in the contract. No GST on the purchase price, no timing problem, no cash shortfall at settlement.
This is the cleaner scenario. But it requires the property to be legitimately tenanted at the time of sale, both vendor and purchaser to be GST-registered, and the correct contractual treatment to be in place. Get any of those wrong and the GST-free treatment falls away.
If the property is vacant; which is common when buying in the sub-$1M strata industrial market, where small business owners frequently sell after outgrowing or exiting, GST is payable on the purchase price. On a $700,000 warehouse, that’s $70,000 landing at settlement.
Here’s the critical detail: you cannot borrow the GST component.
Your lender values the property at $700,000 and lends against that figure. The $70,000 GST must come from your own cash at settlement. That’s a significant liquidity requirement on top of your deposit, stamp duty, and legal costs.
Once you own a vacant commercial property and go to lease it, you face a choice: do you register for GST and charge it on the rent, or not?
For most small investors buying a sub-$700,000 strata warehouse, the annual rent will sit well below the $75,000 GST registration threshold. That means GST registration isn’t compulsory; it’s optional.
If you register, you charge GST on the rent and can claim back your input tax credits (including, eventually, the GST you paid on purchase). But your tenant now pays 10% more in rent, which matters for attracting and retaining small business tenants who may not themselves be GST-registered and can’t claim it back.
If you don’t register, the rent is GST-free, you’re more competitive on headline rent, but you forgo any input tax credit recovery on your purchase and ongoing costs.
Neither answer is automatically right. It depends on the likely tenant profile, the holding period, and your broader tax position, and it’s a decision worth making deliberately rather than by default. For a first-time commercial investor, the GST complexity alone can derail the finance structure entirely.
Residential property investors are accustomed to a relatively accessible lending market. Commercial is a different world.
Deposit requirements: Most lenders require 30-35% for commercial property, compared to 10-20% for residential. On that same $700,000 warehouse, you may need $210,000-$245,000 in equity, before the GST cash requirement on top.
Interest rates: Commercial loans typically carry higher interest rates than residential investment loans, often 1-2% higher, sometimes more depending on the lender and the asset. That gap has a significant impact on your carrying cost and how deeply negative your gearing position actually is.
Loan terms and conditions: Commercial loans are often shorter (15-20 years vs 30 years for residential), can include balloon payments, and are subject to more stringent annual reviews. If your tenant vacates and the property sits empty, your bank will want a conversation.
Serviceability assessment: Lenders assess commercial property income more conservatively, often applying higher vacancy allowances in their own stress testing. The same income that helps you comfortably service a residential loan may not pass muster on a commercial deal.
In residential property, a vacant property is an inconvenience. You might be without rent for 2-4 weeks between tenants, maybe 6–8 weeks in a softer market. It’s painful but manageable.
In commercial property, vacancy is an existential risk to your cash flow.
Commercial tenancies are not weekly or monthly. They are typically 1, 2, 3 or 5-year leases. When a tenant leaves, you are not re-leasing in two weeks. You are engaging a commercial agent, waiting for enquiry, negotiating heads of agreement, preparing a formal lease, and potentially contributing to a fit-out incentive to secure the tenant. In a subdued market, this process commonly takes 3-6 months. In a difficult market, longer.
During that entire period, you are paying your mortgage, your rates, your land tax, your insurance, and your body corporate fees; with zero income coming in.
To put real numbers on it: a warehouse purchased at $700,000 with a 5.5% net yield generates roughly $38,500 per year in rent. Four months of vacancy wipes out $12,800, more than 33% of your annual income, gone before you’ve even started year two.
And when you do re-lease? You may not get the same rent. If market conditions have softened, your new tenant may negotiate a lower face rent, a rent-free incentive period, or a fitout contribution from you. All of that erodes the yield you underwrote the investment on.
Commercial properties are typically quoted on gross yields; sometimes even before outgoings. A 6% gross yield on a $700,000 warehouse sounds more attractive than a residential property yielding 3.5%. But once you account for all the costs that fall to the landlord, the picture changes.
Under a gross or semi-gross commercial lease (common in smaller strata properties), the landlord may be responsible for:
– Council rates
– Water rates
– Land tax
– Insurance (building)
– Body corporate / strata levies
– Property management fees (typically 7-10% of rent in commercial)
– Maintenance and repairs
Net down a 6% gross yield by these costs and you may land at 4-4.5% net in a good year; and considerably less if there’s any vacancy at all.
At that point, the yield premium over residential has compressed significantly, and you’re carrying substantially more risk to get there.
Residential tenants are governed by residential tenancy legislation. There are rules about how much notice you can give, what you can charge for, and how disputes are resolved. The framework broadly protects both parties and creates a relatively predictable environment.
Commercial leases are negotiated contracts. There is no standard protections framework in the same way. When a commercial tenant vacates, breaks a lease, or enters administration, and it happens, your remedies can be complex, expensive, and slow.
Shorter leases compound this. A 2-year lease means you’re back at the re-leasing negotiating table every 24 months. For a small suburban warehouse, that’s a significant amount of management effort and cost for what might be a modest net yield.
Commercial property absolutely has a place in a well-structured portfolio. But the scenarios where it genuinely works tend to look like this:
Owner-occupier leaseback: You own the property through a separate entity (often a SMSF or a family trust) and your business pays rent to that structure. The vacancy risk is effectively eliminated because you are the tenant. The rent is a tax-deductible business expense. The property grows in value as the business grows. This is a fundamentally different risk profile to being a passive investor waiting for a third party to renew.
Experienced investors with strong balance sheets: Those who understand commercial markets, have relationships with commercial agents, can absorb extended vacancy without financial distress, and are buying on fundamentals rather than tax narrative.
Large-scale or institutional-grade assets: Longer leases, stronger tenants, greater lease covenant security. The risk profile at the top end of the market is very different to a 70m² strata warehouse in an outer suburban industrial estate.
The Government’s decision to quarantine negative gearing on established residential property while leaving commercial untouched wasn’t an oversight, it was deliberate policy targeting housing market distortions. Commercial property operates under entirely different market dynamics, and that difference cuts both ways.
The fact that commercial retains full negative gearing doesn’t mean it’s a better investment. It means it’s a different investment, one with higher entry barriers, more complex finance, greater vacancy risk, and structural features that catch inexperienced investors off guard.
If you’re considering pivoting to commercial property in response to the budget changes, the question worth sitting with isn’t “can I negative gear it?”
It’s “do I actually understand what I’m buying?”
This website may contain general advice, but does not take into account your objectives, financial situation or needs. You should consider whether the advice is suitable for you and your personal circumstances. Before you make any decision about whether to acquire a certain product, you should obtain and read the relevant product disclosure statement. In the event that Funded Futures Financial Services is providing personal advice it will be communicated via a ‘statement of advice’.
Funded Futures Financial Planning ABN 81 646 656 804 T/A Funded Futures Financial Services is a Corporate Authorised Representatives and is authorised through Cobalt Advisers Pty Ltd ABN 64 628 654 099 who is an Australian Financial Services Licencee # 512550.
© 2024 Funded Futures | All Rights Reserved | Developed by
