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Ruling

Subject: surrender of commercial lease

Question

Is the agreement by X to surrender the lease between Y Pty Ltd (as lessor) and X (as lessee) in ('Existing Lease') in return for a cash payment from A Ltd a taxable supply within the meaning of section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 ('GST Act)?

Answer

Yes, the agreement by X to surrender the Existing Lease in return for a cash payment from A Ltd is a taxable supply within the meaning of section 9-5 of the GST Act.

Relevant facts and circumstances

X (as lessee) entered into the Existing Lease in respect of the certain Shop in a Shopping Centre for a specified term which commenced on the particular date a number of years ago. Y Pty Ltd was the lessor in respect of the Existing Lease.

Y Pty Ltd entered into a Sale Agreement to sell the site and all improvements on the site (collectively referred to as 'the Property') to A Ltd. A Ltd wished to demolish the existing Shopping Centre in order to construct a new development ('the Centre') on the site. In the particular year X and A Ltd entered into an agreement for lease ('Existing Agreement for Lease') pursuant to which A Ltd agreed to construct the new Centre on the site (the Site') and to lease part of the new Centre to X on completion of the works.

In a subsequent year A Ltd and X executed a further lease agreement ('LA'). The LA recites that on the date that the Sale Agreement (defined as the agreement for sale and purchase of the Property between Y Pty Ltd and A Ltd pursuant to which A Ltd became entitled to a transfer of the Property) is completed the Existing Agreement for Lease will cease to have effect and A Ltd and X will be bound by the LA.

The LA records the basis on which A Ltd will carry out the 'Lessor Works' (i.e. construct the buildings, improvements etc. necessary to create the new Centre) and, on completion, lease a part ('the Premises') of the new Centre to X. The LA provides that, at any time after A Ltd becomes or is entitled to become the registered proprietor of the Site, A Ltd can by written notice call upon X to surrender X's interest in the Existing Lease, giving X at least ZZ days notice of the Surrender Date. The LA also provides:

On the Surrender Date X must surrender the Existing Lease effective from midnight on that date.

X must vacate the Existing Premises within specified number of days of the Surrender Date

And:

During the specified number of days following the Surrender Date X will be entitled to retain occupation of the Existing Premises for the purpose of removing its fixtures, fittings and other property.

The LA provides that A Ltd must pay to X $B per annum (pro-rated as necessary) on receipt of a valid tax invoice for the period starting on the Surrender Date and ending on the 'Commencement Date' (the earlier of either the date X begins trading from the new Centre or the Centre Opening Date for the new Centre).

The LA provides that the amounts payable under certain clause must be paid quarterly in arrears.

The LA provides that X agrees to seek a ruling from the Tax Office asking whether the payments made under the LA are consideration for a taxable supply made by X to A Ltd under the LA..

Reasons for decision

Summary

As all of the requirements of section 9-5 of the GST Act are satisfied and the surrender of the Existing Lease is neither a GST-free nor input taxed supply, X will make a taxable supply when X surrenders the Existing Lease in return for the payment from A Ltd.

Detailed reasoning

Section 9-5 of the GST Act provides:

The opening words of section 9-5 and paragraph 9-5(a) require that X makes a supply. Paragraph 9-10(2)(d) of the GST Act provides that 'supply' includes a grant, assignment, or surrender of 'real property'.

'Real property' is defined in section 195 of the GST Act to include 'any interest in or right over land'. Goods and Services Tax Ruling GSTR 2003/7 explains the meaning of the expression 'any interest in or right over land' as follows (Para 89):

Consistent with the approach adopted by the UK VAT Tribunal and courts, we consider that the expression 'interest in or right over land' is a composite phrase not intended to cover all rights relating to land. Its interpretation is restricted to a legal or equitable interest in or right over the land. Notwithstanding this, the definition encompasses many interests in or rights over land such as, legal estates in fee simple, leasehold interests, restrictive covenants, easements and profits a prendre. In contrast, a mere licence to occupy land falls short of creating a legal or equitable interest in land.

We therefore consider that a leasehold interest falls within the 'real property' definition in section 195 of the GST Act and that a surrender of a lease falls within paragraph 9-10(2)(d) of the GST Act and is a supply.

Goods and Services Tax Ruling GSTR 2006/9 (Para 106) explains the requirement in paragraph 9-5(a) of the GST Act that an entity makes the supply for consideration:

Paragraph 9-5(a) states that 'you make the supply for consideration'. If read alone, 'making a supply for consideration' arguably suggests the existence of enforceable obligations, be they written or oral, between the supplier and recipient. However, this is not an absolute prerequisite to making a supply for consideration.

GSTR 2006/9 goes on to state that an entity can make a supply for consideration in the absence of enforceable obligations, provided there is something else, such as goods, services or some other thing, passing from that entity to the recipient. In our view the surrender of the Existing Lease is made 'for consideration' as X assumes enforceable obligations under the LA in return for the $B per annum payment from A Ltd. The LA makes the payment contingent upon X surrendering the Existing Lease effective from midnight on the Surrender Date. Although the LA allows X to occupy the Existing Premises for the next 21 days in order to remove fixtures etc, the LA also provides that if X does not vacate the Existing Premises within the specific number of days period following the Surrender Date, the period for which the $B plus GST per annum is payable by A Ltd on a proportionate basis does not commence until the day X actually vacates. We therefore consider that the supply made by X is made for consideration and that paragraph 9-5(a) of the GST Act is satisfied.

Paragraph 9-5(b) of the GST Act requires that then supply is made in the course or furtherance of an enterprise carried on by X. 'Enterprise' is defined in section 9-20 of the GST Act to include an activity or series of activities done in the form of a business. Miscellaneous Tax Ruling MT 2006/1 provides (Para 177) that to determine whether an activity amounts to a business the activity needs to be considered against the indicators of a business established by case law, such as significant commercial activity that is or will be profitable, recurrent in nature, systematic, organised, and carried on in a business-like manner. X satisfies these requirements and is therefore carrying on an enterprise. The surrender of the Existing Lease is made in the course or furtherance of that enterprise because it is necessary for X to cease trading from and vacate the Existing Premises so that the A Ltd can carry out the Lessor Works (i.e. construct the new Centre) and X can then resume trading from the Premises within the new Centre.

Paragraph 9-5(c) requires that the supply made by X is connected with Australia. Subsection 9-25(4) of the GST Act provides that a supply of real property is connected with Australia if the real property, or the land to which the real property relates, is in Australia. The land to which the real property (i.e. the Existing Lease) relates is located in Australia.

In the present case we have confirmed that X is registered for GST and therefore satisfies paragraph 9-5(d) of the GST Act.

We are satisfied that the surrender of the Existing X Lease is neither a GST-free nor an input taxed supply.

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