Edited version of private ruling

Authorisation Number: 1011576718423

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Ruling

Subject: Charging of an additional amount for GST payable by the lessor

Question 1

Should you have been charged the separate amount by the lessor in relation to solicitors' costs and disbursements?

Answer

It is not the role of the Australian Taxation Office (ATO) to comment on individual matters involving a contractual or pricing issue.

Relevant facts and circumstances

You carried on a business in leased premises in a shopping centre.

You recently sold the business and the lease of the shop premises was assigned to the new owner of the business.

Under the terms of your arrangement with the lessor/landlord (lessor), you were required to pay the lessor's solicitors' costs and disbursements as the assignor of the lease.

You subsequently received a request to pay the following amounts

· an invoice for a specified amount GST inclusive from the lessor.

· an additional specified amount payable to the lessor said to be GST payable by the lessor in relation to solicitors' costs and disbursements.

No separate tax invoice was issued for the additional charge but an explanatory note from the lessor's solicitors' provided the following quote "Australian Taxation Office has advised the lessor's solicitors that the lessor's solicitors' costs and disbursements (including registration fees [which are otherwise GST-free]) paid by the lessee are liable to GST payable by the lessor. It seems to the lessor's solicitors that GST is so payable in conformity with GST Determination GSTD 2000/10…"

You subsequently paid both amounts by cheque in favour of the lessor.

You now seek advice as to whether you should have been charged the second amount given that you had already paid this amount as GST in the tax invoice for the expenses.

Detailed reasoning

Please note that your question in relation to whether you are able to claim the additional amount as an expense in your tax return without holding an invoice has been forwarded to our income tax business line which will provide separate advice to you in due course.

From a GST perspective, we are unable to comment on whether the additional amount you have paid represents consideration for a supply or whether an additional supply has been made to you in relation to arranging the assignment of your lease, as a tax invoice (or any invoice for that matter) has not been issued to you.

If you consider that a taxable supply has been made to you, then you should approach the supplier to request a tax invoice be issued. Under subsection 29-70(2) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) the supplier of a taxable supply must, within 28 days after the recipient of the supply requests it, give to the recipient a tax invoice for the supply unless it is a recipient created tax invoice. If this approach is unsuccessful you can apply to the Commissioner of Taxation (Commissioner) to treat another document that is not a tax invoice as a tax invoice. Subject to the Commissioner agreeing to applying his discretion (the main consideration is that the Commissioner must be satisfied that a taxable supply has been made to you) you would then be entitled to claim 1/11^th of the additional amount as a GST credit.

We note that the lessor's solicitors' have advised you that the additional amount is GST payable in accordance with Goods and Services Tax Determination GSTD 2000/10.

According to GSTD 2000/10, a lease agreement may provide for the tenant to pay for various outgoings of the landlord that are incidental to the supply of premises. These may be reimbursed to the landlord or paid direct to the charging authority. In either case where the tenant is paying the outgoing as a condition of the lease, payment of these outgoings is part of the consideration for the supply of the premises.

This means that consideration for the supply of commercial premises includes not only the base rent paid, but also amounts paid by the tenant under the terms of the lease: 

· to the landlord for amounts for which the landlord is liable, or

· directly to a third party where the payment is in satisfaction of the landlord's liability.

Paragraph 3 of GSTD 2000/10 states:

If the supply of premises is a taxable supply, GST is payable on the value of the supply. The value of a supply of premises is equal to the GST-exclusive consideration for the supply of the premises. Therefore the landlord is liable for GST on the outgoings whether paid to the landlord or directly to a third party.

Example 3 in GSTD 2000/10 - lease allows GST to be recovered from tenant-demonstrates this principle:

19. On 1 July 2000 Kathleen leases commercial premises to Bob. The consideration under the lease agreement consists of $1,000 base rent per month plus reimbursement of Kathleen's expenses relating to the premises including insurance, electricity, cleaning and maintenance. Under the agreement Kathleen can recoup from Bob any GST payable by her in relation to the lease.

20. Kathleen pays a contractor $220 for cleaning and maintenance work during July. This includes $20 GST. She claims an input tax credit for the $20. Kathleen provides a tax invoice (via her managing agent) to Bob for $1,320. This amount is made up of $1,000 base rent, $200 outgoings and $120 GST.

Example 4 in GSTD 2000/10 - lease does not allow GST to be recovered from tenant but supply is taxable. This illustrates a situation where a landlord is not entitled to recover GST from the tenant and as a result the landlord is able to on-charge the GST-inclusive cost of outgoings to the tenant:

21. On 1 August 1999 Liz leases commercial premises to Tom. The lease does not allow Liz to recover GST payable by her in relation to the lease. As at 1 July 2000 the consideration under the lease agreement consists of $1,000 base rent per month plus Liz's expenses relating to the maintenance of the common areas of the premises.

22. Liz pays a contractor $ 220 for the maintenance work during July. This includes $20 GST. She claims an input tax credit for the $20. Liz provides a tax invoice (via her managing agent) to Tom for $1,220. This amount is made up of $ 1, 000 base rent and $ 220 outgoings. Because the lease allows Liz to recover the full amount of the outgoing she is able to pass on the gross amount of the outgoing.

Liz will comply with the Australian Competition and Consumer Commission (ACCC) guidelines on price exploitation when she passes on the total cost of the outgoings rather than net cost because her net dollar margin has not increase. In this case even though Liz cannot increase the amount charged under the lease because of GST, the price is inclusive of GST because she is making a taxable supply and she is liable for GST of $110.91 (1/11 of $1,220).

The issue you raise concerning the ability of a landlord to include the GST-inclusive price of an outgoing in the consideration for a supply of commercial premises is not a matter determined under the GST Act. Whilst examples 3 and 4 in GSTD 2000/10 illustrate how the consideration for a supply of premises may be calculated with reference to recovery of expenses incurred by the landlord, it is not the role of the Tax Office to comment on individual matters involving a contractual or pricing issue. It is a business decision between the parties as to whether outgoings under an agreement are on-charged on a GST inclusive or GST exclusive basis.

It should be noted that the pricing issues are dealt with by the Department of Fair Trading.

Also we are not privy to all the facts relied on by the supplier in making their calculation of the cost of the services provided via the lessor to you. Nor would we be able to comment on another taxpayer's liability for GST. It is however, open to the supplier to request their own private ruling if they consider that clarification of any issue is required by them.

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