Edited version of private ruling

Authorisation Number: 1011640142802

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Ruling

Subject: GST and tenant's payment of lease outgoings

Question

What are the consequences for you where you do not show GST on the invoice you issue to the tenant where the tenant pays for council rates or water rates?

Answer

Where you are requested by the tenant to issue a tax invoice in respect of a payment from the tenant for council rates or water rates, and you do not issue a tax invoice to the tenant for their payment for council rates or water rates that contains enough information to enable the amount of GST to be clearly ascertained, within 28 days after the tenant requests the tax invoice, you will be liable to a penalty of $2,200.

Relevant facts and circumstances

You are registered for GST.

You lease out a motel, located in Australia on a regular and continuous basis to the tenant.

You incur outgoings such as council rates and water rates. You charge the tenant for outgoings, including council rates and water rates.

Your lease agreement with the tenant (the lease agreement) does not specify that you will make a separate supply of water.

The lease agreement provides that the tenant must pay you the proportion of outgoings for the term.

The lease agreement provides that the proportion of outgoings payable by the tenant is:

· Where the outgoings are for the premises only, the tenant is liable for all those outgoings; and

· Where the outgoings are for the land or building, the tenant is liable for the percentage indicated in a certain part of the lease agreement - the percentage is 100%.

Outgoings is defined in the lease agreement to include all amounts paid or payable by the lessor in connection with the land, the building or the premises including rates and taxes (except for income, capital gains tax or land tax).

The lease agreement provides that the lessee must pay to the lessor an amount equal to the GST determined to be payable under the GST law in respect of any taxable supply made by the lessor under the lease at the same time that rent, outgoings or other monies are to be paid under the lease.

Reasons for decision

Summary

A 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.

Where a supplier of a taxable supply does not issue a valid tax invoice to the recipient of the supply within 28 days after the recipient of the supply requests it, the supplier is liable to a penalty of $2,200, unless it is a recipient created tax invoice.

GST is payable by you on taxable supplies that you make.

One of the requirements of a valid tax invoice is that the document contains enough information to enable the amount of GST payable in relation to each supply to which the document relates to be clearly ascertained.

The amount of GST on a taxable supply is 1/11th of the price of the taxable supply. The price is the consideration for the supply.

The payments made by the tenant for council rates or water rates form part of the consideration for your taxable supply of the motel by way of lease to the tenant. Therefore, GST is payable by you where you charge the tenant for council rates or water rates.

As the payments made by the tenant for council rates or water rates form part of the consideration for a taxable supply, and GST is payable by you where you charge the tenant for council rates or water rates, you must issue a tax invoice to the tenant where the tenant pays for council rates or water rates if the tenant requests one, and you must include enough information in the tax invoice to enable the amount of GST to be clearly ascertained. Otherwise, you will be liable to a penalty of $2,200.

Detailed reasoning

In accordance with subsection 29-70(2) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), a 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.

In accordance with subsection 288-45(1) of Schedule 1 to the Taxation Administration Act 1953, you are liable to an administrative penalty of 20 penalty units ($2,200) if you fail to issue a tax invoice as required by section 29-70 of the GST Act.

GST is payable by you on taxable supplies that you make.

In accordance with subparagraph 29-70(1)(c)(vi) of the GST Act, one of the requirements of a valid tax invoice is that the document contains enough information to enable the amount of GST payable in relation to each supply to which the document relates to be clearly ascertained.

Before we consider whether you must show information on the invoice you issue to the tenant for its payment of council rates or water rates to enable the amount of GST to be clearly ascertained, we must first determine whether you make a taxable supply to the tenant, and have a GST liability, where you charge the tenant for council rates or water rates.

You make a taxable supply where you satisfy the requirements of section 9-5 of the GST Act, which states:

You make a taxable supply if:

(a) you make the supply for *consideration; and

(b) the supply is made in the course or furtherance of an *enterprise that

you *carry on; and

(c) the supply is *connected with Australia; and

(d) you are *registered, or *required to be registered.

However, the supply is not a *taxable supply to the extent that it is

*GST-free or *input taxed.

(*Denotes a term defined in section 195-1 of the GST Act)

You are making a supply of a motel by way of lease. You satisfy the requirements of paragraphs 9-5(a) to 9-5(d) of the GST Act. That is, you make the supply of the motel by way of lease for consideration, which includes the rent and you supply the motel by way of lease in the course or furtherance of the leasing enterprise that you carry on. Additionally, your supply of the motel by way of lease is connected with Australia as the motel is located in Australia and you are registered for GST.

There are no provisions in the GST Act under which your supply of the motel by way of lease is GST-free.

In accordance with paragraph 40-35(1)(a) of the GST Act, a supply of residential premises by way of lease is input taxed subject to certain exceptions. A lease of commercial residential premises is not input taxed under paragraph 40-35(1)(a) of the GST Act. In accordance with section 195-1 of the GST Act, commercial residential premises includes a motel.

You are supplying residential premises by way of lease to the tenant. However, these premises are commercial residential premises, as they are a motel. Therefore, your supply of the motel by way of lease is not input taxed under paragraph 40-35(1)(a) of the GST Act.

There are no other provisions in the GST Act under which your supply of the motel by way of lease is input taxed.

Hence, you are making a taxable supply of the motel by way of lease, as you satisfy all of the requirements of section 9-5 of the GST Act, and therefore, you have a GST liability on your supply of the motel by way of lease.

In accordance with section 9-70 of the GST Act, the amount of GST on a taxable supply is 10% of the value of the taxable supply.

In accordance with subsection 9-75(1) of the GST Act, the value of a taxable supply is 10/11ths of the price.

Therefore, the amount of GST on a taxable supply is 1/11th of the price of the supply.

The price is the consideration for the supply.

Where the consideration for a supply is expressed as an amount of money, the price is that amount.

Goods and Services Tax Determination GSTD 2000/10 considers the GST implications where a tenant pays for outgoings.

In accordance with paragraph 1 of GSTD 2000/10, where a single supply of commercial premises is made to a tenant, the reimbursement or payment of the landlord's outgoings is consideration for the supply of the premises.

Paragraph 2 of GSTD 2000/10 states:

2. The consideration for the supply of premises by a landlord includes amounts which are 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:

3. 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.

Paragraph 7 of GSTD 2000/10 considers the situation where a non-taxable supply is made to a landlord and the tenant pays for the outgoing relating to that supply. It states:

Supply to landlord is not a taxable supply

7. If a single supply is made under the «lease» we do not consider that the payment of outgoings by the tenant is a payment for a supply that has the same character as the supply made by a third party to the landlord. The payment is made by the tenant for the supply by the landlord of the premises and not for the particular supply made to the landlord to which the outgoings relates. Therefore if the landlord is making a taxable supply, it will not matter whether the outgoing, when incurred by the landlord, was a taxable supply to the landlord. For example, the landlord's cost of acquiring a GST-free supply in order to supply the premises becomes a business cost of the landlord. This has implications where the supply made to the landlord is not subject to GST (e.g., because of Division 81 of the GST Act) or is a GST-free supply (e.g., because of Subdivision 38-I of the GST Act).

Paragraph 8 of GSTD 2000/10 considers the situation where a landlord pays taxes, fees and charges that are exempt under Division 81 of the GST Act and the tenant reimburses the landlord for this expenditure. It states:

Supply to landlord is not subject to GST

8. Payment by the landlord of local council rates, land tax or «water» charges may not be subject to GST because of the operation of Division 81. If the tenant is required under the terms of the «lease» to reimburse the landlord's expenditure on an 'Australian tax, fee or charge' listed in the determination made by the Treasurer under subsection 81-5(2) of the GST Act, this is not the 'payment of [an] Australian tax, fee or charge' by the tenant and Division 81 does not apply to the tenant's reimbursement of the rates, land tax or other charges.

Paragraph 9 of GSTD 2000/10 considers the situation where a landlord incurs the costs of taxes, fees and charges that are exempt under Division 81 of the GST Act and the tenant makes payment directly to the entity levying the tax, fee or charge. It states:

9. If the tenant makes payment directly to the entity levying the tax, fee or charge, this payment will be consideration for the supply of the premises not payment for a supply that the entity levying the tax, fee or charge makes to the tenant. Therefore Division 81 does not apply to payments for the supply by a landlord under a «lease» and the payment of the tax, fee or charge by the tenant forms part of the consideration for the supply of the premises.

A reimbursement from the tenant in your case for council rates or water rates is not subject to Division 81 of the GST Act. If payment is made by the tenant directly to the levying authority, Division 81 of the GST Act would not apply to this payment.

The payments made by the tenant for council rates or water rates form part of the consideration for your taxable supply of the motel by way of lease to the tenant. Therefore, GST is payable by you where you charge the tenant for council rates or water rates.

As the payments made by the tenant for council rates or water rates form part of the consideration for a taxable supply, and GST is payable by you where you charge the tenant for council rates or water rates, you must issue a tax invoice to the tenant where the tenant pays for council rates or water rates if the tenant requests one, and you must include enough information in the tax invoice to enable the amount of GST to be clearly ascertained. Otherwise, you will be liable to a penalty of $2,200.

Additional information

We shall now consider how to calculate the GST liability where you charge the tenant for council rates or water rates.

Paragraphs 25 to 28 of GSTD 2000/10 provide examples of how to calculate the GST liability that arises where a tenant is charged for rates that are exempt under Division 81 of the GST Act. They state:

Example 6 - the outgoing is not subject to GST - Division 81 of the GST Act

25. On 1 July 2000 Annette leases commercial premises to Matthew. The consideration under the lease agreement consists of $ 1,000 base rent per month plus reimbursement of Annette's expenses for the property including rates. Under the agreement Annette can recoup from Matthew any GST payable by her in relation to the lease.

26. Annette pays the local authority $ 220 for rates for July. The rates are a ' tax, fee or charge' specified in the Division 81 Determination made by the Treasurer. Therefore the payment of the rates is not consideration for a supply that the local authority makes to Annette and the local authority does not make a taxable supply to Annette. She is not entitled to an input tax credit in relation to the rates .Annette provides a tax invoice to Matthew for $ 1,342. This amount is made up of $ 1,000 base rent, $ 220 outgoings and $ 122 GST.

Example 7 - the outgoing is paid directly to the landlord's supplier

27. Assume the same facts as Example 6 except that the lease provides that Matthew is to pay, directly to the local authority, the rates for which Annette is liable. Matthew pays the rates in connection with the supply of the premises and the amount of GST payable by Annette is the same as Example 6.

28. Division 81 does not preclude the payment by Matthew to the local authority from being consideration for the supply of premises under the lease. The tax invoice Annette gives to Matthew will show a total consideration of $ 1,342.

Under the lease agreement in your case, you can recoup from the tenant the GST liability you have where you charge the tenant for council rates or water rates.

Therefore, where you charge the tenant for council rates or water rates, your GST liability would be 10% of the amount of the council rates or water rates account.

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