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Ruling

Subject: GST and surrender of lease

Question 1

(a) Have you made any supply under the Deed?

(b) Has the Landlord made any supply under the Deed?

Answers

(a) No

(b) Yes

Question 2

Have you made a creditable acquisition under the Deed?

Answer

Yes

Relevant facts and circumstances

You are registered for goods and services tax (GST).

You surrendered you lease on a commercial property located in Australia.

You and the landlord (Landlord) entered into a Deed.

The Landlord and you have agreed to surrender the Lease and the Landlord releases you, on the terms of the Deed.

Under the Deed

· You surrender all your interest in the Lease and the Premises with effect on and from the surrender date.

· The Landlord accepts the a monetary payment in full and final satisfaction of:

o -the performance and observance of all of your covenants and obligations contained in the Lease, including its monetary and make good obligations (whether past, present or future), and

o -all and any claims, demands, costs, losses, liabilities, damages and expenses of every kind (whether past, present or future) directly or indirectly as a result of or arising from or in connection with the Lease in any way.

· You must:

o vacate the Premises;

o deliver all keys to the Landlord;

o deliver to the Landlord a duly executed form of surrender of the Lease; and

o pay rent, outgoings and other amount payable under the Lease up to and including the surrender date.

· The landlord agrees that: in consideration of the terms of this deed and the payment of the Surrender Amount the landlord, on and from the surrender date, releases to the fullest extent permitted by law you, yours directors, officers, officers, employees, agents, servant, contractors and others under your control from:

o the performance and observance of all of your covenants and obligations contained in the Lease, including its monetary and make good obligations (whether past, present or future), and

o all and any claims, demands, costs, losses, liabilities, damages and expenses of every kind (whether past, present or future) directly or indirectly as a result of or arising from or in connection with the Lease in any way.

· The Landlord must, as a preconditioned to the payment of the agreed amount give you a tax invoice.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999

s 9-5

s 9-10

s 9-15

s 11-5

s 11-15

s 29-10

Reasons for decision

Question 1

Summary

(a) You have not made any supply under the Deed. The surrender of the lease is not considered to be non-monetary consideration (counter supply) in relation to the Deed.

(b) The Landlord has made a supply under the Deed. The supply is the release of your obligations under the lease.

Detailed reasoning

1. Have you made any supply in relation to the Deed

You have considered that under the Deed both parties made supplies to each other:

o You made a supply of the surrender (Surrender) of the lease (non-monetary supply) and monetary payment in exchange for another supply, the release by the Landlord from the obligations under the lease (the Release).

o the Landlord made a supply of the Release in exchange for the monetary amount and the surrender of the lease.

The issue to be determined is whether there is any non-monetary consideration (counter supply) made by you or the only supply made under the Deed was the Release and you merely the recipient of the supply and provided monetary consideration for the Release.

Goods and services tax ruling GSTR 2001/6 explains how the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) applies if part or all of the consideration for a supply is not expressed as an amount of money (non-monetary consideration).

Consideration is defined in section 9-15 of the GST Act as follows:

(1) Consideration includes:

(a) any payment, or any act or forbearance, in connection with a supply of anything; and

(b) any payment, or any act or forbearance, in response to or for the inducement of a supply of any thing.

(2) It does not matter whether the payment, act or forbearance was voluntary, or whether it was by the *recipient of the supply.

(2A) It does not matter:

(a) whether the payment, act or forbearance was in compliance with an order of a court, or of a tribunal or other body that has the power to make orders; or

(b) whether the payment, act or forbearance was in compliance with an order of a court, or of a tribunal or other body that has the power to make orders; or

Note: *the asterisk denotes a defined term in the GST Act.

Under the definition, the surrender of the Lease can be consideration for GST purposes under paragraphs 9-15(1)(a) and (b) of the GST Act. The issue is whether the surrender is consideration made to the Landlord under the Deed.

Paragraphs 80 to 89 of GSTR 2001/6 explain the view of the Tax Office on whether you made a non-monetary consideration (counter supply) in addition to monetary consideration by surrendering the interest in the lease.

In your circumstances, following the guidance in those paragraphs, it is considered that:

o The surrender of the lease as required under the Deed has not been provided as compensation for the making of the supply as there was no arrangement assigned any specific or separate value to the Surrender.

o The surrender of the lease by you does not have an economic value. You have provided that the value of the surrender of the lease does not have any value.

o Many transactions involving exchanging various rights and obligations between the parties to the transaction. It is considered that under the Deed, the obligation to surrender the lease entered into as a part of the transaction by you that is liable to pay an amount will not be a separate part of the consideration for the supply by the landlord. The obligation to surrender the lease was a part of your consideration for the supply by the landlord, not a separately identifiable supply.

o The terms of the Deed only involved a supply by the landlord for monetary consideration. The terms of the Deed did not go beyond merely defining or describing the supply, nor specifying rights that are to be retained by you (if it is the supplier). The terms did not form a separate supply or additional consideration for a supply under the transaction. The obligation to surrender the lease is a consequence of the Deed. Following the Deed, you are released from its obligation under the lease and as consequence you were required to surrender the lease (and terminated the occupation). In other words you surrendered the right to occupy of the premises for the Deed to have effect.

The surrender of the lease by you is merely a condition of the Deed to give effect to the Deed so that the Release can be exercised. The surrender of the lease is not a counter supply made by you in addition to the monetary consideration. The payment of the monetary amount is not a supply in itself.

Therefore, you only provided monetary consideration to the Landlord. Under subsection 9-10(4) of the GST Act, the supply of money is not a supply unless the money is provided as consideration for a supply that is a supply of money.

It can be concluded that you have not made a counter supply in the form of providing non-monetary consideration in relation to the Deed.

Has the Landlord made a supply in relation to the Deed?

Under section 9-10 of the GST Act, the term supply has a very broad definition of any form of supply whatsoever. In particular, paragraph 9-10(2)(g) provides that an entry into or release from an obligation to (i) do anything, or (ii) refrain from an act, or (iii) tolerate an act or situation, is a supply. In the case of a transaction which is in substance the supply of a right or obligation, the thing consumed may be the right or obligation itself, by its exercise or discharge.

Paragraphs 26-36 of GSTR 2000/11 discuss transactions which are supplies of rights or obligations. Paragraph 29 of GSTR 2000/11 states that:

Consumption must always be present but the nature of the consumption depends on the nature of what is consumed. The explanatory memorandum to the GST Act commences with the proposition that 'the GST is a broad based indirect tax', and it provides that while the GST is effectively a tax on final private consumption in Australia, 'GST taxes the consumption of most goods, services, and anything else ...'. In the case of a transaction which is in substance the supply of a right or obligation, the thing consumed may be the right or obligation itself, by its exercise or discharge.

Paragraph 33 of GSTR 2000/11 adds:

For there to be a supply of rights or obligations, such rights or obligations must be binding on the parties. The creation of expectations among the parties does not establish a supply. An agreement that does not bind the parties in some way would not be sufficient to establish a supply by one party to the other unless there is something else, such as goods or some other benefit, passing between the parties.

In your circumstance a Deed was entered into that binds both parties. The substance of the transaction is the release you from your obligation under the Lease which is an entry into or release from an obligation. This is the thing consumed by its exercise or discharge and is a supply under paragraph 9-10(2)(g) of the GST Act

Was the payment under the Settlement Deed consideration for the supply?

Following the definition of consideration in section 9-15 of the GST Act above, there are two elements to the definition of consideration:

o the payment from one entity to the other, and

o the nexus that must be established between the payment and the supply.

Monetary payment was made by you to the Landlord. We need to consider the nexus between the monetary consideration and the supply of the release by the Landlord.

Matters in dispute may be resolved either by the judgement of a court or by agreement between the parties (out-of-court settlement). It is considered that an out-of-court settlement will include any form of dispute resolution in which the terms of the resolution are agreed between the parties including an agreement between the parties settling their differences before court action commences.

The views of the Commissioner on the GST consequences resulting from out of court settlements are expressed in goods and services tax ruling GSTR 2001/4. This ruling explains how a payment (or act of forbearance) that is made in compliance with an out of court settlement constitutes consideration for a supply and if so, whether the supply is in the nature of taxable, GST-free or input taxed.

In GSTR 2001/4, the Commissioner is of the view the supplies for an out-of-court settlement fall within three categories:

1. Earlier supply - where the subject of the dispute is an earlier transaction in which the supply was made involving the parties.

2. Current supply - where a new supply is created by the terms of the settlement.

3. Discontinuance - supply where the terms of settlement, in finalising a dispute, create one or more new supplies to ensure that no further legal action in relation to the dispute.

The payment under the Deed was not made for an earlier supply as it was not made for rental purposes. The payment was not made in return for the right to occupy the commercial premises. The rent, outgoings and other amount payable under the Lease up to and including the surrender date is not covered by the payment under the Deed.

The payment was made for the Release which was a new supply created by the terms of the Deed.

The payment was not made for a discontinuance supply was there was no specific consideration for those discontinued activities, if any.

It should also be noted that. The terms of the Deed indicated that under the Deed:

o damages were not the specific subject of the claim,

o damages were not the substance of the dispute that led to the Deed.

o damages did not have economic value or independent identity separate from the supply of the Release so that it can be considered as being provided as compensation for the supply.

It is considered that the landlord made a supply for monetary consideration under paragraph

9-10(2)(g) of the GST Act when it releases you from the obligations contained in the Lease.

Question 2

Have you made a creditable acquisition in relation to the Deed?

Summary

You have made a creditable acquisition under the Deed as all of the requirements under section 11-5 of the GST Act are met.

Detailed reasoning

Under section 11-5 of the GST Act you make a creditable acquisition if:

(a) you acquires something solely or partly for a creditable purpose,

(b) the supply of the thing to you is a taxable supply,

(c) you provide or are liable to provide consideration for the supply, and

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

a. Firstly, we need to consider whether you acquired anything under the Deed. Goods and services tax ruling 2006/9 (GSTR 2006/9) examines the meaning of 'supply' in the GST Act which also has relevance to acquisitions.

Of particular relevance in this case, paragraphs 54 and 56 of GSTR 2006/9 state:

54. To make an acquisition you have to be the 'recipient' of the supply of the thing you are acquiring. Although the term 'recipient' does not appear in Division 11, it is defined in section 195-1 to mean the entity to which the supply was made. This definition suggests that there is a supplier, a recipient and that something is passed from the supplier to the recipient.

Creditable acquisitions and input tax credits

56. If you make an acquisition and the other requirements of section 11-5 are met then the acquisition is a creditable acquisition. However, if you are not the recipient of the supply you will not have made a creditable acquisition, even if you provide consideration for the supply.

You are the recipient of the supply because under the Deed you are the entity that received the release from the obligations contained in the Lease.

Creditable acquisition

Section 11-15 of the GST Act provides the meaning of 'creditable acquisition as follows:

1. You acquire a thing for a creditable purpose to the extent that you acquire it in *carrying on your *enterprise.

2. However, you do not acquire the thing for a creditable purpose to the extent that:

(a) the acquisition relates to making supplies that would be *input taxed; or

(b) the acquisition is of a private or domestic nature.

Your enterprise is a trading business. Entering into, altering terms or terminating a lease of commercial premises that you were carrying its business is considered activities done in carrying your enterprise. Paragraph 3.10 of the Explanatory Memorandum to the A New Tax System (Goods and Services Tax) Bill 1998 explains the meaning of the term:

In the course of furtherance is not defined, but is broad enough to cover any supplies made in connection with your enterprise. An act done for the purpose or object of furthering an enterprise, or achieving its goal, is a furtherance of an enterprise although it may not always be in the course that enterprise. In the course of an enterprise does not extent to the supply of private commodities, such as when a car dealer sells his or her own private car.

b. The supply of under the Deed to you is a taxable supply if all of the requirements under section 9-5 of the GST Act are met:

o The Landlord made the supply for consideration.

It has been considered above that the Landlord made the supply for monetary consideration.

o The supply is made in the course or furtherance of an enterprise that the Landlord is carrying on.

Similar to the reasoning above, the entry into a lease, or terminating a lease by the Landlord was made in the course or furtherance of the Landlord's enterprise.

o The supply is connected with Australia.

The commercial building is in Australia and the place where the Deed was entered into is in Australia.

o The Landlord is registered or required to be registered for GST.

A tax invoice was issued by the Landlord. This indicated that the Landlord is registered for GST.

o The supply is not GST-free or input taxed.

The supply is not GST-free or input taxed under any provision of the GST Act or other Acts.

o You have provided monetary consideration for the supply

o You are registered for GST.

Therefore, you were making a creditable acquisition under the Deed and is eligible to claim the GST embedded in the GST-inclusive price of the supply. It should be noted that under subsection 29-10(3) of the GST Act it is required that you hold a tax invoice when you give the Commissioner a GST return for the relevant period that the input tax credit on the creditable acquisition was attributable.

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