Edited version of your written advice

Authorisation Number: 1051188320457

Date of advice: 9 February 2017

Ruling

Subject: Sale of property subject to lease incentive

This ruling applies for the following periods:

Financial year ending 30 June 2017

The scheme commences on:

1 July 2016

Relevant facts and circumstances

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

You purchased a commercial property (property) for which you entered into a sale contract with the vendor.

You purchased the property as a going concern as the property was tenanted at the time of sale and as evidenced by the sale contract. Prior to the sale, the vendor had offered a rent free period to the tenant as a lease incentive. At the time of the sale of the property to you, there remained an unexpired rent free period.

The sale contract between you and the vendor included a clause which provided that you would be entitled to a payment in respect of any unexpired rent free period at the time of the sale.

At settlement date, a cheque (the payment) was made in your favour in respect of the remaining rent free period.

No invoice was issued for the payment and no GST has been collected or paid on this amount.

Relevant legislative provisions

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

Section 9-5

Section 9-15

Income Tax Assessment Act 1997

Section 6-5

Reasons for decision

Goods and services tax

Under subsection 9-10(1) of the GST Act, a supply is any form of supply whatsoever. Goods and Services Tax Ruling GSTR 2006/9 Goods and services tax: Supplies (GSTR 2006/9) examines the meaning of supplies in the GST Act. GSTR 2006/9 uses ten propositions to assist in analysing a two party transaction to identify the supply or supplies made in that transaction.

In a two party transaction, the GST consequences turn on identifying one or more supplies in the transaction. In your case it is necessary to identify whether or not you are making a supply under the sale contract for which the payment constitutes consideration. In this regard proposition 11 (the agreement is the logical starting point when working out the entity making the supply and the recipient of that supply), proposition 15 (one set of activities may constitute the making of two or more supplies) and proposition 16 (the total fact situation will determine the nature of a transaction, the entity that makes a supply and the recipient of the supply), are relevant to the two party transaction in the present circumstances.

In order for the payment to be consideration for a supply (other than the supply of the property), subsection 9-15(1) of the GST Act requires the payment to be in connection with, in response to, or for the inducement of a supply of something by you as the purchaser.

Goods and services tax Ruling GSTR 2001/8 Goods and services tax: Apportioning the consideration for a supply that includes taxable and non-taxable parts (GSTR 2001/8) explains that the supplies need to be separate and identifiable. Paragraph 55 of GSTR 2001/8 states:

Some supplies include parts that do not need to be separately recognised for GST purposes. We refer to these parts of a supply as being integral, ancillary or incidental. In a composite supply, the dominant part of the supply has subordinate parts that complement the dominant part. If such a supply is analysed in a commonsense way, it can be seen that the supply is essentially the provision of one thing. It need not be broken down, unbundled or dissected any further. For this reason, a composite supply may appear, at first, to have more than one part, but is treated as if it is the supply of one thing.

Further, paragraphs 136 and 137 of GSTR 2006/9 states:

136. …Rights are created under executory contracts and although the creation of such rights is supported by valuable consideration, the supply may not be characterised as a supply that is made in relation to rights if, for example, those rights contribute to the supply as a whole but cannot be identified as the dominant part of the supply.

137. The grant of a right or entry into an obligation may be a term or condition of a larger transaction. Where the grant of the right or entry into the binding obligation is the substance of the transaction it will be the subject matter of a supply.

In your case, the vendor makes a supply to you of the property for consideration. The property was tenanted since before the sale contract was signed with you; it was tenanted at the time of sale to you and is still tenanted now.

Prior to the sale of the property to you, the vendor had provided a lease incentive to the tenant for a rent free period. At the time of the sale of the property to you (that is at settlement date), there was a balance of the rent free period still remaining. Under the sale contract, you were entitled to and were paid the payment of the outstanding balance of the lease incentive from the settlement proceeds.

In considering the total fact situation in your case, your obligations and or rights under the sale contract can be characterised as integral to the transaction, being the sale of the property. That is, your actions and obligations/rights cannot be identified as the dominant part of the supply but is a term or condition of a larger transaction and therefore will not amount to a separate supply under the sale contract in return for the payment.

As there is no separate supply made by you, the payment will not be consideration for any separate supply by you to the vendor. As such, no GST is payable on this amount. The payment will represent a reduction to the purchase price of the property.

Income Tax

Rental income from real property is ordinary income for the purposes of section 6-5 of the Income Tax Assessment Act 1997. Conversely, the proceeds from the sale of an asset are, generally, considered to be capital receipts.

In determining whether or not a payment is rent, it is the reality or substance of the matter, rather than the label given by the parties to the transaction which is decisive (Ex parte Lathouras; Re Vendardos [1964-1965] NSWR 254).

In the case of Colonial Mutual Life Assurance Society Ltd v FCT (1953) 89 CLR 428; 5 AITR 597; 10 ATD 274 a life insurance company purchased land adjoining land that it already owned. There were a number of shops on the land which were leased to tenants. As part of the consideration for the transfer the purchaser agreed to pay the vendor 90% of the rents it received for a 50 year period.

The High Court held at 5 AITR 609 that the expenditure was not deductible as it was an outgoing of capital. Fullagar J concluded that the payments formed part of the purchase price of a capital asset for the following reasons at 5 AITR 609:

It is incontestable here that the moneys are paid in order to acquire a capital asset. The documents make it quite clear that these payments constitute the price payable on a purchase of land, and that appears to me to be the end of the matter. It does not matter how they are calculated, or how they are payable, or when they are payable, or whether they may for a period cease to be payable. If they are paid as parts of the purchase price of an asset forming part of the fixed capital of the company, they are outgoings of capital or of a capital nature.

In your case, you purchased a commercial property from the vendor under a contact of sale. The wording of the contract indicates the payment made by the vendor for the unexpired period of the Lease Incentive was a condition of sale at the date of settlement and was not part of any rental or lease arrangement with the existing tenants.

Therefore, the payment relating to the rent free period is not assessable income under section 6-5 of the ITAA 1997 as the payment is a reduction of the capital purchase price of the property.

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