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Ruling
Subject: lease premiums
Question
Is your receipt of $x in exchange for granting a long term lease of residential property consideration for a taxable supply?
Answer
No
Relevant facts and circumstances
You are registered for GST.
One of your activities is the provision of long-term (2-3 years) rental accommodation to people.
Your units are one and two bedroom units which have sleeping accommodation and facilities for day to day living.
Current rent for a one bedroom unit is $y per week. You currently treat this as an input taxed supply.
You also offer a "longer term" option.
Under the longer term option:
· the tenant pays a premium of $y (GST exclusive) in exchange for you granting a longer term lease.
· the tenant continues to pay the weekly rental amount.
· the premium is rebated on a pro-rata basis if the tenant leaves within the first ten years of the lease.
Relevant legislative provisions
A New Tax System (Goods and Services Tax) Act 1999 section 40-35
A New Tax System (Goods and Services Tax) Act 1999 section 195-1
Reasons for decision
Under subsection 40-35(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), a supply of residential premises by way of lease, hire or licence, (other than a supply of commercial residential premises or a supply of accommodation in commercial residential premises provided to an individual by an entity that owns or controls the commercial residential premises) is input taxed.
The definition of residential premises in section 195-1 of the GST Act refers to land or a building that is occupied as a residence, or for residential accommodation, or is intended and capable of being occupied as a residence or for residential accommodation (regardless of the term of occupation), and includes a floating home.
Paragraph 26 of Draft Goods and Services Tax Ruling GSTR 2012/D1: residential premises and commercial residential premises (GSTR 2012/D1) explains that the physical characteristics common to residential premises are premises that provide the occupants with sleeping accommodation and at least some basic facilities for day to day living. The units in your complex contain a bedroom, bathroom and a kitchen. Further, they are fit for human habitation. Therefore, the apartments meet the definition of residential premises.
In addition your accommodation does not fit the definition of commercial residential premises.
Paragraph 100 of Goods and Services Tax Ruling 2003/16 Goods and services tax: inducements to enter into a lease of commercial premises (GSTR 2003/16) explains that a tenant may provide consideration to a landlord for the granting of a lease. In such cases the supply by the landlord is the granting of the lease, rather than the supply of the premises. The premium is paid as consideration for the granting of the lease. The distinction is important where the premises supplied are commercial premises.
However, paragraph 114 of GSTR 2003/16 explains that for residential premises, both the grant of the lease and the supply of the premises are covered by section 40-35 of the GST Act. Whilst the transactions and circumstances may characterise separate supplies, both are input taxed as each is a supply of premises that is by way of lease, hire or licence.
Therefore the $y is consideration for an input taxed supply.