Edited version of your private ruling

Authorisation Number: 1012455300257

Ruling

Subject: GST and the on-charging of water rates

Question 1

Does goods and services tax (GST) apply when the landlord on charges water rates to the tenant?

Answer

Yes. GST applies when the landlord on charges water rates to the tenant. The outgoings payable by the tenant are part of the consideration for the taxable supply of the commercial premises. Therefore, the landlord is required to remit 1/11^th of the on charged outgoings to the Australian Taxation Office.

Question 2

Does GST apply if the tenant pays the water rates directly to the council?

Answer

Yes. GST applies irrespective of whether the tenant pays the water rates to the landlord or directly to the council.

Question 3

Is the landlord able to recover the GST from their tenant?

Answer

Whether the landlord is able to recover the GST from the tenant is a contractual matter to be determined between the parties to the agreement. This matter is not governed by the GST Act.

Relevant facts and circumstances

· You were registered for GST between the periods dd/mm/yy to dd/mm/yy.

· You leased a commercial premise from the landlord.

· The landlord is registered for GST.

· The Lease Agreement between you and the landlord states the following:

For the purposes of the Act, the Occupancy Costs for this lease are:

(a) rent: $xx,xxx p.a. (plus GST)

(b) total prescribed outgoings (section E or F) = $x,xxx approx. p.a. (plus GST)

(c) tenant's contribution to the marketing fund (section G) = NIL

§ Total: $xx,xxx

· Water rates are received in the name of the landlord.

· The amount of the rates is then on charged to you plus GST.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 section 9-5

A New Tax System (Goods and Services Tax) Act 1999 section 81-5

Reasons for decision

Question 1

Summary

GST applies when the landlord on charges water rates to the tenant. The outgoings payable by the tenant are part of the consideration for the taxable supply of the commercial premises. Therefore, the landlord is required to remit 1/11^th of the on charged outgoings to the Australian Taxation Office.

Detailed reasoning

The provisions of subsection 81-5(2) of the GST Act, state that the payment of Australian taxes, fees or charges specified in the Treasurer's Determination is not regarded as consideration for a supply. Since such a payment is deemed not to be consideration for a supply, a GST liability does not arise under section 9-5 of the GST Act. That is, such a supply is not subject to GST. Water rates are amongst the items listed in that determination.

Although charges such as water rates are not subject to GST, yet their GST-free status only applies to the entity that is legally liable for the payment of the charges. Subsection 81-5(1) of the GST Act states:

The payment of any Australian tax, fee or charge (other than the GST) that you make, or the discharging of your liability to make such payment, is to be treated as the provision of consideration, to the entity to which the tax, fee or charge is payable, for a supply that the entity makes to you.

Therefore, in your case as the landlord is legally liable for the payment of the charges, the rates are GST-free only to the landlord, and not the lessee.

Paragraph 8 of the Goods and Services Tax Determination GSTD 2000/10 provides that a payment of water rates made by the landlord may not be subject to GST because of the operation of Division 81 of the GST Act. However, if the tenant is required under the terms of the lease to pay or incur 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. Hence Division 81 does not apply to the tenant's payment of the water rates, and does not render these expenses GST free.

It is explained that where charges such as water rates are on-charged to a tenant, they lose their identity as distinct supplies which were GST-free originally. That is, when the tenant pays the charges on behalf of the landlord to a third party, the reimbursement or payment by the tenant forms part of the consideration for the supply of premises. The landlord is liable for GST on the consideration for the taxable supply of the premises which includes the reimbursement or payment of these charges (paragraph 9 of GSTD 2000/10)

A supply of premises under a commercial property lease together with the incidental services required by a tenant to use the premises is considered a single supply of real property. In such instances, the payment by the lessee either to the landlord or managing company for expenses or costs for which the landlord is liable will form part of the consideration of the supply of the premises. Since the supply of the premises is a taxable supply, a GST liability arises on the consideration as a whole including the amounts paid by the lessee as payment for water rates.

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.

Therefore, GST applies when the landlord on charges water rates to the tenant. The landlord is required to remit 1/11^th of the on charged outgoings to the Australian Taxation Office.

Question 2

Summary

GST applies irrespective of whether the tenant pays the water rates to the landlord or directly to the council.

Detailed reasoning

It does not matter whether the tenant makes the payment of the rates and charges to the landlord or directly to the council. This is because the landlord, as the owner of the property, is liability for the payment of the rates and charges, not the tenant. The supply of services by the council is to the landlord, and the landlord is making a separate supply of property to the tenant. Therefore, if the tenant pays the outgoings directly to the council they would be making the payment on the landlord's behalf, not on their own behalf.

Paragraph 27 and 28 of GSTD 2000/10 gives and example of the above:

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.

The tax invoice that Annette gives Matthew could include the following information:

Rent	$1,000
Rates as outgoing	$220
GST	$122
Total	$1,342
less Rates payable to Council	$220
Net amount payable	$1,122

Therefore, GST applies irrespective of whether the tenant pays the water rates to the landlord or directly to the council.

Question 3

Summary

Whether the landlord is able to recover the GST from the tenant is a contractual matter to be determined between the parties to the agreement. This matter is not governed by the GST Act.

Detailed reasoning

The following examples from GSTD 2000/10 demonstrate a landlord's GST liability taking into account whether or not the lease allows GST to be recovered from the tenant.

Example 3 lease allows GST to be recovered from tenant

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 - lease does not allow GST to be recovered from tenant but supply is taxable

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 increased. 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).

Part 2 of the lease agreement between you and the landlord states the following:

For the purposes of the Act, the Occupancy Costs for this lease are:

(a) rent: $xx,xxx p.a. (plus GST)

(b) total prescribed outgoings (section E or F) = $x,xxx approx. p.a. (plus GST)

(c) tenant's contribution to the marketing fund (section G) = NIL

Total: $xx,xxx

According to the lease agreement, the phrase '(plus GST)' indicates that the lease allows GST to be recovered from the tenant. Therefore, under the agreement, the landlord will be able to recoup from you any GST payable by the landlord in relation to the lease.

Further issues for you to consider

The payment you make for water forms part of the consideration for a taxable supply of commercial premises. Consequently, you are entitled to input tax credits on the acquisitions of that taxable supply for the periods in which you were registered for GST, provided you hold a tax invoice.