Edited version of private advice

Authorisation Number: 1012677558771

Ruling

Subject: GST and charging services to commercial property tenants

Question 1

On your tax invoice, what is the correct amount of GST to be charged to the tenant, when you recovered land tax on behalf of the owner?

Decision 1

The correct amount of GST to be charged to the tenant was $1.1X.

Question 2

On the tax invoice, what is the correct amount of GST to be charged to the tenant when you recovered an insurance premium on behalf of the owner?

Decision 2

The correct amount of GST to be charged to the tenant was $1.1G.

Relevant facts and circumstances

• You manage commercial properties on behalf of their owners. You collect rent and certain property expenses from the tenants on behalf of the owners.

• In the first example, a state revenue office has issued a land tax assessment notice to a commercial property owner for a total amount of $X. As a state government levy, it has not been subject to goods and services tax (GST).

• As the property manager, you have submitted a tax invoice to the tenant to recover the land tax assessment payable by the owner. You have added GST $0.1X on to the land tax assessment and charged it to the tenant. The total amount payable by the tenant was $1.1X.

• In the second example, an insurance broker has issued a tax invoice for a total insurance premium $E to a commercial property owner. It included the actual premium $A, stamp duty $B, broker fee $C and GST $D.

• As the property manager, you have issued a tax invoice for $G to the tenant, to recover the insurance premium. On your invoice, you have removed the GST charged by the insurance broker and charged GST on the total balance. It resulted in charging GST on the actual insurance premium, stamp duty and broker fee to the tenant.

• You have mentioned that you follow the guidelines given in the Goods and Services Tax Determination GSTD 2000/10 (GSTD 2000/10 or determination).

• In both examples, the owners were registered for GST.

Relevant legislative provisions

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

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

Reasons for the decisions

Decision 1

GSTD 2000/10 (determination) refers to the issue of whether the outgoings payable by a tenant under a commercial property lease are part of the consideration for the supply of the premises. Paragraphs 1-3 of the determination state:

1. A supply of premises under a commercial property lease together with the services required by the tenant to use the premises will, subject to paragraph 5 of this Determination, be a single supply of real property for the purposes of the A New Tax System (Goods and Services Tax) Act 1999 ('GST Act') and the A New Tax System (Goods and Services Tax Transition) Act 1999 ('Transition Act'). Where a single supply is made the reimbursement or payment of the landlord's outgoings is consideration for the supply of the premises.

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.

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.

Paragraphs 5-6 of the determination refers to tenant's GST liability on services supplied by the landlord and state:

Single supply or multiple supplies

5. Whether a single supply or multiple supplies are made under a lease will depend on the nature of the supply and the terms of the individual agreement. There may be services referred to as outgoings which are provided to the tenant in addition to the premises and which are separate from the supply of the premises. For example, if the landlord makes a supply of office services such as typing and photocopying and makes a discrete charge for this supply based on the tenant's use of the services, this is a supply which is separate from the supply of the premises. If a payment is for a service that would normally be expected to form part of the supply of the premises and is merely incidental to the supply of the premises, then that payment will be for the supply of the premises.

6. Other obligations imposed under the lease for the tenant to reimburse the landlord, or pay costs for which the landlord is liable, will also form part of the consideration for the supply of the premises. Examples are insurance, promotional levies, and reimbursement of the landlord's costs of repairs and maintenance. If the tenant is liable for an expense regardless of the terms of the lease, the payment of the expense will not form part of the consideration for the supply of the premises.

Paragraph 7 of the determination explains the tenant's GST liability in case of a single supply made by the landlord and 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).

Accordingly, if the lease agreement signed between the tenant and the landlord requires the tenant to pay the land tax payable by the landlord, then payment of land tax will form a part of the consideration for the supply of the premises.

Taxable supply

Section 9-5 of the GST Act provides that you make a taxable supply if you make the supply for consideration, and the supply is made in the course or furtherance of an enterprise that you carry on, the supply is connected with Australia; and 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.

In this case the owner supplied the commercial premises and all the relevant services to the tenant for consideration and in the course of an enterprise of leasing commercial premises. The supply was connected with Australia as the property is located in Australia and the owner was registered for GST. A supply of commercial premises and the relevant services is not a GST-free or an input taxed supply under any provision of the GST Act. Therefore, the supply of the premises and the relevant services under a commercial lease to the tenant was a taxable supply from the owner to the tenant.

Under subsection 81-5(1) of the GST Act, a payment or the discharging of a liability to make a payment is not the provision of consideration to the extent the payment is an Australian tax. Under provisions of the GST Act, an Australian law includes a state law. Therefore, when the owner pays land tax to the state government, it is not consideration for a supply from the state government. Therefore, the supply from the state government to the owner was not a taxable supply and was not subject to GST.

However, when the same supply was on supplied from the owner to the tenant, under the terms of the lease agreement, it was a taxable supply from the owner to the tenant and the owner incurred a GST liability.

The GST inclusive value of this taxable supply was land tax $x plus GST $x amounting to $x. Therefore, the correct amount of GST to be charged to the tenant was $1.1x.

Decision 2

Example 3 of GSTD 2000/10 refers to a lease, which allows the owner to recover GST from the tenant and it is quoted below.

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.

In the second example you provided, the insurance broker has supplied insurance services to the commercial property owner for a total GST inclusive value of $G. Under the commercial lease, the owner has on supplied this service to the tenant.

The on supply of the insurance services to the tenant satisfied all the requirements of section 9-5 of the GST Act as a taxable supply.

In this case, the GST exclusive value of the supply from the owner to the tenant included the premium of $3G, stamp duty of $G and brokerage fee of $G which taken together amounted to $G GST exclusive.

The GST inclusive value of the supply of insurance services to the tenant was $G plus GST $G amounting to $G.

Therefore, the correct amount of GST to be charged to the tenant was $1.1G.