Edited version of your written advice

Authorisation Number: 1012833138784

Date of advice: 8 July 2015

Ruling

Subject: GST and other payments made under a lease

Question

Are the other payments made by you in accordance with the terms of a lease (Lease), consideration for a creditable acquisition under section 11-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes, where the supply made by the Landlord satisfies the requirements of a taxable supply made to you, the other payments made by you in accordance with the terms of the Lease is consideration for a creditable acquisition under section 11-5 of the GST Act.

Relevant facts and circumstances

You are registered for goods and services tax (GST). You report GST on a non cash basis. You carry on an enterprise.

You entered into an agreement with the owner of land, under which you agreed to contribute funds towards the cost of improvements on the Land.

The owner of the Land as Landlord entered into a Lease with you as the tenant (Tenant) to lease the Land on which the improvements had been made.

Under the terms of the Lease, the Landlord is to conduct the replacement of certain surfaces and you are required to contribute funds towards the cost of this replacement.

The GST clause in the Lease provides that if GST is payable on the supply of any good, service or thing by either party under the Lease the party receiving the supply must pay to the party making the supply any GST payable by the supplier in respect of that supply. A party's obligation to pay an amount is subject to a valid tax invoice being delivered to that party.

The Landlord issued you with a one page document with the words 'tax invoice' nominating a total amount (inclusive of GST) payable. That document:

• provides a description of the supply

• shows an amount of GST payable

• and provides the Landlord's name and ABN.

The Landlord is registered for GST and on the facts provided, carries on an enterprise.

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 9-10,

A New Tax System (Goods and Services Tax) Act 1999 Section 9-15,

A New Tax System (Goods and Services Tax) Act 1999 Section 11-5,

A New Tax System (Goods and Services Tax) Act 1999 Section 11-20 and

A New Tax System (Goods and Services Tax) Act 1999 Section 195-1.

Reasons for decision

Under section 11-20 of the GST Act you are entitled to input tax credits, for any creditable acquisition that you make.

An acquisition is a creditable acquisition under section 11-5 of the GST Act if:

• you acquire anything solely or partly for a creditable purpose

• the supply of the thing to you is a taxable supply

• you provide or are liable to provide, consideration for the supply, and

• you are registered or required to be registered for GST.

Under subsection 11-15(1) of the GST Act, you acquire a thing for a creditable purpose to the extent that you acquire it in carrying on your enterprise. However, under subsection 11-15(2) of the GST Act you do not acquire a thing for a creditable purpose to the extent that the acquisition relates to making input taxed supplies or is of a private or domestic nature.

On the facts provided, you are registered for GST and any acquisitions made pursuant to the Lease are acquired in carrying on your enterprise and are not input taxed or of a private or domestic nature.

The issue that arises under section 11-5 of the GST Act, in the present circumstances, is whether the other payments made by you is consideration for the supply of a 'thing' to you that is a taxable supply made to you by the Landlord.

In other words, to make an acquisition you have to be the recipient of the supply of the 'thing' you are acquiring. The term 'recipient' is defined in section 195-1 of the GST Act to mean the entity to which the supply was made. That definition suggests that there is a supplier, a recipient and that something is passed from the supplier to the recipient.

The GST consequences in relation to such payments, therefore turns on identifying

• one or more supplies made by the Landlord to you, and

• a sufficient nexus between the payments made by you and any supplies made to you by the Landlord such that the payments are consideration for those supplies.

The Commissioner of Taxation (Commissioner) has considered the concept of 'supply' and 'consideration' in the context of arrangements involving a supplier and the ultimate recipient in Goods and Services Tax Ruling GSTR 2006/9.

GSTR 2006/9 sets out ten propositions to assist in analysing a transaction to identify the supply or supplies made in a transaction.

A supply is a taxable supply under section 9-5 of the GST Act if, among other criteria not presently relevant, the Landlord made a supply for consideration (paragraphs 9-5(a) of the GST Act).

In addition to the general words 'any form of supply whatsoever' in subsection 9-10(1) of the GST Act, subsection 9-10(2) of the GST Act includes, amongst other things, 'a supply of services', a grant … of real property' or 'an entry into … an obligation to do anything…'.

The meaning of 'acquisition' is given in section 11-10 of the GST Act and is the corollary to the meaning of supply in section 9-10 of the GST and includes an acceptance of a grant of real property or an acquisition of a right to require another person to do anything or any combination of any 2 or more matters referred to in subsection 11-10(2) of the GST Act.

Proposition 6 in GSTR 2006/9 provides that a 'supply' usually, but not necessarily, requires something to be passed from one entity to another. The grant of a lease interest by the Landlord in commercial premises and the corresponding acquisition of the lease interest by you under the terms of the Lease fall within the definition of an acquisition and a supply under sections 11-10 and 9-10 of the GST Act respectively. The 'thing', in this case, which has passed from the Landlord to you as the Tenant, is the lease interest in the Land.

The terms of the Lease give rise to a number of obligations by both parties. The Landlord's responsibility under the Lease to conduct the replacement also answers the definition of a supply of an entry into an obligation to do something and in the manner specified in the Lease. That supply corresponds to an acquisition by you of a right to require the Landlord to do something.

The Lease may give rise to many acts or things which satisfy the statutory definition of a supply and a corresponding acquisition by you. However, unless there is a sufficient nexus between the payments made by you and the supplies made by the Landlord there is no taxable supply made to you under the Lease and hence no creditable acquisition made by you.

Consideration is defined in section 195-1 of the GST Act to mean any consideration within the meaning given by section 9-15 of the GST Act in connection with the supply or acquisition.

The term 'consideration' is defined in subsection 9-15(1) of the GST Act so as to include any payment, or any act or forbearance, in connection with a supply of anything and any payment, or any act or forbearance, in response to or for the inducement of a supply of anything.

For the payments made by you to be consideration for a supply made by the Landlord there must be a sufficient nexus between the payment and the supply. A payment is consideration for a supply if the payment is 'in connection with', 'in response to' or 'for the inducement of a supply'. In identifying the character of the connection, the word 'for' ensures that not every connection between a supply and consideration meets the requirements for a taxable supply.

In the present circumstances, the rent and any other money payable under the Lease such as those amounts specified in the Lease are payments that have a sufficient nexus with the supplies identified to constitute consideration for those supplies.

This accords with the view expressed in Goods and Services Tax Determination GSTD 2000/10 in which the Commissioner explains that 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 which the landlord is liable.

In particular, paragraph 6 of GSTD 2000/10 states:

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 or 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.

Here, the Lease indicates that the Landlord is responsible for conducting the replacement. The Landlord is liable for those costs and the other payments made by you forms part of the consideration for the supply.

Having regards to the arrangement between you and the Landlord contemplated by the Lease the essential requirement for a taxable supply that there is 'a supply for consideration' is satisfied. Where the Landlord satisfies the other requirements of section 9-5 of the GST Act, the supply made by the Landlord of the commercial premises (lease interest in the Land) is a taxable supply on which GST is payable. In issuing you with a tax invoice calling for you to make a payment which includes an amount of GST payable, the Landlord is indicating that the supply it is making to you is a taxable supply.

If that is the case, then the requirement for a creditable acquisition under section 11-5 of the GST Act that the supply of the 'thing' to you is a taxable supply is also satisfied.

It follows that, all of the requirements for a creditable acquisition would be satisfied where the Landlord satisfies the requirements for making a taxable supply. As such the other payments made by you is consideration for creditable acquisition which gives rise to an entitlement to input tax credits.