Edited version of your written advice

Authorisation Number: 1012917832218

Date of advice: 9 December 2015

Ruling

Subject: Goods and services tax (GST) and payments under a sublease

Question

Is the payment to Entity A (you) by Entity B, of an amount under a sublease entered into between you and Entity B, consideration for a GST-free supply of water and sewerage services?

Answer

No, the payment made by Entity B to you is consideration for a single supply of real property under the sublease and is subject to GST. You are liable to remit GST in relation to the payment.

All legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

Section 7-1 provides that GST is payable on taxable supplies. Under section 9-5, one of the requirements for making a taxable supply is that you make the supply for consideration; however, the supply is not a taxable supply to the extent that it is GST-free or input taxed. If a supply is GST-free or input taxed, no GST is payable on the supply.

Section 9-10 provides that a supply is not just a supply of goods or services. Supplies can also be made in relation to rights, obligations and information for GST purposes. Under section 9-15, the term 'consideration' is broadly defined as including any payment, or any act or forbearance, 'in connection with', 'in response to' or 'for the inducement' of a supply.

To determine if the payment made by Entity B is for a GST-free supply, it is first necessary to examine whether you make a supply for which the payment constitutes consideration.

In your case, you entered into a lease of land with Entity C (Head Lease). You, in turn, sublet an area of the land to Entity B (subtenant). You do not have a written sublease with the subtenant, however, the basis on which you allow occupancy includes that the subtenant pays you an amount equal to the outgoings for water and sewerage charges levied by a Water Authority for which you are liable as lessee under the Head Lease, exclusive of GST, in relation to the respective area of land occupied (Sublease).

Goods and Services Tax Determination GSTD 2000/10 provides guidance about whether outgoings payable by a tenant under a commercial property lease are part of the consideration for the supply of the premises. The guidance and principles contained in GSTD 2000/10 are considered to apply equally to the circumstances in your case involving a sublessor and subtenant arrangement in relation to the subletting of an area of the land.

Paragraph 1 of GSTD 2000/10 explains that a supply of premises under a lease together with the services required by the tenant to use the premises will, subject to paragraph 5, be a single supply of real property for the purposes of the GST Act. Under section 195-1 'real property' is defined as including 'a licence to occupy land or any other contractual right exercisable over or in relation to land'. Where a single supply is made the reimbursement or payment of the landlord's outgoings is consideration for the supply of the premises.

Paragraph 5 of GSTD 2000/10 discusses whether a single supply or multiple supplies are made under a lease and explains that, 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. Paragraph 5 states:

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.

In your case, the supply you make to the subtenant is a single supply of real property. The provision of water and sewerage services under the Sublease is only incidental to the supply of real property. Further, the payment the subtenant makes to you constitutes consideration for the purposes of section 9-15. Therefore, the payment is consideration for the single supply of real property you make to the subtenant under the Sublease.

Supply to landlord is not a taxable supply

As it has been established above that you are making a single supply for consideration, it is next necessary to examine whether the supply is GST-free or input taxed.

Paragraph 7 of GSTD 2000/10 discusses circumstances where the supply to the landlord is not a taxable supply, including where the supply is a GST-free supply of water and sewerage services under Subdivision 38-I. The payment of outgoings by the tenant is not a payment for a supply that has the same character as the supply made by a third party to the landlord, as the payment is made for the supply by the landlord of the premises and not for the particular supply made to the landlord to which the outgoings relates. Paragraph 7 states:

Supply to landlord is not a taxable supply

7. If a single supply is made under the lease the payment of outgoings by the tenant is not 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).

Further, and of particular relevance in your case, the guidance at paragraph 10 of GSTR 2000/10 explains that a supply under the lease to the tenant which involves an incidental provision of water is not a GST-free supply of water for the purposes of the GST Act. The amount payable by the tenant in respect of water or sewerage is subject to GST if the supply of the premises is a taxable supply. Paragraph 10 states:

Supply to landlord is GST-free

10. Supplies of water and sewerage services to the landlord may be GST-free. Where the supply under the lease to the tenant involves an incidental provision of water this will not be a supply of water for the purposes of the GST Act. Unless the lease agreement specifies that the landlord will make a separate supply of water to the tenant, any contribution by the tenant to the landlord's expenditure on water will not be consideration for a GST-free supply of water. Where a single supply is made by the landlord, the amount payable by the tenant in respect of water or sewerage will be subject to GST if the supply of the premises is a taxable supply.

Therefore, consistent with the guidance at paragraph 10 of GSTD 2000/10, the payment made by the subtenant to you under the Sublease is not for a GST-free supply of water and sewerage services for the purposes of the GST Act.

In addition, there are no provisions of the GST Act that apply to make the supply to the subtenant input taxed.

Conclusion

Therefore, as the payment made by the subtenant to you is consideration for a supply and there are no provisions of the GST Act that apply to make the supply GST-free or input taxed, you are liable to remit GST if all of the other requirements for a taxable supply under section 9-5 are met. In relation to the other requirements, the supply made by you is made in the course or furtherance of your enterprise, the supply is connected with Australia and you are registered for GST.

Accordingly, you are making a taxable supply for which the payment by the subtenant to you under the Sublease is consideration and is subject to GST. You are liable to remit GST in relation to the payment.

Relevant facts and circumstances

You are registered for GST.

You entered into the Head Lease with Entity C which contains relevant provisions.

You sublet an area of the land that is the subject of the Head Lease to the subtenant.

You do not have a written Sublease with the subtenant, however, the basis on which you allow occupancy includes that the subtenant pays you an amount equal to the outgoings for water and sewerage charges levied by a Water Authority for which you are liable as lessee under the Head Lease, exclusive of GST, in relation to the respective area of land occupied.

Relevant legislative provisions

References to the GST Act:

• section 7-1

• section 9-5

• section 9-10

• section 9-15

• Subdivision 38-I.