Edited version of your written advice

Authorisation Number: 1012930515436

Date of advice: 31 May 2016

Ruling

Subject: Goods and services tax (GST) and rental guarantee payments

Question

Do the rental payments made by you to the Buyer/Lessor during a period of vacancy reduce the consideration for the supply of the property by way of sale and therefore give rise to a decreasing adjustment under Division 19 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)

Answer

No.

Relevant facts and circumstances

You are registered for GST.

You sell new residential premises to a Buyer for monetary consideration under a Contract of Sale. You then lease the property back from the Buyer under a Lease Agreement for an amount of 'guaranteed rent'.

You sub-lease the properties to X's employees. X is required to pay you rent pursuant to a contract between you and X.

You provided the Australian Taxation Office (ATO) with a copy of a typical Contract of Sale and Lease Agreement.

Sale of the property to the Buyer

You enter into a Contract of Sale with each Buyer.

The sale of the property is a taxable supply.

Pursuant to the Contract of Sale:

• On the settlement date the Buyer grants you with a lease of the property on the terms and conditions set out in the Lease Agreement annexed to the Contract of Sale.

• The commencement date of the lease is the settlement date.

Lease of the property to you

Under the Lease Agreement the Buyer leases to you the property described in the Lease Agreement and you accept the lease of the property for the term and at the rent specified and subject to the terms and conditions contained in the Lease Agreement and acknowledge the amount payable or other consideration for the lease.

Under the Lease Agreement the Buyer/Lessor acknowledges the specified purpose of entering into a Lease Agreement with you. That is, you lease the property to be able to fulfil your role to allow X's employees to occupy the property.

The term of a lease agreement between you and a buyer is up to a specified number of years.

The Lease Agreement specifies the frequency of rent review during the term of the lease.

The rent review mechanism ensures that the Lessor will receive at least the rent at the commencement date for the duration of the lease. Where the market rent increases above the rent at the commencement date, the Lessor will be entitled to the increased rent.

The Lease Agreement specifies when the rent accrues, how each periodic payment is to be calculated, when rent is required to be paid and the method of payment.

The Lease Agreement, with respect to occupancy arrangements, provides that provided that you continue to pay rent in accordance with the agreement, the Lessor consents to you:

(a) allowing X's employees to occupy the property

(b) subletting the property on the private rental market, or

(c) leaving the premises unoccupied.

By virtue of the Lease Agreement, you are required to continue to pay rent to the Lessors (Buyers) even when the property is unoccupied.

You have provided the ATO with details of a range of marketing materials that you use with respect to the rental guarantee arrangement.

Your contentions

You submitted that the amounts paid by you to the Buyer/Lessor are not consideration for a supply of residential accommodation to the extent that the property is vacant and is not being used for the intended primary purpose as residential accommodation.

In your view the agreement to pay rent to a Buyer/Lessor when the property is not occupied is an undertaking or other arrangement that is not consideration for a separate supply by the Buyer to you or by you to the Buyer. You stated that the payments that you make to the Buyer/Lessor when the property is unoccupied encourages a Buyer to enter into the Contract of Sale. Further, the agreement to pay rent even in the periods of vacancy forms part of the Lease Agreement which in turn forms part of the Contract of Sale of the property. You consider that there is such a close nexus between the lease and the Contract of Sale that the Lease Agreement is integral, ancillary or incidental to another dominant supply made by you, being the supply of new residential premises by way of sale.

It is your view that by virtue of the nexus between the rental guarantee payment and the supply of the property under the Contract of Sale, the consideration for the supply of the property by way of lease to you should be limited to the rent payable when the property is tenanted and used predominantly for residential accommodation.

You therefore consider that the rent that you pay under the lease agreement is partly consideration for the supply of the residential premises by way of lease and partly a rental guarantee. The lease payments made to the Buyer/Lessor when the property is vacant is not consideration paid for the tenancy of the property rather the payment has the effect of reducing the higher Purchase Price paid by the Buyer/Lessor.

You also referred to Goods and Services Tax Determination GSTD 2014/3 and consider that the facts and circumstances of your agreement with the Buyer/Lessor under the Lease Agreement are very similar to the circumstances set out in paragraph 1 of GSTD 2014/3.

Relevant legislative provisions

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

A New Tax System (Goods and Services Tax) Act 1999 subsection 19-10(1)

A New Tax System (Goods and Services Tax) Act 1999 subsection 19-10(2)

A New Tax System (Goods and Services Tax) Act 1999 section 19-40

A New Tax System (Goods and Services Tax) Act 1999 section 19-55

Reasons for decision

Summary

You do not have a decreasing adjustment under Division 19 of the GST Act because the amounts in question do not change the consideration for your sale of the premises.

Detailed reasoning

Section 19-40 of the GST Act sets out the requirements for an adjustment to arise under Division 19 of the GST Act. It states:

You have an adjustment for a supply for which you are liable to pay GST (or would be liable to pay GST if it were a *taxable supply) if:

(a) in relation to the supply, one or more *adjustments event occur during a tax period; and

(b) GST on the supply was attributable to an earlier tax period (or, if the supply was not a taxable supply, would have been attributable to an earlier tax period had the supply been a taxable supply); and

(c) as a result of those adjustment events, the *previously attributed GST amount for the supply (if any) no longer correctly reflects the amount of GST (if any) on the supply (the corrected GST amount), taking into account any change of circumstances that has given rise to an adjustment for the supply under subdivision or Division 21 or 134.

(* denotes a term defined in section 195-1 of the GST Act)

Section 19-10 of the GST Act defines 'adjustment event'. Subsection 19-10(1) of the GST Act states:

An adjustment event is any event which has the effect of:

(a) cancelling a supply or acquisition; or

(b) changing the *consideration for a supply or acquisition; or

(c) causing a supply or acquisition to become, or stop being, a *taxable supply or *creditable acquisition.

Paragraph 19-10(2)(b) of the GST Act provides that a change in the previously agreed consideration for a supply, whether due to the offer of a discount or otherwise, is an example of an adjustment event.

Section 9-15 of the GST Act provides that a payment will be consideration for a supply if the payment is 'in connection with', 'in response to' or 'for the inducement' of a supply of anything.

Thus, there must be a sufficient nexus between a particular payment and a particular supply for the payment to be consideration for that supply.

Goods and Services Tax Ruling GSTR 2001/6: Goods and Services Tax: non-monetary consideration (GSTR 2001/16) considers the issue of whether a sufficient nexus exists between a payment and a supply. Paragraphs 71 and 72 of GSTR 2001/16 state:

71. In determining whether a sufficient nexus exists between supply and consideration, regard needs to be had to the true character of the transaction. An arrangement between parties will be characterised not merely by the description that parties give to the arrangement, but by looking at all of the transactions entered into and the circumstances in which the transactions are made.

72. The test as to whether there is a sufficient nexus is an objective test. The motive of the supplier and the recipient also may be relevant in determining whether the supply was made for consideration, if a reasonable assessment of the evidence supports that motive.

You submitted that the amounts paid by you to the Buyer/Lessor are not consideration for a supply of residential accommodation to the extent that the property is vacant and is not being used for the intended primary purpose as residential accommodation.

In your view the agreement to pay rent to a Buyer/Lessor when the Property is not occupied is an undertaking or other arrangement that is not consideration for a separate supply by the Buyer to you or by you to the Buyer. You stated that the payments that you make to the Buyer/Lessor when the property is unoccupied encourages a Buyer to enter into the Contract of Sale. Further, the agreement to pay rent even in the periods of vacancy forms part of the Lease Agreement which in turn forms part of the Contract of Sale of the property. You consider that there is such a close nexus between the lease and the Contract of Sale that the Lease Agreement is integral, ancillary or incidental to another dominant supply made by you, being the supply of new residential premises by way of sale.

It is your view that by virtue of the nexus between the rental guarantee payment and the supply of the property under the Contract of Sale, the consideration for the supply of the property by way of lease to you should be limited to the rent payable when the property is tenanted and used predominantly for residential accommodation.

You therefore consider that the rent that you pay under the Lease Agreement is partly consideration for the supply of the residential premises by way of lease and partly a rental guarantee. The lease payments made to the Buyer/Lessor when the property is vacant is not consideration paid for the tenancy of the property rather the payment has the effect of reducing the higher Purchase Price paid by the Buyer/Lessor.

We disagree with the above view.

We consider that the payments that you make under the Lease Agreement to the Buyer have an exclusive nexus with the supply of the premises by way of lease to you. These payments are rent whether the property is occupied or not. It should be noted that a property can be leased even if it is not occupied.

In your case, the Buyer/Lessor leases the residential premises to you pursuant to the Lease Agreement that you enter into with the Buyer/Lessor. You are responsible to pay rent to the Buyer/Lessor under the Lease Agreement for the term of the lease. In return, you get vacant possession of the property for the term of the lease. Pursuant the Lease Agreement, provided you continue to pay rent, you may allow X's employees to occupy the property, sublet the property on the private rental market, or leave the premises unoccupied.

Under the Lease Agreement, you simply pay rent for the lease of the property from the Buyer and nothing in that agreement or otherwise deprives those payments of that character. The payments that you make to the Buyer/Lessor under the Lease Agreement are in the nature of rent. There is no rental guarantee payment. The marketing use of the term 'guarantee' in your case may make your rent obligation more emphatic, but it provides no additional legal benefit to the Buyer in your case.

While you make a promise to pay rent during periods of vacancy, this promise confers no 'measurable practical benefit' on the Buyer. The reason is that the Lease Agreement obliges the payment of rent by you to the Buyer/Lessor anyway, which is something the Buyer can rely on in any legal proceedings following rental default.

Additionally, the idea that payments made in satisfaction of a promise to perform an existing obligation change the legal nature of those payments runs against a major theme in contract law. The arrangement you have with a Buyer is simply an arrangement for you to pay rent to the Buyer in return for exclusive possession of the property for the term of the lease. The fact that the language of guarantee is used does not change the character of the arrangements, nor does it mean the rent you pay during a period of vacancy adjusts the purchase price retroactively.

You also referred to GSTD 2014/3 and consider that the facts and circumstances of your agreement with the Buyer/Lessor under the Lease Agreement are very similar to the circumstances set out in paragraph 1 of GSTD 2014/3.

We disagree.

Paragraph 1 of GSTD 2014/3 provides that payments made to a purchaser of real property by the vendor when the rent received falls below the rental yield guaranteed by the vendor of the real property for a specified period, give rise to an adjustment event for the purposes of Division 19 of the GST Act when:

• the payments are made by the vendor, pursuant to a bilateral agreement between the vendor and the purchaser of the real property, and

• the guaranteed rental yield is a bona fide and reasonable representation of the rental return that the real property may achieve, and of how the property is expected to perform in the market place, at the time that the vendor and the purchaser enter into the agreement under which the rental guarantee payments are required to be made

• the agreement between the vendor and the purchaser of the real property is integral to the contractual arrangement under which the parties have agreed to the terms and set the price for the sale of the property

• the vendor and purchaser agree, as part of the terms of their agreement, that the vendor is responsible for securing a tenant, and the vendor may act as the purchaser's letting agent or may appoint an external letting agent for the real property acquired under the contract of sale, and

• the terms of the agreement between the vendor and the purchaser of the real property include:

i. the real property is to be leased to a tenant pursuant to a lease agreement between the purchaser of the real property and the tenant

ii. the vendor is required to make a payment or payments to the purchaser which are based on the difference between the rent received from the real property (or relevant part of the real property) and the amount of the return that the property (or relevant part of the property) is expected to achieve in the market place (that is, the guaranteed rental yield)

iii. the vendor guarantees the rental amount or the rental yield of the real property for a set period of time subsequent to its sale to the purchaser, and

iv. the consideration provided by the purchaser is limited to the agreed sale price for the real property, and the purchaser does not provide any separate or additional consideration for the rental guarantee.

In GSTD 2014/3, it is the purchaser that leases the property direct to the tenant, with the vendor guaranteeing rent to the purchaser in periods of vacancy and where the actual rent falls below/fails to achieve a guaranteed level. There is no leaseback arrangement considered in GSTD 2014/3 between the vendor and the purchaser, nor does the vendor at any stage enter into any legal relationship directly or indirectly with the tenant. What happens in the GSTD 2014/3 scenario is that the vendor independently agrees to meet any rent shortfall (the shortfall between guaranteed rent and rent received) in the situation where the vendor would not otherwise have any obligation in this regard.

For the above reasons, we do not consider that the reasoning or principles regarding rental guarantee payments which GSTD 2014/3 seeks to explain apply in your case. Therefore, that determination is not a basis for concluding that the payments in question in your case are a refund of part of the purchase price of the property.

Conclusion

The payments that you make to the Buyer/Lessor during the periods that the property is unoccupied are consideration for the supply of the residential premises by way of lease to you. The payments do not represent a refund of part of the purchase price of the property. Therefore, they are not an adjustment event in relation to the sale of the property. Hence, you do not have an adjustment under Division 19 of the GST Act.