Edited version of your written advice

Authorisation Number: 1013089762273

Date of advice: 5 October 2016

Ruling

Subject: GST and rental guarantee

Question

Is your receipt of the Guaranteed Rent, directly from the Vendor or by deduction from your solicitor's trust account, an adjustment event under section 19-10 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes, your receipt of the Guaranteed Rent, directly from the Vendor, or by deduction from your solicitor's trust account, are adjustment events under section 19-10 of the GST Act.

Relevant facts and circumstances

• You, specified entity are registered for GST.

• Specified entity is the Vendor in a sale contract executed specified date ("the Contract") for the specified address ("the Property"). Completion of the Contract occurred on specified date. You acquired the Property under the Contract.

• The parties treated the sale as a GST free supply of a going concern. You have confirmed that all elements necessary to treat the sale as a GST free supply of a going concern existed.

• You own commercial buildings and your enterprise is the leasing of the buildings to tenants.

• Specified clause of the Contract contained rent guarantee provisions.

• Specified clause contains definitions.

• Specified clause sets out the formula and an example with respect to calculating the Guaranteed Rent.

• Specified clause provides that you must use your best endeavours to advertise for tenants at your expense and negotiate and enter into leases as soon as possible in respect of the vacant areas.

• Specified clause provides that commencing on the Completion Date until the expiration of the rent guarantee period the Vendor will pay you on a monthly basis the Guaranteed Rent in respect of the vacant areas during that month. The Guaranteed Rent shall be paid upon you, among other things, providing the Vendor with a valid tax invoice for the Guaranteed Rent payment.

• The rental guarantee only applies when the premises are vacant. Once a shop has a tenant then the rental guarantee has no future application to that shop. Therefore, the guarantee does not apply if in future that same shop is vacant again.

• Specified clause provides that on the Completion Date the total amount of possible Guaranteed Rent, at that date, must be paid into your solicitor's trust account. This will serve as a retention fund to secure the Vendor's obligation under specified clause and it will be dealt with, among other things, as follows:

• if instalments of Guaranteed Rent payable under specified clause are not paid then the relevant amount may be deducted from the trust account and paid to you. You shall at the same time give, if you have not already done so, a tax invoice to the Vendor.

• The Contract is authority from both the Vendor and you for your solicitor to make payments from their trust account in accordance with specified clause.

• Specified clause provides that the Vendor and you agree that the maximum possible Guaranteed Rent which may be required to be paid to your solicitor's trust account on the Completion Date is specified sum inclusive of GST.

• After completion, the managing agent issued tax invoices to the Vendor for the Guaranteed Rent, which tax invoices provided that GST was payable. The Vendor paid tax invoices for the months of specified months.

• The Vendor then ceased to pay tax invoices for the Guaranteed Rent, with subsequent tax invoices issued by the managing agent then being paid from the money held in your solicitor's trust account. The Vendor subsequently advised the managing agent that Goods and Services Tax Determination GSTD 2014/3 Goods and services tax: do payments made by a vendor to a purchaser of real property when the rent received falls below a rental yield guaranteed by the vendor give rise to an adjustment event for the purposes of Division 19 of the A New Tax System (Goods and Services Tax) Act 1999? (GSTD 2014/3) applied. The vendor advised that no GST was applicable to the payment of the Guaranteed Rent in specified clause as any payment of the Guaranteed Rent simply reduced the consideration for the supply of the Property.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 subsection 9-10(1).

A New Tax System (Goods and Services Tax) Act 1999 paragraph 9-10(2)(g).

A New Tax System (Goods and Services Tax) Act 1999 Division 19.

Reasons for decision

Why the Guaranteed Rent is not a separate supply

A 'supply' is any form of supply whatsoever [subsection 9-10(1) of the GST Act]. 'Supply' also includes 'an entry into, …, an obligation…' [paragraph 9-10(2)(g) of the GST Act]. The undertaking to provide the Guaranteed Rent would fall into either of these two categories and is, therefore, prima facie a supply that is separate from the supply of the Property.

However, nothing in the the Contract indicates that the Guaranteed Rent is intended to be a supply made by the Vendor to you that is separate from the supply of the Property to you. In the absence of a clear intention to the contrary in the Contract, the Guaranteed Rent is readily viewed as being merely a term in the Contract for the sale of the Property.

Support for our view that the Guaranteed Rent should be viewed as being merely another term of the Contract for the supply of the Property is found in the United Kingdom case lliffe and Anor [1994] BVC 625 (the lliffe case). The taxpayer there acquired a lease of a unit for a specified sum. The taxpayer and the vendor entered into a mortgage capping agreement (MCA) under which the taxpayer received payments from the vendor to ensure the taxpayer's interest payments for their finance were kept below a certain level. The parties also entered into a rent guarantee agreement to protect the incoming cash flow of the taxpayer by guaranteeing the rental income over a 2 year period.

The question at issue was whether the payments made under the MCA were consideration for a supply made by the taxpayer to the vendor. That is, was there any service provided by the taxpayer to the vendor that was not simply an integral part of the overall agreement under which the vendor entered into various undertakings in return for a payment of a specified sum by the taxpayer? Although the tribunal only had to decide the question of whether the MCA payments were consideration for a supply made by the taxpayer to the vendor, they also addressed the treatment of the payments made by the vendor to the taxpayer under the rent guarantee agreement - deciding that they fell for the same treatment as the payments made under the MCA.

The tribunal found as facts that the commercial substance of the transaction entered into by the parties was that the vendor undertook:

• to complete the construction of the unit;

• to grant the lease at the peppercorn rent;

• to cap the interest expense incurred by the taxpayer;

• to ensure a certain level of rental income was received over a 2 year period.

In return, the tribunal found that the taxpayer undertook to pay a specified sum and to nominate the vendor as a letting agent.

The Commissioner contended that the payments received by the taxpayer under the MCA constituted an inducement offered to the taxpayer to enter into the transaction, take the lease and get the taxpayer to part with his money. The taxpayer contended that the payments received by them under the MCA were not consideration received for a supply made by them to the vendor.

The tribunal concluded on the facts, that the MCA was part and parcel of the overall transaction, and the terms entered into in the MCA were part of that transaction.

In the same way, we see the Guaranteed Rent as being but one term in the Contract for the sale of the Property.

GSTD 2014/3 does not technically apply in your situation because:

• there is no guaranteed 'rental yield' for the whole property; and

• specified clause of the Contract provides that "the purchaser must use its best endeavours to advertise for tenants at its own cost and negotiate and enter into" the leases.

Paragraph 5 of GSTD 2014/3 states:

"Rental guarantees that are not covered by the circumstances set out in paragraph 1 are outside the scope of this Determination. Whether payments made under such rental guarantees give rise to adjustments would require consideration of all the relevant facts and circumstances."

However, we are of the view that the following rationale from paragraph 1 of GSTD 2014/3 applies to your situation:

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.

Composite Supply

Another reason why we consider that the Guaranteed Rent is not a separate supply is that it could also be viewed as being incidental and integral to the dominant supply of the Property. Goods and Services Tax Ruling GSTR 2001/8 Goods and services tax: apportioning the consideration for a supply that includes taxable and non-taxable parts (GSTR 2001/8) provides guidance in differentiating between mixed and composite supplies. Paragraph 17 of GSTR 2001/8 provides information on a composite supply and states among other things that:

a 'composite supply' is used to describe a supply that contains a dominant part and includes something that is integral, ancillary or incidental to that part. You treat a composite supply as a supply of a single thing.

Thus, the Guaranteed Rent is simply a part of a composite supply made under the Contract. Therefore, the Guaranteed Rent is not a separate supply for the purposes of the GST Act. Paragraph 59 of GSTR 2001/8 provides information on the indicators that a part of a supply may be integral, ancillary or incidental to the dominant part of the supply. The relevant indicators from paragraph 59 of GSTR 2001/8 that the Guaranteed Rent is integral, ancillary or incidental to the supply of the Property are:

• it is reasonable to conclude that the guarantee is a means of better enjoying the Property supplied, rather than constituting an aim in itself for you; and

• it is necessary or contributes to the supply as a whole but cannot be identified as the dominant part of the supply.

Why payments of Guaranteed Rent are not consideration for a taxable supply (if any) made by you.

For the Guaranteed Rent to be consideration for a taxable supply (if any) made by you there must be a nexus between the payment and the supply.

As a statement of general principle, the tribunal in the Iliffe Case said:

'…in the absence of such clear evidence…, the tribunal should be reluctant to dissect the transaction entered into artificially into a separate supply of entering into the transaction and the transaction itself. What is the entire transaction will depend upon the facts of each individual case but the presumption must normally be that all the undertakings and commitments entered into by each of the parties to the transaction are themselves integral parts of the overall transaction and not separate commitments which can be categorised as inducements for the other party to enter into the overall transaction.'

For the above reasons, we are of the view that the Guaranteed Rent is not consideration for a separate taxable supply made by you.

The Guaranteed Rent payments are adjustment events

The consideration for sale of the Property is effectively reduced when the Vendor makes Guaranteed Rent payments directly to you or when you deduct those payments from the amount held in trust. The decrease in the consideration is an adjustment event within the meaning of Division 19 of the GST Act.

However, the initial specified sum deposit of Guaranteed Rent into your solicitor's trust account is not an adjustment event. This is because the mere depositing of the specified sum into the trust account has not had the effect of changing the consideration for either party.

In summary, we conclude that the Vendor entered into a single arrangement with you under which the Property was sold to you. One of the terms of that agreement is a Guaranteed Rent clause in your favour. The Guaranteed Rent is an integral part of the supply of the Property by the Vendor and so it is arguable that it can be viewed as being a part of a composite supply. You have not, on the facts presented to us, made a separate supply to the Vendor. Therefore, the Guaranteed Rent is not consideration for a taxable supply made by you. Finally, those Guaranteed Rent payments are merely made to meet the rent guarantee obligations under the Contract. The payments have the effect of changing the consideration for the supply of the Property. Accordingly, the payments are adjustment events.

As you have advised that the supply of the Property was a GST-free supply of a going concern the adjustment events will not result in an adjustment to your net amounts for the relevant tax periods. The 'net amount' refers to the GST payable or GST refundable in the relevant tax period. This means that there is no numerical adjustment to the Business Activity Statement that was lodged in relation to the tax period relevant to the sale of the Property. There is also no numerical adjustment to the Business Activity Statements that relate to the tax periods relevant to the receipt of the Guaranteed Rent. The GST payable or refundable for the relevant tax periods remains unchanged because the Guaranteed Rent only affects the amount of consideration for the GST-free supply of the Property.