Edited version of your written advice

Authorisation Number: 1051318412720

Date of advice: 12 December 2017

Ruling

Subject: GST and the supply of a lease

Question

Will you be liable for goods and services tax (GST) on an up-front payment received for a lease being granted pursuant to section 9-40 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes.

Relevant facts and circumstances

You are registered for GST.

You are a non-profit entity.

You own land (the Property) where you operate a club.

You are currently negotiating with Entity B (the Developer) to utilise part of the Property (not being utilised by the Club) to develop and operate a retirement village. It is expected to comprise Independent living units (ILU’s) and Care units (the Desired Development Yield). In addition there is expected to be communal facilities.

The arrangement will be governed by the following documents:

● Development Management Agreement (DMA) between you and Entity B.

● Lease granted by you to Entity B.

The arrangement being negotiated with Entity B includes:

● The receipt of an upfront payment of $X (exclusive of GST) for a X year lease – the payment would fall due either at the commencement of construction of Stage One, or within 30 days of the Development Application being approved by the Council, whichever occurs first. The final amount will be dependent on Entity B achieving the Desired Development Yield and a formulae set out in the DMA)

● X% commission will be payable to the Club on the initial sale of any units to members of the Club.

● X% of any Deferred Management Fees earned by Entity B on the re-sale of any units through the lease period will be payable to the Club.

● The granting of the Lease is conditional on Entity B obtaining the development approval and the Survey Plan being registered and will be granted five business days after these conditions are satisfied. The Lease will be granted prior to construction of the premises.

You have provided a copy of the draft DMA which includes the following information:

● In consideration of Entity B making the payments under this Agreement the Club has agreed to grant Entity B the Lease.

● Premium means $X (inclusive of GST).

● The Lease is granted in consideration of Entity B paying the Premium.

● You have provided a copy of the proposed Lease between you and Entity B. It includes the following information:

● The Tenant will pay to the Landlord the Rent as follows:

● X% of the Exit Fee received by the Tenant from residents of the Retirement Village Scheme

● X% of the Ingoing Contribution received by the Tenant from initial sales of the right to occupy units in the Retirement Village Scheme to residents of the Retirement Village Scheme who are members of the Landlord at the date of the sale to the member

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 9-40

A New Tax System (Goods and Services Tax) Act 1999 Subsection 29-5(1)

A New Tax System (Goods and Services Tax) Act 1999 Division 156

Reasons for decision

In this reasoning, please note:

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

● all reference materials referred to are available on the Australian Taxation Office (ATO) website ato.gov.au

● all legislative terms of the GST Act marked with an asterisk are defined in section 195-1 of the GST Act.

Section 9-40 requires you to pay GST on any taxable supply you make.

Section 9-5 provides that you make a taxable supply if:

a) you make the supply for consideration

b) the supply is made in the course or furtherance of an enterprise that you carry on

c) the supply is connected with the indirect tax zone (Australia), and

d) you are registered, or required to be registered, for GST.

However, the supply is not a taxable supply to the extent that it is GST-free or input taxed.

It is first necessary to determine what is supplied for the upfront payment, which is defined in the DMA as the Premium.

Paragraphs 68 to 73 of Goods and Services Tax Ruling GSTR 2000/35 Goods and services tax: Division 156 - supplies and acquisitions made on a progressive or periodic basis provides guidance on lease premiums.

A genuine lease premium is consideration for the grant of the lease, whilst Rent is a payment for the use of the property leased. A lease premium is consideration for a supply which is separate from the supply of the leased property under the lease.

The supply for which the lease premium is paid is not made for a period or on a progressive basis, therefore division 156 does not apply. The basic attribution rule in subsection 29-5(1) will apply to attribute the GST payable to the earlier of the tax period in which any of the lease premium is received, or an invoice is issued.

It is a question of fact whether an amount paid is rent or a lease premium. If the terms of the lease agreement show the payment is for the use of the property rather than for the grant of the lease, then the amount will be rent and not a lease premium.

In this case:

● The lease makes no reference to the Premium which is outlined in the DMA.

● The DMA provides that the Lease is granted in consideration of RA paying the Premium.

● The Premium is due either at the commencement of construction of Stage One, or within 30 days of the Development Application being approved by the Council, whichever occurs first.

We consider that the upfront payment is a lease premium and not a payment for the use of the property leased.

In your case, you are registered for GST and will make a supply for consideration in in Australia in the course of your enterprise. In addition, there are no provisions whereby the supply would be GST-free or input taxed.

As such you will make a taxable supply and you will you be liable for GST on the up-front payment received.