GST issues registers

Property and construction

Section 10 - leased or rented property

Table note: (a) added, (u) updated, (w) withdrawn

10.1 Ruling on GST-free supplies under existing agreements

The GST implications for a supply of a leased or rented property under a transitional arrangement (that is, an arrangement that spans 1 July 2000) are discussed in GSTR 2000/16.

10.2 Transitional and general issues

Issues 10.2.1 to 10.2.9 are concerned with matters that arose during the introduction of GST, and that are adequately dealt with by GSTR 2000/16. These issues have been withdrawn from 21/01/2004.

10.2.1 Are supplies of commercial premises by way of lease subject to GST?

Withdrawn on 21/01/2004.

10.2.2 Does a 'rates and taxes' clause under a long term lease give rise to a 'review opportunity'?

Withdrawn on 21/01/2004.

10.2.3 Does an 'option to renew' clause amount to a review opportunity and does the exercise of the option to renew result in the parties entering into a new lease?

Withdrawn on 21/01/2004.

10.2.4 Does a clause which calculates rent based upon the turnover of the lessee's business amount to a review opportunity?

Withdrawn on 21/01/2004.

10.2.5 Will a valuer, asked to conduct a rent review under a lease agreement on or after 8 July 1999, include an uplift for GST or take GST into account directly or indirectly in fixing the value?

Withdrawn on 21/01/2004.

10.2.6 Is a market rent review a review opportunity?

Withdrawn on 21/01/2004.

10.2.7 It may be necessary to establish whether the recipient of the supply is entitled to claim full input tax credits. Will a declaration made by the recipient of the supply be sufficient to satisfy this requirement?

Withdrawn on 21/01/2004.

10.2.8 Can a lessee claim input tax credits for lease payments made on or after 1 July 2005, where all of the requirements in section 13 of the Transition Act have been satisfied?

Withdrawn on 21/01/2004.

10.2.9 Can landlords claim input tax credits for the GST included in the price of building expenses?

Withdrawn on 21/01/2004.

10.3 General

Issues 10.3.1 to 10.3.2 are concerned with matters that arose during the introduction of GST, and that are adequately dealt with by GSTR 2000/16. These issues have been withdrawn.

10.3.1 Is GST payable on the supply of commercial premises by way of lease where the lease:
- is silent on GST?
- payments can be grossed up?
- was entered into before 1 July 2000 and a fixed contract price is stated?

Withdrawn on 21/01/2004.

10.3.2 When is GST payable on the supply of commercial premises by way of lease where the lease explicitly states that GST is recoverable?

Withdrawn on 21/01/2004.

10.3.3 Is the supply of a rent free period subject to GST?

For source of ATO view, refer to paragraphs 81 to 98 of GSTR 2003/16 - Goods and services tax: inducements to enter into a lease of commercial premises

ATO position

The consideration for the supply is the rent paid by the tenant under the terms of the lease. However, the supply is provided on a progressive or periodic basis. This means that each supply is treated as a separate supply. Therefore, the supply of rent-free periods is not a taxable supply because no consideration is received during this period and consequently no GST is payable.

10.3.4 Is a lease of commercial property a taxable supply if the lease is supplied to the Commonwealth or a Commonwealth entity?

For source of ATO view, refer to paragraph 9 of GSTR 2003/3 - Goods and services tax: when is a sale of real property a sale of new residential premises?

ATO position

Yes, if the requirements under section 9-5 of the GST Act are satisfied. This is the case regardless of the identity of the recipient.

This issue is now superseded by Goods and Services Tax Ruling GSTR 2012/5 - Goods and services tax: residential premises.

10.3.5 An investor, who is registered for GST, purchases new residential premises from a builder who is also registered for GST. The house has all the usual physical characteristics to enable it to be used for residential accommodation. The investor then supplies the house by way of lease to the builder who intends to use it as a display home.
(1) Is the investor entitled to claim an input tax credit in relation to the purchase of the house from the builder?
(2) Is the supply of the house by the investor to the builder by way of lease an input taxed supply, or a taxable supply?

This issue is now superseded by Goods and Services Tax Ruling GSTR 2012/5 - Goods and services tax: residential premises.

10.4 Examples

10.4.1 Entity A, who is not required to be registered for GST, intends to buy a shop to lease to another entity.

For source of ATO view, refer to:

•

MT 2006/1 - The New Tax System: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian business number

•

GSTR 2001/7 - Goods and services tax: meaning of GST turnover, including the effect of section 188-25 on projected GST turnover

•

GSTR 2002/5 - Goods and services tax: when is a 'supply of a going concern' GST-free?

•

for part (a) of this issue, paragraphs 29 to 45 of GSTR 2001/7 - Goods and services tax: meaning of GST turnover, including the effect of section 188-25 on projected GST turnover.

(a) Is the lease of the shop a taxable supply?

(b) If the shop is sold with the lease intact, is the sale a taxable supply?

ATO position

(a) Leasing activities

In leasing the shop, Entity A is carrying on an enterprise of leasing. So, if the lease payments meet the GST registration turnover threshold (see GSTR 2001/7), Entity A will be required to be registered for GST and the lease of the shop from 1 July 2000 onwards will be a taxable supply. Even if the GST registration turnover threshold is not met, Entity A may choose to register, and if registered, will be required to pay GST on the supply of the lease. It will also be entitled to claim input tax credits for any creditable acquisitions.

(b) Sale of the shop

Whether the sale of the shop is a taxable supply depends on whether Entity A is registered for its leasing activity. If Entity A is not registered or required to be registered for the leasing activity, the sale of the shop will not require it to be registered. This is because the proceeds from the sale of the shop will not form part of the GST registration turnover threshold (see paragraphs 29 to 45 of GSTR 2001/7). So, if Entity A is not registered or required to be registered for the leasing activity, the sale of the shop will not be a taxable supply. GSTR 2001/7

If Entity A is registered for the leasing activity, the sale of the shop will be part of the leasing enterprise - section 195-1 of the GST Act states that carrying on of an enterprise includes doing anything in the course of the commencement or termination of the enterprise. The sale of the shop will be a taxable supply unless it qualifies as a GST-free supply of a going concern under section 38-325 of the GST Act. (For more information about the requirements of section 38-325 of the GST Act, see GSTR 2002/5.)

10.4.2 Entity B buys a shop to carry on a business (its only enterprise). Entity B is registered for GST, and claims an input tax credit for the purchase of the shop. It later sells the shop for $200,000.

For source of ATO view, refer to:

•

GSTR 2001/7 Goods and services tax: meaning of GST turnover, including the effect of section 188-25 on projected GST turnover

•

GSTR 2018/1 Goods and services tax: supplies of real property connected with the indirect tax zone (Australia)

•

GSTR 2002/5 Goods and services tax: when is a 'supply of a going concern' GST-free?

•

for part (a) of this issue, paragraphs 29 to 45 of GSTR 2001/7 - Goods and services tax: meaning of GST turnover, including the effect of section 188-25 on projected GST turnover.

(a) What are the GST implications if, six months before the shop is sold, the business ceases trading?

(b) If the shop is sold together with the business, is the sale a taxable supply?

ATO position

(a) When the business ceases trading, Entity B would be required to cancel its GST registration (section 25-50 of the GST Act). The subsequent sale of the shop will not require Entity B to register. This is because the proceeds from the sale of the shop will not form part of the GST registration turnover threshold (see paragraphs 29 to 45 of GSTR 2001/7). So, if Entity B is not registered or required to be registered when the shop is sold, the sale will not be a taxable supply. However, the cancellation of GST registration will lead to an adjustment, in Entity B's concluding tax period, for any input tax credits claimed for the acquisition of the shop: section 138-5 of the GST Act.

(b) Entity B will be selling the shop as part of its enterprise. As Entity B is registered for GST at the time of sale, the sale will be a taxable supply unless it qualifies as a GST-free supply of a going concern under section 38-325 of the GST Act. (For more information about the requirements of section 38-325 of the GST Act, see GSTR 2002/5.)

10.4.3 Entity C buys a shopping centre containing a number of shops from which it derives commercial rent. Entity C is required to be registered for GST. If Entity C sells the shopping centre, is the sale a taxable supply?

For source of ATO view, refer to:

•

GSTR 2018/1 Goods and services tax: supplies of real property connected with the indirect tax zone (Australia)

•

the general principles in GSTR 2002/5 Goods and services tax: when is a 'supply of a going concern' GST-free?

ATO position

The sale of the shopping centre will be in the course, or furtherance, of the leasing enterprise carried on by Entity C. The sale may be a GST-free supply of a going concern if all of the requirements of section 38-325 of the GST Act are met. (For more information about the requirements of section 38-325 of the GST Act, see GSTR 2002/5.) Otherwise, it's a taxable supply.

10.4.4 Entity D buys a shop with the intention of resale for a profit, but leases it out for about 6 months before selling it. Entity D has no other enterprise and is not required to be GST registered for the lease of the shop as the annual rent is less than $75,000. Is the sale of the shop a taxable supply when it is sold for $200,000?

For source of ATO view, refer to:

•

paragraphs 46 to 47 of GSTR 2001/7 - Goods and services tax: meaning of GST turnover, including the effect of section 188-25 on projected GST turnover

•

the general principles in GSTR 2002/5 - Goods and services tax: when is a 'supply of a going concern' GST-free?

ATO position

Even though Entity D is not required to be registered for GST for the lease of the shop, it is required to register for GST for the sale of the shop. It is considered to be carrying on an enterprise in the form of an adventure in the nature of trade by acquiring the shop for resale at a profit (see paragraphs 46 to 47 of GSTR 2001/7). Therefore, the sale of the shop will be a taxable supply. If the shop is sold with the lease intact, it may be a GST-free supply of a going concern if all of the requirements of section 38-325 of the GST Act are met. (For more information about the requirements of section 38-325 of the GST Act, see GSTR 2002/5)

10.4.5 Is a refundable rental bond paid by a lessee of commercial premises consideration for a taxable supply made by the lessor if it is a security deposit for the lessee to perform all its obligations under the lease?

For source of ATO view, refer to the general principles in GSTR 2006/2 - Goods and services tax: deposits held as security for the performance of an obligation

ATO position

No, unless the bond is:

•

forfeited because of a failure to perform the obligations, or

•

applied as all or part of the consideration for a supply.

This is because of Division 99 of the GST Act. For more information about the application of Division 99 of the GST Act, see GSTR 2006/2

10.5 Long term leases

10.5.1 If a supplier, who holds a freehold interest in land, supplies that land by way of lease to a lessee, is it possible for the lease to be a long term lease for the purposes of the GST Act?

Non-interpretative - straight application of the law

ATO position

Yes. An Australian government agency, as defined in section 195-1 of the GST Act, and other entities that hold a freehold interest in land may make a supply by way of long-term lease as defined in section 195-1 of the GST Act. However, where the supplier is not an Australian government agency, they must satisfy the requirement in paragraph (b) of the definition. The ATO is currently preparing further public guidance on this issue.

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