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ATO Interpretative Decision

ATO ID 2013/30 (Withdrawn)

Goods and Services Tax

GST and the sale of commercial premises that are subject to a lease
  • This ATO ID is withdrawn. The ATO view in this ATO ID is now contained in Goods and Services Tax Determination GSTD 2012/2 Goods and services tax: what are the goods and services tax consequences following the sale of commercial residential premises that are subject to a lease? An addendum to GSTD 2012/2 implementing changes to the ruling in order to incorporate the view formerly in this ATO ID has issued today.
    This document has changed over time. View its history.

CAUTION: This is an edited and summarised record of a Tax Office decision. This record is not published as a form of advice. It is being made available for your inspection to meet FOI requirements, because it may be used by an officer in making another decision.

This ATOID provides you with the following level of protection:

If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.

Issue

Is the entity, a vendor of commercial premises that are subject to a lease, liable for GST on the prepaid rent it receives and retains for a particular month when the supply of the reversionary interest occurs part way through that month?

Decision

Yes. The vendor of commercial premises that are subject to a lease is liable for GST on all of the prepaid rent it receives and retains for a particular month when the supply of the reversionary interest occurs part way through that month.

Facts

The entity leases commercial premises in the form of an office complex for $110,000 (including GST of $10,000) per month. The leasing of the premises is a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

The entity accounts on a non-cash basis and issued an invoice for $110,000 to the tenant on 1 April for the rent payable for the month of April. The rent was paid on 1 April.

The entity sells their reversionary interest in the leased commercial premises on the 16th of April for $11m.

The terms of the contract for sale provide for the entire amount of the $110,000 prepaid rent for the month of April to be retained by the entity. However, under the contract the entity is obliged to allow for an adjustment to the purchase price at settlement in favour of the purchaser equal to the portion of the prepaid rent that is referable to the number of days in the month following the sale (from 16 to 30 April).

In accordance with the contract for sale, the entity retains all of the $110,000 prepaid received for the month of April and at settlement the purchase price is adjusted by $50,000 in favour of the purchaser on account of the portion of the prepaid rent, net of GST, that is referable to the number of days in the month following the sale.

Reasons for Decision

Paragraph 4 of Goods and Services Tax Determination GSTD 2012/2: Goods and services tax: what are the goods and services tax consequences following the sale of commercial premises that are subject to a lease? (GSTD 2012/2) states:

Following a sale of commercial premises that are subject to lease, the purchaser of the reversion is liable for GST relating to the lease where the elements of section 9-5 [of the GST Act] are satisfied.

Paragraph 5 of GSTD 2012/2 goes on to say that the purchaser's liability is attributed in accordance with the rules in Division 29 and Division 156 of the GST Act. Paragraph 7 states that the vendor of the commercial premises is not liable for GST relating to the lease where it is no longer in receipt of or entitled to rent or other consideration for the lease following the sale of the reversion.

Similarly, the example at paragraphs 9 to 11 of GSTD 2012/2 demonstrates that the purchaser of commercial premises subject to lease is liable for GST in respect of the lease to the extent that rent or other consideration is paid to it in connection with the lease.

Paragraph 22 of GSTD 2012/2 then explains that under subsection 156-5(1) of the GST Act, the GST on a taxable supply an entity that accounts on a non-cash basis makes for a period or on a progressive basis and for consideration to be provided on a progressive or periodic basis, is attributed pursuant to subsection 29-5(1) of the GST Act, as if each progressive or periodic component of the supply was a separate supply. Paragraphs 25 and 26 of GSTD 2012/2 further explain that an ongoing lease of commercial premises gives rise to a supply that is made on a progressive or periodic basis.

In this case, the entity was entitled to receive all of the monthly rent invoiced for on 1 April, and the contract for sale of the commercial premises contemplated that the entity would retain the entire amount of rent paid for the month of April. Therefore, in accordance with the views set out on GSTD 2012/2, the entity is liable for GST on the entire amount of $110,000 that was prepaid as rent for the month of April.

Although, the consideration that the purchaser pays to acquire the commercial premises subject to the lease is adjusted by reference to the portion of the prepaid rent referable to the number of days in the month of April following settlement, the purchaser does not receive and is not entitled to receive any of the $110,000 rent paid for the lease of the commercial premises for the month of April. Therefore, the purchaser is not liable for GST, and is not required to attribute any amount of GST for the $110,000 rent paid to the entity for the month of April.

Note:
1. The amount of any adjustments to the purchase price of a reversionary interest on account of prepaid rent retained by a vendor is determined in accordance with the terms of the contract.
2. Although the adjustment to the purchase price, under the terms of the contract, is made on the basis of the prepaid rent referable to the number of days in the month following the sale, the adjustment is not consideration received by the purchaser in relation to the supply by way of lease. The $50,000 reduction in the purchase price is a reduction in the consideration paid by the purchaser for the supply of the reversionary interest by the entity. See Goods and Services Tax Determination 2006/3: Goods and services tax: are settlement adjustments taken into account to determine the consideration for the supply or acquisition of real property.

Amendment History

Date of amendment Part Comment
20 June 2013 Facts (last paragraph) Minor change to the example to align with industry practice.
Reason for decision (Note 2) Minor change to the example to align with industry practice.

Date of decision:  17 May 2013

Legislative References:
A New Tax System (Goods and Services Tax) Act 1999
   section 9-5
   section 29-5
   subsection 156-5(1)

Related Public Rulings (including Determinations)
GSTD 2006/3
GSTD 2012/2

Keywords
goods and services tax
real property
commercial premises

Business Line:  Indirect Tax

Date of publication:  17 May 2013

ISSN: 1445-2782

history
  Date: Version:
  17 May 2013 Original statement
  21 June 2013 Updated statement
You are here 23 September 2015 Archived

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