Australia: New ATO Interpretative Decision: GST & Prepaid Rent

Tax Update (Australia)
Last Updated: 27 May 2013
Article by Matthew Cridland

On 17 May 2013, the ATO issued a new Interpretative Decision, ATO ID 2013/30, entitled: "GST and the sale of commercial premises that are subject to a lease". This is an important decision that will have implications for all entities that buy or sell tenanted commercial premises. The key points and implications are summarised below.

1. ISSUE & DECISION

The lease of commercial premises is a taxable supply and subject to GST, which is payable by the landlord. The decision sets out the Commissioner's view on whether a vendor of a commercial premises is liable for GST on prepaid rent in circumstances where a tenanted property is sold part way through the month to which the prepaid rent relates.

Note in this context "commercial premises" includes all premises other than residential premises (i.e. office, industrial, commercial, rural and other properties).

The Commissioner considers that the vendor is liable for GST on the prepaid rent. This is notwithstanding that the vendor may allow the purchaser a purchase price adjustment to reflect the days of the relevant month during which the purchaser will be the owner of the property.

2. IMPLICATIONS FOR VENDORS

Vendors will need to consider this issue for the sale of any tenanted commercial premises, including where the sale may be GST-free as the supply of a going concern or farm land.

Given that vendors should be liable for GST on the prepaid rent, a vendor will want to ensure that any rent adjustments are calculated on a GST exclusive basis (so that the vendor in effect retains all of the GST component of the prepaid rent, which will be remitted to the ATO). This is illustrated in a worked example further below.

Note that if the sale of a property is a taxable supply and subject to GST (i.e. not GST-free as a going concern or farm land), the vendor may only DLA Piper 2 be liable for GST on the reduced purchase price (i.e. after taking into account the settlement adjustment for prepaid rent).

3. IMPLICATIONS FOR PURCHASERS

As purchasers will not be liable for GST on any portion of the prepaid rent, a purchaser may not need to issue tax invoices to tenants for the portion of the month that the purchaser owns the tenanted property. Rather, a purchaser will generally only need to commence issuing tax invoices from the beginning of the next month.

4. HOW CAN DLA PIPER ASSIST?

We can assist clients by:

  • providing advice / sign-off as to which party will be liable for GST on prepaid rents in the context of a particular sale;
  • drafting appropriate clauses to ensure that any rental adjustments are calculated on a GST exclusive basis (if appropriate); and
  • ensuring that GST is calculated correctly on any settlement adjustments (where the sale of the property is a taxable supply and subject to GST).

5. PROPERTY COUNCIL'S VIEW

The Property Council of Australia has lobbied the ATO for guidance on these issues. The decision is broadly consistent with the Property Council's submissions to the ATO and will likely be welcomed by most property groups (notwithstanding the limitations of the decision outlined below).

6. LIMITATIONS/ADDITIONAL POINTS TO NOTE

  • An Interpretative Decision is not a "public ruling". While it does provide guidance on the Commissioner's view, and provides vendors/purchasers with some protection in limited circumstances, it does not provide the same level of protection as a public ruling.
  • The decision refers to circumstances where a vendor has "received and retained" prepaid rent for a particular month (i.e. the money has come in from tenants). In our view, the same principles should also apply where a vendor has invoiced for prepaid rent (and remains entitled to receive that rent), albeit the monies may not be received until after the property has been sold. Typically a purchaser that receives rent that is due to the vendor does so on behalf of the vendor (and is generally obliged to on-pay the rent to the vendor). The Interpretative Decision may not offer any protection in these circumstances and vendors should consider whether they need GST advice / sign-off.
  • The decision only deals with circumstances where rent has been prepaid in advance for one month. It does not deal with circumstances where a lease premium or prepaid rent may have been paid upfront for the entire lease period. Such premiums /prepayments are common in the context of "development lease arrangements" and infrastructure projects which may involve leases for 99+ years, with either a premium or prepaid rent (for the life of the lease) being payable when the lease is granted. It is arguable that the same principles should apply. However, the Interpretative Decision itself won't apply and the parties should consider whether they may need a separate GST opinion / sign-off.

7. WORKED EXAMPLE

In the decision the ATO outlines a scenario in which an entity leases office premises for $110,000 (including GST of $10,000) per month. The rent was invoiced to the tenant on 1 April and the tenant paid the rent on the same date. The property is then sold on 16 April for $11 million.

The contract provides that the entity is entitled to retain the $110,000, but that the vendor will make an adjustment in favour of the purchaser to reflect the number of days (from 16 April to 30 April) during which the purchaser will be the owner of the property.

The ATO example suggests that the vendor allows an adjustment of $55,000 (being half of the prepaid rent and GST). However, in our view, the vendor should only allow an adjustment of $50,000 based on the GST exclusive prepaid rent. This is because, consistent with the Commissioner's view, the vendor will need to retain and remit $10,000 as GST (so the adjustment should be 50% of $100,000, not 50% of $110,000).

The sale of the property would likely be treated as the GST-free supply of a going concern. The ATO's decision does not indicate whether the $11 million purchase price includes or excludes GST, or the GST treatment applied to the sale. However, if the sale was instead treated as a taxable supply, the vendor may be entitled to first take into account the purchase price reduction (i.e. the settlement adjustment) relating to the prepaid rent before calculating its GST liability.

8. LINK TO ATO ID 2013/30

The decision is available on the ATO's website at the following address:

http://law.ato.gov.au/atolaw/print.htm?DocID=AID% 2FAID201330%2F00001&PiT=99991231235958&L ife=20130517000001-99991231235959

© DLA Piper

This publication is intended as a general overview and discussion of the subjects dealt with. It is not intended to be, and should not used as, a substitute for taking legal advice in any specific situation. DLA Piper Australia will accept no responsibility for any actions taken or not taken on the basis of this publication.


DLA Piper Australia is part of DLA Piper, a global law firm, operating through various separate and distinct legal entities. For further information, please refer to www.dlapiper.com

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