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GST consequences of the sale of Australian commercial property subject to a lease Real Estate Update (Australia)

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Australia: GST consequences of the sale of Australian commercial property subject to a lease
Real Estate Update (Australia)

14 November 2012
Article by Peter Burden and Julia Godfrey
In February 2012, the Australian Taxation Office (ATO) published a Goods and Services Tax (GST) Determination on GST consequences following the sale of commercial property that is subject to a continuing lease.
The Determination confirms that following a sale of commercial property that is subject to a lease, the buyer is liable for GST relating to the lease following the sale of the property because it makes a taxable supply when it receives rent and allows the tenant to remain in possession of the premises under the lease. The seller 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. This result is consistent with the interpretation of GST supplies by the High Court in the recent case of Commission of Taxation v Qantas Airways Ltd [2012] HCA 41 (2 October 2012) (Qantas case).
In a practical sense, the issue impacts on whether rent adjustments in sale contracts should be done on a GST-exclusive or inclusive basis. On the basis that parties adopt the Determination, rent adjustments should generally be done on a GST-exclusive basis. The seller alone is liable for GST for the period straddling completion and is entitled to receive the GST amount recovered from the tenant shown on the tax invoice given to the tenant.
However the Determination does not deal with the question as to which party has the GST liability for lease periods that straddle settlement, that is, where leased commercial property is sold part way through a GST tax period. An example is where the landlord of a commercial property receives rent in advance and part of that rent relates to the period after settlement. Industry practice is that the seller has the entire GST liability on the rent and any rent adjustments between the parties are on a GST-exclusive basis. We consider that this is the correct position.
As the High Court observed in the Qantas case, GST will be payable once and will be attributable to the first tax period in which any of the consideration is received. The ATO considers that Division 156 of the Goods and Services Act 1989 (Cth) has the effect of treating each periodic component of the lease as if it were a separate supply. As a result, the seller is liable for the GST for the rent period straddling the completion date because it makes the supply of the property under the lease for that month and receives the rent. The first period for which the buyer has a GST liability is the period which starts after completion. While the buyer makes a supply to the tenant from the date of completion because it allows the tenant to occupy the premises, the buyer does not receive any consideration for that supply. The rent has already been paid. So the buyer is not making a taxable supply for the balance of the lease period which straddles completion.
The buyer receives compensation from the seller for the prepaid rent through the settlement adjustments, which form part of the calculation of the consideration for the purchase or supply of the property. However, because the Determination does not deal with this issue, sellers and buyers should contractually protect their GST positions.
The property industry has asked the ATO to issue a GST ruling on the GST treatment of rent adjustments on the sale of a leased commercial property, in particular, whether the seller or the buyer is liable for GST on rent received from tenants in advance or arrears of settlement.
If you would like further advice on this particular issue, please contact Julia Godfrey or Peter Burden.
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