ATO ID 2002/1055: GST and tenant's surrender of a commercial lease (supply) - lessor's agreement to provide premises for rent-free period (consideration)
Date of decision: 14 August 2001
Business line: Indirect Tax

Issue
Does the supply of premises for a rent-free period made by the lessor to the entity, a tenant, form part of the consideration for the entity's taxable supply to the lessor under section 9-5 of the A New Tax System (Goods and Service Tax) Act 1999 (GST Act), the supply being the surrender of a commercial lease?

Decision
Yes, the supply of premises for a rent-free period made by the lessor to the entity does form part of the consideration for the entity's taxable supply to the lessor under section 9-5 of the GST Act, the supply being the surrender of a commercial lease.

Facts
The entity is a tenant. The entity agrees to surrender its rights to lease commercial premises from the lessor. The lessor pays the entity a lump sum to vacate the commercial premises. The surrender of the commercial lease is a taxable supply under section 9-5 of the GST Act. The lessor and the entity also agree that the entity will remain in the commercial premises for a rent-free period before it vacates the commercial premises. The entity is registered for goods and services tax (GST).

Reasons for decision
Summary: In accordance with subsection 7-1(1) of the GST Act, GST is payable on taxable supplies. Under section 9-5 of the GST Act, an entity makes a taxable supply if: The entity is making a taxable supply when it surrenders its rights to lease commercial premises from the lessor. However, in working out the GST payable it needs to be determined whether the supply of premises for a rent-free period made to the entity forms part of the consideration for the entity's taxable supply. Consideration is defined in subsection 9-15(1) of the GST Act to include any payment, act or forbearance in connection with, in response to or for the inducement of a supply of anything. The entity is receiving a lump sum payment to vacate the premises. In addition to this, the entity is entitled to remain in the premises for a rent-free period. In this case, the lessor is forgoing its right to be paid rent. This is in connection with and for the inducement of the entity's surrender of the lease. Therefore, the supply of premises for a rent-free period made by the lessor to the entity does form part of the consideration for the entity's taxable supply to the lessor under section 9-5 of the GST Act, the supply being the surrender of a commercial lease.

Legislative references: A New Tax System (Goods and Services Tax) Act 1999 subsection 7-1(1) section 9-5 subsection 9-15(1)
Related public rulings and determinations: GSTR 2001/6
Subject references: Goods and Services Tax GST supplies & acquisitions GST consideration Taxable supply