Private ruling: GST
Date of advice: 23 October 2017
Published: March 2018

Ruling: Q1: Is GST payable by the purchaser in respect of the guaranteed rent payment (currently $X per annum) plus outgoings that the purchaser receives from the vendor under the rental guarantee agreement? | A1: No.

Relevant facts and circumstances: ● The purchaser (You) is registered for the goods and services tax (GST). ● Your enterprise is the leasing of commercial space in return for payment of rent. ● You and the vendor have executed a Sale Contract for the purchase of a Property. ● The Property was sold free from encumbrances and subject to the existing Leases and Tenancies. ● At the time of settlement, part of the Property was vacant and untenanted. ● The sale was subject to a Rental Guarantee for the untenanted space. ● The terms and conditions of the Rental Guarantee are set out in an attachment to the Sale Contract. The Rental Guarantee is not an agreement separately executed by the parties. ● Subject to and in accordance with the terms and conditions of the Rental Guarantee, the vendor must pay the annual Guaranteed Rent and the outgoings to you during the Term. The vendor must pay the Guaranteed Rent and outgoings to you by monthly instalments. ● The rental guarantee commencement date is the date of settlement of the Sale Contract. ● Where a tenant is found for the vacant space, a lease is entered into between you and the tenant. The tenant would pay to you the agreed rent payable under the lease and over the term of the lease. ● Once a tenant is procured to lease the Property during the term, the vendor’s obligation to pay the Guaranteed Rent ceases if the rent during the term is equal to or exceeds the Guaranteed Rent. If the rent during the term is less than the Guaranteed Rent, then the Guaranteed Rent is reduced by the amount of the rent. That is, the vendor makes up the difference in rent and pays the difference to you. The amount is paid to make up for a shortfall in rent received from the premises. ● You must pay any costs, fees and expenses associated with procuring a tenant for the property. ● No tenants have been found for the vacant space since settlement to date. ● The vacant space is still advertised and available for lease. ● Under the rental guarantee, the vendor has been required to pay the Guaranteed Rent and the outgoings during the period of vacancy. ● You have not entered into any lease agreement with the vendor in respect of any part of the Property.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 section 9-5 | A New Tax System (Goods and Services Tax) Act 1999 subsection 9-10(1) | A New Tax System (Goods and Services Tax) Act 1999 section 9-15 | A New Tax System (Goods and Services Tax) Act 1999 subsection 9-15(1)

Reasons for decision: Summary: GST is payable on taxable supplies. The requirements of a taxable supply are set out in section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act). One of the requirements is for an entity to make the supply for consideration. In order for there to be a supply for consideration, there needs to be a supply, consideration and a sufficient nexus between the supply and the consideration. Under subsection 9-10(1) of the GST Act, a supply is any form of supply whatsoever. Section 9-15 of the GST Act provides that a payment will be consideration for a supply if the payment is 'in connection with', 'in response to' or 'for the inducement' of a supply. Thus, there must be a sufficient nexus between a particular payment and a particular supply for the payment to be consideration for that supply. In order for the payments made by the vendor under the rental guarantee to be consideration for a supply (other than the supply of the Property by the vendor), subsection 9-15(1) of the GST Act requires them to be payments in connection with, in response to, or for the inducement of a supply of something by the purchaser. In determining whether a sufficient nexus exists between supply and consideration, regard needs to be had to the true character of the transaction. An arrangement between parties will be characterised not merely by the description that parties give to the arrangement, but by looking at all of the transactions entered into and the circumstances in which the transactions are made. The test as to whether there is a sufficient nexus is an objective test. The motive of the supplier and the recipient also may be relevant in determining whether the supply was made for consideration, if a reasonable assessment of the evidence supports that motive. Application to your case In considering the total fact situation, you entering into the Sale Contract can be characterized as you purchasing the Property with a rental guarantee arrangement for a period. The rental guarantee is an integral part of the supply of the Property by the vendor to you. Your obligations under the Sale Contract (which includes the annexed rental guarantee) can be characterized as integral to this transaction. Your actions and obligations will not amount to a separate supply under the contract, in return for the rental guarantee payments (guaranteed rent and outgoings). We consider that the vendor’s payments of the agreed quantified guaranteed rent per annum and the outgoings under the rental guarantee are part of the arrangement for the supply of the Property by the vendor to you. As there is no separate supply made by you, the rental guarantee payments will not be consideration for any separate supply made by you to the vendor. As you do not make any supply for which you receive the rental guarantee payments as consideration, no GST is payable by you upon receipt of the rental guarantee payments. | Detailed Reasoning - Note: In considering the total fact situation, and as discussed above, we consider that there is sufficient nexus between the rental guarantee payments made by the vendor to you and the sale of the Property by the vendor. The payments are merely made to meet the vendor’s rental guarantee obligations under the Sale Contract. As a consequence, when the vendor pays the guaranteed rent and outgoings to you, these payments will have the effect of reducing the consideration that you pay for the purchase of the Property.

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