Private ruling: GST and rental guarantees
Published: December 2012

Ruling: Q1: Are amounts paid by you to purchasers of new residential premises, pursuant to a rental guarantee agreement, adjustments to the selling price of the new residential premises? | A1: Yes, amounts paid to purchasers, pursuant to a rental guarantee agreement, will constitute an adjustment to the selling price. Conversely, amounts paid by the purchaser to you, in the form of rental received from tenants, will also constitute an adjustment to the selling price. | Q2: Do you have a decreasing adjustment in respect of the amounts paid pursuant to the rental guarantee provided to the purchasers of the new residential premises? | A2: Yes, on the basis that previous GST amounts have been attributed correctly, amounts paid to purchasers pursuant to a rental guarantee will constitute a decreasing adjustment to the net amount of GST payable. Conversely, amounts paid by the purchaser to you, in the form of rental received from tenants, will constitute an increasing adjustment to the net amount of GST payable. | Q3: Is the decreasing adjustment attributable to the tax period in which the Rental Guarantee Commencement Date occurs? | A3: No. The decreasing adjustment will be attributable to the tax period in which you become aware of each adjustment. In your case, this will be when the relevant rental guarantee payments are due while the rental guarantee agreement remains in force. Conversely, the increasing adjustment will be attributable to the tax period in which you become aware of the adjustment. That is, when the lease payments are actually received (or receivable) by you.

Relevant facts and circumstances: You are registered for GST, accounting on an accruals basis. You are planning to purchase real property with the intention to develop the property into residential apartments. The apartments are to be sold to individual purchasers and other entities such as superannuation funds. As an incentive to the purchasers of the apartments, you will be offering the purchasers a Rental Guarantee. The Rental Guarantee Agreement (RGA) contains the following key conditions: (a) The Rental Guarantee Period is for a set period as agreed with purchasers. (b) The agreement guarantees to the purchaser that they will receive a fixed amount as rent for the period of the guarantee, for example, $x per week. The amount of the guarantee may vary depending on the size of a particular property . (c) The Rental Guarantee is only available if the purchaser of the property utilises the services of a real estate agent nominated by you. This is to ensure that you can be certain that all efforts to find tenants for the relevant property are maximised.. (d) In the event that the property is sold before the expiry of the Rental Guarantee period, the Rental Guarantee will no longer be available. The Rental Guarantee is only available to the original purchaser of the property. (e) You, in conjunction with the nominated real estate agent, have control over the rental of the property during the rental guarantee period, though the tenancy agreement must by law be signed by the property owner and the tenant. (f) Payment of rental guarantee states: The Developer will pay to the Purchaser the Rental Guarantee by way of monthly electronic funds transfer to the account nominated in writing by the Purchaser or in such other manner and frequency as determined by the Developer acting reasonably. The Seller will pay the rental guarantee amount where there is no tenant or the shortfall amount if the rental is less than the rental guarantee amount. This amount will be paid to the real estate agent, who will pay it in full to the purchaser. The above payments will only be made where there is no tenant, or the rental is less than the rental guarantee amount ie only where there is a rental shortfall. (g) Pre-conditions states, in part: The Developers obligation to pay the Rental Guarantee is conditional on the Purchase's compliance with the terms of the deed, Including: (f) the Purchaser enforcing any rights it has under the Lease in relation to the non-payment of rent for the benefit of the Developer and paying to the Developer any amounts recovered by such enforcement

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 section 19-10(1) | A New Tax System (Goods and Services Tax) Act 1999 section 19-40 | A New Tax System (Goods and Services Tax) Act 1999 section 19-55 | A New Tax System (Goods and Services Tax) Act 1999 section 195-1

Reasons for decision: Summary: Under section 19-10 of the GST Act, an adjustment event is any event which has the effect of: · cancelling a supply or acquisition; or · changing the consideration for a supply or an acquisition; or · causing a supply or acquisition to become, or stop being, a taxable supply or creditable acquisition. The Rental Guarantee Payment (RGP) does not result in the cancellation of the supply of new residential premises. In addition, the RGP does not cause the supply of new residential premises to stop being a taxable supply. However, a RGP gives rise to adjustment events if it has the effect of changing the consideration for the supply of new residential premises. Whether the RGP has the effect of changing the consideration for the supply of new residential premises depends on whether the RGP can be characterised as consideration for a separate supply made by the purchaser. If the RGP is consideration for a separate supply made by the purchaser then the RGP does not have the effect of changing the consideration for the supply of new residential premises. For the RGP to be consideration for a supply made by the purchaser, such as the entry into the sale contract, there must be a sufficient nexus between the RGP and the entry into the sale contracts. The terms of the RGA do not indicate that the RGPs are made simply because the purchaser has entered into the sale contract. The vendor has no obligation to pay the RGP when the purchaser signed the sale contract. After settlement the vendor is not liable to pay the RGP where the monthly rent paid by the tenant is equal to or exceeds the monthly guaranteed rent. The liability for the RGP arises where the actual rent is less than the guaranteed rent or where the property is vacant. In addition, the liability for the RPG also depends on the purchaser fulfilling a number of obligations arising from the RGA after settlement. These facts indicate that there is insufficient nexus between the RGP and the entry into the sale contract. Therefore, the RGP is not consideration for a supply of an entry into the sale contract made by the purchaser. We also need to consider whether the RGP is consideration for a separate supply made by the purchaser in the form of obligations that the purchaser is required to fulfil. A sale of land transaction may involve the granting of various rights and entry into various obligations by the parties to the transaction. However, not every obligation that arises under the transaction is a separate supply made for consideration. The reasoning in the decision in the UK case Iliffe & Anor [1994] BVC 625 is relevant. In Iliffe , the taxpayer acquired a 999-year lease of a unit (at a peppercorn rent) for £86,225 and obtained finance to do so. The taxpayer and the vendor of the unit entered into the Mortgage Capping Agreement (MCA) under which the taxpayer received payments from the vendor to ensure the taxpayer's interest payments for the finance were kept below a certain level. The parties also entered into a rent guarantee agreement (RGA) to protect the incoming cash flow of the taxpayer by guaranteeing the rent income over a 2-year period. The Tribunal found as facts that the commercial substance of the transaction entered into by the parties was that the vendor undertook: · to complete the construction of the unit; · to grant the lease at the peppercorn rent; · to cap the interest expense incurred by the taxpayer; · to ensure a certain level of rent income was received over a 2 year period. In return, the Tribunal found that the taxpayer undertook to pay £86,225 and to nominate the vendor as a letting agent. The question at issue was whether the payments made under the MCA were consideration for a supply made by the taxpayer to the vendor. That is, whether any service provided by the taxpayer to the vendor that was not simply an integral part of the overall agreement under which the vendor entered into various undertaking in return for a payment of £86,225 by the taxpayer. The Tribunal found that the Mortgage Capping Agreement was simply part of the overall transaction. The Tribunal found that there was nothing done by the Partnership that could be directly, or indirectly, linked with the Mortgage Capping Agreement other than the payment of the purchase price by the Partnership to EMDL. The entry into the commitment to make the mortgage capping payments by EMDL was simply one other thing done by EMDL in return for the consideration of the payment of the purchase price. The eventual payment of the sums that subsequently became due under that commitment by EMDL to the Partnership was the carrying out by EMDL of what it undertook to do in return for the consideration constituted by the purchase price. Those payments were not themselves consideration for anything further done by the Partnership. Although the Tribunal only had to decide the question of whether the MCA payments were consideration for a supply made by the taxpayer to the vendor, they also decided that the payments made by the vendor to the taxpayer under the rent guarantee agreement fell for the same treatment as the payments made under the MCA payments. The tribunal also found that there was no essential difference between the two commitments (the MCA and the RGA). They were both entered into as part of the overall transaction. The Tribunal concluded that on the facts the MCA and the RGA were part and parcel of the overall transaction for the supply of the lease. Those payments were not themselves consideration for anything further done by the Partnership. Under the purchase contract in the present circumstances, you make a supply of property to a purchaser who will pay the contract price for that supply to you. As an incentive to purchasers of the properties, you have offered the purchasers a Rental Guarantee (RG). Under the Rental Guarantee Agreement (RGA): · You agree to pay the RGP in consideration of the Purchaser purchasing the Property. The rental guarantee amount is paid only where there is a rental shortfall. · The RGP is only available if the purchaser of the property utilises the services of a real estate agent nominated by you. (This is to ensure that you can be certain that all efforts to find tenants for the relevant property are maximised). Refer Clause 4.1(a). · The RGP amount is paid to the property purchaser monthly or as otherwise agreed. Refer Clause 8. · You are authorised to select the tenant, and the purchaser is, at your direction, required to sign a tenancy agreement with the tenant. Your agent advised that when the property is tenanted, the real estate agent will collect the rent and remit this, less commission, to the purchaser - ie as per standard real estate agency procedures. In considering the total fact situation, the purchaser's entry into the contract is characterised as the purchase of a property with a rental guarantee arrangement for a period. The purchaser's obligations under the contract can be characterised as integral to the transaction. The purchaser's actions and obligations will not amount to a separate supply under the contract in return for the RGPs. As there is no separate supply made by the purchaser, the RGPs will not be consideration for any separate supply by the purchaser to you. Rather the RGPs will represent a reduction to the selling price of an apartment. As with the rental guarantee payments that you make, there is no separate supply when you receive any rental payments from the tenant. Any rental from the tenant, which is paid to you (via the real estate agent) is part of the overall transaction income and as such is an increase in consideration received for the sale of the apartment. Section 19-40 of the GST Act provides that an adjustment for a supply will arise if an entity is liable to pay GST and the GST amount previously attributed no longer reflects the correct GST amount on the supply. Section 19-55 of the GST Act provides that if the correct GST amount is less than the previously attributed GST amount, the entity has a decreasing adjustment equal to the difference between the previously attributed GST amount and the correct GST amount. As established earlier, the purchaser's actions and obligations will not amount to a supply under the contract in return for the RG payments. Rather the Contract of Sale and the RGA are part of the arrangement for the supply of the property from you to the purchaser. Similarly, payment of the tenant's rental amounts to you (via the real estate agent) is also part of the arrangement for the supply of the Property from you to the purchaser. As a consequence, where you as the vendor make the payments of the RG amount to the purchaser pursuant to the RGA, the payments will have the effect of reducing the consideration for the sale of the property. Therefore, you will have a separate adjustment event under Division 19. Similarly, when the real estate agent pays to you the amount of rental paid by the tenant, those payments will have the effect of increasing the consideration for the sale of the property. Therefore, you will have both a decreasing and increasing adjustment event under Division 19 of the GST Act. Subsection 29-20(1) of the GST Act provides that an adjustment that you have is attributed to the tax period in which you become aware of the adjustment. Your agent submits that in this case you will become aware of the amount of the decreasing adjustment on the rental guarantee commencement date (clause 1.1 of the rental guarantee) as the term and amount of the rental guarantee will be known at that time. As such, your agent considers that you can attribute the total decreasing adjustment, which relates to all the proposed RG payments payable under the RGA, to the period in which the rental guarantee commencement date occurs. Your agent has offered the view that the quantum of the decreasing adjustment can be ascertained at the commencement of the rental guarantee period by way of a simple calculation. That is, a lump sum adjustment is made in the tax period that the RG payments commence. Your agent also offered the alternative view that you only become aware of the adjustment in the period when each individual RG payment becomes due. We consider this to be the better view because, in accordance with the RGA: · the purchaser has the right to terminate the RGA deed at any time by written notice ceasing your obligation to pay the RG amount · if the purchaser sells the property the deed will terminate · you may terminate the deed if the purchaser breaches any provision of the agreement Hence, the continuity of the deed rests solely on acts done by the purchaser and there is no certainty to the overall term of the payments and, as a consequence, the quantum. Certainty (and awareness) is only achieved as you become liable for each monthly payment. Therefore, each monthly payment (or accrual of the liability) gives rise to a separate adjustment event, which in turn, gives rise to a separate decreasing adjustment to the net amount of GST payable. Similarly, each receipt of a rental payment (or accrual of the income) gives rise to a separate adjustment event, which in turn, gives rise to a separate increasing adjustment to the net amount of GST payable. Therefore, each decreasing or increasing adjustment is then attributable to the period in which you are liable for each RG payment or you receive each rental payment.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet. | Reasons for decision: Subsection 19-10(1) of A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that an adjustment event is any event which has the effect of: | (a) cancelling a supply or an acquisition; or | (b) changing the consideration for a supply or an acquisition; or | (c) causing a supply or acquisition to become, or stop being, a taxable supply or creditable acquisition. | Paragraph 14 of Goods and Services Tax Ruling GSTR 2000/19 Goods and services tax: making adjustments under Division 19 for adjustment events (GSTR 2000/19) explains that when any of the events, described above, occur, an entity may have accounted for too much (or not enough) GST for a supply, or too much (or not enough) input tax credit for an acquisition. If this is the case the entity may have to make an adjustment. | For the payments made under the rental guarantee to give rise to a decreasing adjustment to you, they must reduce the consideration for the supply of the property. In that case, you will have accounted for too much GST on the sale of the property. To work this out it is necessary to examine whether the rental guarantee payments are consideration for a supply by the purchaser that is separate from the supply of the property to the purchaser. If the rental guarantee payments are consideration that you give for a separate supply by the purchaser, they will not have the effect of changing the consideration for the supply of the property.