Private ruling: Rental guarantee
Published: June 2012

Ruling: Q1: Are amounts paid monthly by you to purchasers of new residential premises, pursuant to a rental guarantee, adjustments to the selling price of the new residential premises? | A1: Yes, amounts paid to purchasers pursuant to a rental guarantee 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, 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 by you.


Relevant legislative provisions: GST Act 19-10(1), 9-5, 9-10(1), 9-15, 19-40, 19-55, 195-1

Reasons for decision: Summary: Are amounts paid monthly to purchasers of new residential premises, pursuant to a rental guarantee, adjustments to the selling price of the new residential premises? Under subsection 9-10(1) of the GST Act, a supply is any form of supply whatsoever. Goods and Services Tax Ruling GSTR 2006/9 Goods and services tax: supplies (GSTR 2006/9) explains at paragraphs 67-70 the circumstances in which in a transaction there may be two supplies, one from the supplier to the recipient and vice versa. In those paragraphs we explain supply proposition 4, which covers the situation in which a recipient gives non-monetary consideration to a supplier. The non-monetary consideration is a separate supply by the recipient In two party transactions, the GST consequences turn on identifying one or more supplies in the transactions. It is therefore necessary to identify the supplies in transactions evidenced by the contract. In this regard supply propositions 11 (the agreement is the logical starting point when working out the entity making the supply and the recipient of that supply), 15 (one set of activities may constitute the making of two or more supplies) and 16 (the total fact situation will determine the nature of a transaction, the entity that makes a supply and the recipient of the supply) are relevant to the two party transaction in the present circumstances In order for the payments under the rental guarantee to be consideration for a supply (other than the supply of the property) 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. Goods and services tax Ruling GSTR 2001/8 which is about apportioning the consideration for a supply that includes taxable and non-taxable parts (GSTR 2001/8) provides that the supplies need to be separate and identifiable. Paragraph 55 of GSTR 2001/8 provides that some supplies include parts that do not need to be separately recognised for GST purposes: … We refer to these parts of a supply as being integral, ancillary or incidental. In a composite supply, the dominant part of the supply has subordinate parts that complement the dominant part. If such a supply is analysed in a commonsense way, it can be seen that the supply is essentially the provision of one thing. It need not be broken down, unbundled or dissected any further... The reasoning in the decision in the UK case Iliffe & Anor [1994] BVC 625 is also 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 taxpayers 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 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. 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 that 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 an apartment to a purchaser who will pay the contract price for that supply to you. As an incentive to purchasers of the apartments, you have offered the purchasers a Rental Guarantee (RG). | Detailed Reasoning - Under the Rental Guarantee Agreement (RGA):: You agree to pay the RG in consideration of the Purchaser purchasing the Property. The RG 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 X. The RG amount is paid to the property purchaser monthly or as otherwise agreed. Refer Clause X. The purchaser is, at your direction, required to sign a tenancy agreement with the tenant. The real estate agent has an obligation to pay the amount received as rent from the tenants to you during the term of the rental guarantee. In considering the total fact situation, the purchasers entering into the contract can be characterised as the purchaser 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 RG payments. As there is no separate supply made by the purchaser, the RG payments will not be consideration for any separate supply by the purchaser to you. Rather the RG payments will represent a reduction to the selling price of an apartment. Similarly, rental paid by the tenant to you (via the real estate agent) is part of the overall transaction income and as such is an increase in consideration received. | Detailed Reasoning - Question 2: Are the payments of the Rental Guarantee adjustment events? 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. This is so because In accordance with the RGA, the purchaser has effectively assigned their legal right to the income earned when the property is subsequently leased to a third party. Under the RGA the rental receipts are diverted to you under obligation of the real estate agent (see clauses X and X1) and your contentions). We consider that this arrangement amounts to a payment from the purchaser to you. Such payments for the reasons mentioned above in relation to the RG payment, are part of the arrangement for the supply of the property from you to the purchaser. The amounts of rental income received have the effect of increasing the selling price. 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 in accordance with the lease of the property to the tenant by the purchaser, 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. | Detailed Reasoning - Question 3: Is the decreasing adjustment attributable to the tax period in which the Rental Guarantee Commencement Date occurs? 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. You submit that in this case you will become aware of the amount of the decreasing adjustment on the rental guarantee commencement date (clause X of the rental guarantee) as the term and amount of the rental agreement will be known at that time. As such you consider 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. You have 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 in the tax period that the RG payments commence. Accordingly, this method would also need to be used to determine the extent of the rental income to be received over the term of the lease of the premises that are essentially controlled by you and your real estate agent under the terms of the RGA (clause X and your contentions). Obviously, the rental calculation period could not exceed the RG expiry date. You have 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 (clause X). · if the purchaser sells the property the deed will terminate (clause X). · you may terminate the deed if the purchaser breaches any provision of clause X. 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. | Relevant facts: You are registered for GST. | You have developed a property at a location in Australia. The property has been developed into residential apartments and also includes some commercial retail outlets. | The apartments have been sold to individual purchasers and other entities such as superannuation funds. You acknowledge that you will have a GST liability in respect of the sale of new residential premises (the apartments) when the sales are completed at settlement. | You have provided a copy of the Rental Guarantee Agreement (RGA) that is entered into with the property purchasers. The following clauses are of particular relevance: | Recital X - in consideration of the purchaser purchasing the property the developer has agreed to pay the rental guarantee to the purchaser subject to and in accordance with the terms and conditions more particularly described in this deed. | Recital X1 - The rental guarantee will be paid from the rental guarantee commencement date until the rental guarantee expiry date | Definitions: Rental Guarantee - means the amount of $_____ per week payable from the rental guarantee commencement date until the rental guarantee expiry date. | Rental Guarantee Commencement Date - means the date which is ______ after settlement of the contract. | Rental Guarantee Expiry Date - means the earlier date to occur of: | _______ after the Rental Guarantee Commencement Date; and | termination of this Rental Guarantee in accordance with clauses XX or XX1. | No obligation: The developer has no obligation to pay any amount to or on behalf of the purchaser but for the rental guarantee as provided for in the deed. | Pre-condition to rental guarantee: The Developer's obligation to pay the rental guarantee is conditional on the purchaser's compliance with the terms of this deed including: | · the purchaser executing an agency agreement with the agent on or before settlement of the Purchaser's purchase of the property under which the purchaser agrees to: (i) deal exclusively with the agent in relation to leasing the property; and (ii) comply with the terms of the agency agreement; | · the purchaser doing all things necessary to allow the agent to market the property, including allowing the agent to show prospective tenants through the property; | · 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. | Developer may terminate: The developer may, on not less than X days written notice to the purchaser specifying the relevant breach of any provision of clause X, terminate this deed in which event this deed will terminate on the date of the developer's notice and neither party will have any obligation to the other from that date but for any antecedent breach of its terms. | Purchaser's acknowledgments: · if the purchaser sells the property this deed will terminate on the date of settlement… | · the agent's fees and disbursements … will be paid by the developer which… the developer may deduct from any payment or payments of the rental guarantee. | · the rent payable under the lease will be $..... per week and neither the developer or the agent have any obligation to seek or secure any higher rent for the property at any time. | · the maximum liability the developer has under this deed is the rental guarantee amount; | · the developer has advised the purchaser to procure insurance cover over the property and the lease including insurance cover for contents, public liability, loss of rent and malicious damage. | · the developer and or the agent is authorised to select the tenant under the lease… | Purchaser may terminate: The purchaser may terminate this deed at any time by written notice to the developer. The developer's obligation to pay the rental guarantee will cease and determine on the date of the purchaser's notice. | Payment of rental guarantee: 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 any such other manner and frequency as determined. | Under the RGA, the tenant pays the rent directly to you (via an agent). | In practice, you may authorise the real estate agent to use the rental proceeds from the tenant to meet your RG obligation to the property owner. | You are entitled to keep all the rent paid by the tenant regardless of whether the amount of rent is more or less than the RG amount. | 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.