Private ruling: GST and rental bonds
Published: May 2014

Ruling: A1: No, are not entitled to claim input tax credits on the amount deposited at a bank in favour of the lessor to be used by the lessor in the event you, the lessee, breach certain conditions under the lease agreement. You may be entitled to claim input tax credits if and when these amounts are applied by the lessor against a taxable supply that they make to you.

Relevant facts and circumstances: • You on a real estate enterprise from a lease commercial property (property). • You are registered for GST. • The rent payable by you for leasing of the property under the lease agreement is a certain amount. In addition to this amount, it is a requirement under the lease agreement that you pay a sum of money (which is referred to as a "Bank Guarantee") in instalments which will be held in the favour of the lessor. • The lease agreement sets out how the amount under the above mentioned 'Bank Guarantee' should be worked out. You have duly paid these amounts to a bank that is holding the amount in favour of the landlord. The documents/certificates that are issued by the bank in respect of these amounts refer to these amounts as a 'rental bond'. • Under the lease agreement, the lessor is entitled to apply the money held by the bank in their favour towards the satisfaction of any amount which may become payable as a result of any breach by the lessee (that is, you). • At the end of the lease agreement, you, the lessee, become entitled to any monies not used by the lessor. • So far, you have not defaulted on your rental payments, or breached any other conditions which entitle the landlord to apply monies held at the bank to apply against those breaches.


Reasons for decision: Summary: You are entitled to claim input tax credits on creditable acquisitions that you make. Pursuant to section 11-25 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), the amount of the input tax credit for a creditable acquisition is an amount equal to the GST payable on the supply of the thing acquired (unless the thing acquired is for a partly creditable purpose). Division 99 of the GST Act specifically provides that a deposit held as security for the performance of an obligation is not treated as consideration for a supply unless the deposit is forfeited because of a failure to perform the obligation, or is applied as all or part of the consideration for a supply. It is our view that payments made by a tenant in favour of a landlord/lessor to be used by the landlord/lessor as a deposit which the landlord is capable of applying against any amounts due from the tenant is not treated as consideration for a supply at the time it is paid and is therefore not subject to GST. GST is only payable by the lessor, in the event, if and when the amount deposited in favour of them is forfeited or applied against consideration for a taxable supply the lessor makes. Accordingly, as the amounts that you have paid as specified in the lease agreement is a deposit/bond that entitles your landlord/lessor to use in the event of certain breaches by you, they should be treated in the same manner as this ATO view. As none of the amounts that you have deposited at the bank has been applied by your lessor against any amounts due from you, there is no GST amount to be claimed by you at this stage as input tax credits. Whilst there is no GST payable until such time when the lessor applies the money against a taxable supply, if the formula used to calculate the relevant amount takes into a 'GST component' as part the calculation of that amount, it is a contractual issue between the two parties to the contract. The ATO cannot comment on such pricing matters. The calculation of the dollar value to be paid under an agreement similar to those amounts that you were required to pay as outlined in your lease agreement is a contractual issue between you, the lessee and the lessor.

Are you, the lessee of a lease agreement entitled to claim input tax credits on the amount deposited at a bank in favour of the lessor to be used by the lessor in the event you breach certain conditions under the lease agreement? | Relevant legislative provisions: Section 11-5 of the A New Tax System (Goods and Services Tax) Act 1999 Reasons for decision