Landlords and tenants of commercial premises are often confused about whether tenants should pay GST on top of outgoings which did not include GST.
Water, rates and land tax are examples of outgoings a landlord pays to operate their premises, for which they do not pay an additional charge for GST.
When passing on those amounts to the tenant as recoverable outgoings, the landlord often adds a charge for GST on top of the outgoings even though the landlord has not paid GST itself.
And, understandably, tenants frequently ask how this can be correct.
Partner Kristy Dorney explains the question is best answered by looking at the transaction in the following context:
So, the landlord is not looking to make a profit by adding GST to the outgoings. Rather, the landlord is passing on a charge it has incurred for GST in the same way it does all other outgoings.
The transaction described above represents the majority of the leases we see. However, before charging GST on GST-free or exempt outgoings, the landlord should consult their tax adviser about whether the landlord is liable to pay GST on the outgoings recovery paid to it by the tenant. In some cases, GST may not be payable on the landlord's supply to the tenant. Then, the tenant should not be charged GST.
Each landlord and tenant's unique circumstances should be considered first. Only if the answer to this is yes and the lease contains an appropriate GST recovery clause can the landlord recover its GST liability from the tenant.
This ATO tax ruling also provides some useful guidance.
As an aside, the landlord must also observe any terms of the lease and any applicable Retail Shop Lease legislative provisions which may also impact upon the rights of the landlord to recover outgoings. In some cases, a failure to observe these provisions may result in the landlord losing any right to recover outgoings and GST altogether.