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04.06.2018

News

Recovering GST from tenants for GST-free outgoings

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:

  • By agreeing to lease the premises, the landlord is providing a taxable supply
  • Pursuant to the terms of the lease, the tenant agrees to pay certain amounts in consideration for the supply of the premises
  • Sometimes the tenant agrees to pay a flat rent. Other times the tenant agrees to pay an amount which is calculated by adding together rent plus an amount representing the sum of the costs and expenses incurred by the landlord (ie outgoings) as part of supplying the premises
  • However the amount is calculated, the total sum of the tenant's payment obligations under the lease represents the consideration it is paying for the taxable supply of the premises
  • Generally, the landlord is liable to remit GST to the ATO on the consideration it receives from the tenant. So, where that consideration is calculated in part by reference to an amount necessary to reimburse the outgoings paid by the landlord, the landlord will generally be required to pay GST on the outgoings sum
  • If the lease includes a clause permitting the landlord to recover from the tenant any liability the landlord has to pay GST on monies paid by the tenant, then a charge for GST will be added to the tenant's invoice on top of the rent and outgoings.

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.


Authors

Kristy Dorney

Kristy Dorney

Partner

Contact McMahon Clarke

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A Level 7, 100 Creek Street, Brisbane Qld 4000

Melbourne
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