In February 2012, the Australian Taxation Office (ATO) published
a Goods and Services Tax (GST) Determination on GST consequences
following the sale of commercial property that is subject to a
The Determination confirms that following a sale of commercial
property that is subject to a lease, the buyer is liable for GST
relating to the lease following the sale of the property because it
makes a taxable supply when it receives rent and allows the tenant
to remain in possession of the premises under the lease. The seller
is not liable for GST relating to the lease where it is no longer
in receipt of or entitled to rent or other consideration for the
lease following the sale. This result is consistent with the
interpretation of GST supplies by the High Court in the recent case
of Commission of Taxation v Qantas Airways Ltd  HCA
41 (2 October 2012) (Qantas case).
In a practical sense, the issue impacts on whether rent
adjustments in sale contracts should be done on a GST-exclusive or
inclusive basis. On the basis that parties adopt the Determination,
rent adjustments should generally be done on a GST-exclusive basis.
The seller alone is liable for GST for the period straddling
completion and is entitled to receive the GST amount recovered from
the tenant shown on the tax invoice given to the tenant.
However the Determination does not deal with the question as to
which party has the GST liability for lease periods that straddle
settlement, that is, where leased commercial property is sold part
way through a GST tax period. An example is where the landlord of a
commercial property receives rent in advance and part of that rent
relates to the period after settlement. Industry practice is that
the seller has the entire GST liability on the rent and any rent
adjustments between the parties are on a GST-exclusive basis. We
consider that this is the correct position.
As the High Court observed in the Qantas case, GST will be
payable once and will be attributable to the first tax period in
which any of the consideration is received. The ATO considers that
Division 156 of the Goods and Services Act 1989 (Cth) has
the effect of treating each periodic component of the lease as if
it were a separate supply. As a result, the seller is liable for
the GST for the rent period straddling the completion date because
it makes the supply of the property under the lease for that month
and receives the rent. The first period for which the buyer has a
GST liability is the period which starts after completion. While
the buyer makes a supply to the tenant from the date of completion
because it allows the tenant to occupy the premises, the buyer does
not receive any consideration for that supply. The rent has already
been paid. So the buyer is not making a taxable supply for the
balance of the lease period which straddles completion.
The buyer receives compensation from the seller for the prepaid
rent through the settlement adjustments, which form part of the
calculation of the consideration for the purchase or supply of the
property. However, because the Determination does not deal with
this issue, sellers and buyers should contractually protect their
The property industry has asked the ATO to issue a GST ruling on
the GST treatment of rent adjustments on the sale of a leased
commercial property, in particular, whether the seller or the buyer
is liable for GST on rent received from tenants in advance or
arrears of settlement.
If you would like further advice on this particular issue,
please contact Julia Godfrey or Peter Burden.
This publication is intended as a general overview and
discussion of the subjects dealt with. It is not intended to be,
and should not used as, a substitute for taking legal advice in any
specific situation. DLA Piper Australia will accept no
responsibility for any actions taken or not taken on the basis of
DLA Piper Australia is part of DLA Piper, a global law firm,
operating through various separate and distinct legal entities. For
further information, please refer to www.dlapiper.com
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