Issue
Does the supply of premises for a rent-free period made by the lessor to the entity, a tenant, form part of the consideration for the entity's taxable supply to the lessor under section 9-5 of the A New Tax System (Goods and Service Tax) Act 1999 (GST Act), the supply being the surrender of a commercial lease?
Decision
Yes, the supply of premises for a rent-free period made by the lessor to the entity does form part of the consideration for the entity's taxable supply to the lessor under section 9-5 of the GST Act, the supply being the surrender of a commercial lease.
Facts
The entity is a tenant. The entity agrees to surrender its rights to lease commercial premises from the lessor. The lessor pays the entity a lump sum to vacate the commercial premises. The surrender of the commercial lease is a taxable supply under section 9-5 of the GST Act.
The lessor and the entity also agree that the entity will remain in the commercial premises for a rent-free period before it vacates the commercial premises.
The entity is registered for goods and services tax (GST).
Reasons for Decision
In accordance with subsection 7-1(1) of the GST Act, GST is payable on taxable supplies.
Under section 9-5 of the GST Act, an entity makes a taxable supply if: • it makes a supply for consideration; • the supply is made in the course or furtherance of an enterprise that it carries on; • the supply is connected with Australia; and • the entity is registered, or required to be registered for GST.
The entity is making a taxable supply when it surrenders its rights to lease commercial premises from the lessor. However, in working out the GST payable it needs to be determined whether the supply of premises for a rent-free period made to the entity forms part of the consideration for the entity's taxable supply.
Consideration is defined in subsection 9-15(1) of the GST Act to include any payment, act or forbearance in connection with, in response to or for the inducement of a supply of anything. The entity is receiving a lump sum payment to vacate the premises. In addition to this, the entity is entitled to remain in the premises for a rent-free period. In this case, the lessor is forgoing its right to be paid rent. This is in connection with and for the inducement of the entity's surrender of the lease.
Therefore, the supply of premises for a rent-free period made by the lessor to the entity does form part of the consideration for the entity's taxable supply to the lessor under section 9-5 of the GST Act, the supply being the surrender of a commercial lease. [Note 1: As the supply of premises for a rent-free period forms part of the total consideration received for the entity's taxable supply, it must be included in the calculation of the entity's GST liability. In this instance, the relevant part of the consideration would be the GST inclusive market value of the rental otherwise payable by the entity during the rent-free period. If there is any doubt please refer to Goods and Services Tax Ruling GSTR 2001/6 which provides reasonable methods for determining the GST-inclusive market value of non-monetary consideration.]