GST and whether a lease with an option to renew is a long-term lease

Is the supply of real property by the entity, an Australian Government agency, by way of lease for less than 50 years with an option to renew, a 'long-term lease' as defined in section 195-1 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

No. The supply of real property by way of lease for less than 50 years with an option to renew is not a 'long-term lease' as defined in section 195-1 of the GST Act.

The entity is an Australian government agency, which administers the leasehold over an area of real property.

The entity enters into a lease agreement with another party (lessee) for a term of less than 50 years. The lease agreement contains an option for the lessee to renew the lease for a period of 50 years. The lessee has exercised the option to renew the lease.

The entity is registered for goods and services tax (GST).

A 'long-term lease' is defined in section 195-1 of the GST Act as a supply by way of lease, hire or licence, including a renewal or extension of a lease, hire or licence for at least 50 years if: • at the time of the lease, or the renewal or extension of the lease, it was reasonable to expect that it would continue for at least 50 years; and • unless the supplier is an Australian government agency - the terms of the lease, or the renewal or extension of the lease, as they apply to the recipient are substantially the same as those under which the supplier held the premises.

The entity is an Australian government agency. As such the entity must satisfy only the first requirement above (the term 'unless' means 'except when').

Pursuant to the definition of 'long term lease' it is apparent that the 'lease, hire or licence' and the renewal or extension of a 'lease, hire or licence' are to be considered as separate supplies. The lease is a supply for a particular period and the renewal or extension of that lease is a supply for a separate period. This can be illustrated as follows:

As seen above if the entity and the lessee agree to renew or extend the lease, the entity and the lessee enter into a further supply of the real property by way of lease for a further period. The renewal or extension of the lease therefore is not considered in making a determination as to whether the lease is a long-term lease.

The definition of a long-term lease provides that it must be reasonable to expect that the lease would continue for at least 50 years at the time the lease was entered. The phrase 'reasonable to expect' has not been defined in the GST Act. To find the meaning, one must consider the ordinary meaning of the words in the phrase, the legislative context in which the phrase appears, and any comments made by judges interpreting statutes that have provisions which incorporate the concept of 'reasonable expectation'.

The above has been considered in paragraphs 37 to 46 of Goods and Services Tax Ruling GSTR 2000/7 by the Commissioner in determining the meaning of the phrase 'could reasonably be expected' in section 11 of the A New Tax System (Goods and Services Tax Transition) Act 1999 . The Commissioner concluded that for there to be a 'reasonable expectation' there must be about an even chance of the event occurring.

Consistent with the above meaning of 'reasonable expectation', if there was about an even chance that the lease would continue for at least 50 years, the lease would be a long-term lease.

In this case the lease was for less than 50 years and was not reasonably expected to continue for 50 years when the lease was entered between the entity and lessee. The lease therefore is not a long-term lease as defined in section 195-1 of the GST Act. Note 1: A lease created by exercising an option to renew or an extension of, the lease will be a long- term lease where it is reasonably expected to be for at least 50 years at the time that the option is exercised, or the extension agreed to, being the point at which the lease is entered. Note 2: The current practice within an industry will give an indication of the reasonableness of the period of the lease as stipulated by the parties in the lease agreement.