GST and whether a sublease of real property is a long-term lease

For the purposes of the definition of 'long term lease' in section 195-1 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), are the terms of a sublease substantially the same as those under which the supplier held the real property?

No. For the purposes of the definition of 'long term lease' in section 195-1 of the GST Act, the terms of the sublease are not substantially the same.

The supplier is registered for goods and services tax (GST) and is not an Australian government agency.

The supplier leases an area of real property (the head lease) from an Australian government agency. Under the terms of the head lease, the supplier: • holds the real property in perpetuity • is required to pay an annual fixed amount of lease rental, and • is entitled to use the real property for development and business purposes.

Subsequent to entering into the head lease, the supplier constructed a block of residential units on the real property and granted subleases over the individual units to other parties.

Under the terms of each sublease, the sublessee: • holds the unit for a period of 99 years with an option for a further 99 years • is required to pay an annual rental of a nominal sum plus an amount of contribution towards the operating costs incurred by the sublessor (that is, the supplier), and • is only entitled to use the unit for residential purposes.

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: (a) at the time of the lease, hire or licence, or the renewal or extension of the lease, hire or licence, it was reasonable to expect that it would continue for at least 50 years, and (b) unless the supplier is an Australian government agency - the terms of the lease, hire or licence, or the renewal or extension of the lease, hire or licence, as they apply to the recipient are substantially the same as those under which the supplier held the premises.

Whether, for the purposes of paragraph b) of the definition, the terms of a sublease applying to the sublessee are substantially the same as those for the supplier under the head lease is a question of fact and degree in each particular case. Consideration needs to be given to matters such as: • the amount of rental payable and how it is worked out or is to be paid • the area of real property subject of the lease • the period of occupancy, and • conditions governing the use or occupancy of the property.

A comparison of the sublease here with the head lease indicates the terms of each lease are not substantially the same. The amount of rental payable, the way it is worked out and paid, the area of property leased, and how the leased property can be used are all significantly different. While the period of occupancy for the head lease (in perpetuity) may be said to be substantially the same as the sublease (99 years with an option for further 99 years), all the other essential terms are not substantially the same.

As the supplier is not an Australian government agency, and paragraph b) of the definition is not satisfied, the sublease is not a long term lease.