GST and varying a transitional lease agreement retrospectively before 22 February 2005

If the consideration for a supply by way of lease that was GST-free under section 13 of the A New Tax System (Goods and Services Tax Transition) Act 1999 (GST Transition Act) is changed prior to 22 February 2005 with retrospective effect, does the supply lose its GST-free status from when the change is made or from when the change takes effect?

The supply loses its GST-free status under section 13 of the GST Transition Act on the date when the change to the consideration is made and not when the change takes effect.

Prior to 1 July 2000, the entity, a lessor of commercial premises, entered into a long-term written lease agreement with a tenant of the premises. Rent was payable monthly. The quantum of the rent was expressed as a formula that took into account the monthly turnover of the tenant. The lease agreement satisfied section 13 of the GST Transition Act and did not contain a 'review opportunity'.

GST commenced on 1 July 2000 and some time after this, the parties became aware that the turnover formula was no longer appropriate. In 2004, they executed a deed of variation to the lease agreement consideration formula and backdated this change to 1 July 2000.

The total rent payable under the amended lease agreement for the period from 1 July 2000 to the date the variation was executed exceeded the rent payable for that period under the original lease agreement. The tenant made a lump sum payment to cover the difference. After this, the tenant continued to make monthly rent payments under the amended lease agreement.

Section 13 of the GST Transition Act makes certain supplies identified in a written agreement GST-free if the agreement was made before 8 July 1999 and the conditions of the section are met. The supply is GST-free to the extent it is made until the earlier of 1 July 2005 or a review opportunity arises on or after 8 July 1999.

However, on or after 22 February 2005 if a change is made to the consideration for a supply covered by section 13 of the GST Transition Act and the change applies to supplies made before 1 July 2005 then the supply is not GST-free to the extent that it is made on or after the day the change takes effect.

Goods and Services Tax Ruling GSTR 2000/16, amended on 11 May 2005, provides guidance on the interpretation of the GST Transition Act. The position taken in GSTR 2000/16 is that where a variation to the consideration in a written agreement that satisfies section 13 of the GST Transition Act is made before 22 February 2005 with a future date of effect, a supply ceases to be GST-free from the date of the variation and not the future date of effect. The alteration in the consideration changes the agreement, even if the alteration does not take practical effect until a future time.

This is confirmed in paragraph 69C of GSTR 2000/16, which states: If a variation which changes the consideration was made before 22 February 2005 but was to take effect at some time after the variation was made, it remains our view that section 13 ceased to apply to the supplies from the date of the variation rather than the date on which the change takes effect. The new rule explained in paragraphs 69A and 69B of this Ruling applies only if the change is made on or after 22 February 2005.

Consistent with paragraph 69C of GSTR 2000/16, it is also our view that section 13 of the GST Transition Act ceases to apply to a supply, or part of a supply, from the date of a variation made before 22 February 2005 that changed the consideration retrospectively. The already completed part of the lease does not cease to be GST-free under section 13 of the GST Act merely because the parties later agree to treat the price for that part of the lease as having been greater or less than it actually was. Note 1: This ATO Interpretative Decision is restricted to variations made prior to 22 February 2005. It does not consider the possible impact of new subsections 13(4B) and 13(4C) of the GST Transition Act on variations in consideration made on or after 22 February 2005. Note 2: The consideration for supplies made before 1 July 2005 may be changed, possibly with retrospective effect and section 13 of the GST Transition Act may continue to apply in some circumstances.