On Friday the Commissioner published ATO ID 2013/30 “GST and the sale of commercial premises that are subject to a lease’. The Commissioner takes the view that the vendor of leased commercial premises is liable for GST on the entire prepaid rent it receives for the month when the supply occurs part-way through that month. Interestingly, the Commissioner takes this view notwithstanding that the rent is adjusted at settlement.
In the facts considered, the vendor receives pre-paid rent of $110,000 for a month and the sale takes place half-way through the month. The terms of the contract provide for the entire amount of the rent to be retained by the vendor, but under the contract the entity is obliged to allow for an adjustment to the purchase price at settlement to take into account the rent referable to that part of the month after settlement. Accordingly, at settlement the price is adjusted by $55,000.
The Commissioner notes that paragraph 7 of GSTD 2012/2 states that “the vendor of the commercial premises is not liable for GST relating to the lease where it is no longer in receipt or entitled to rent or other consideration for the lease following the sale of the reversion”. Similarly, paragraphs 9-11 of the determination are to the effect that the purchaser is liable for GST in respect of the lease to the extent that rent or other consideration is paid to it in connection with the lease.
The Commissioner takes the view that the vendor was entitled to receive all the monthly rent “and the contract contemplated that the entity would retain the entire amount of rent paid” for the month. Further, notwithstanding the rent is adjusted, the purchaser does not receive and is not entitled to receive any of the rent for the month. The Commissioner views this adjustment as a reduction to the consideration paid by the purchaser for the supply of the premises.
While I can understand the reasoning of the Commissioner, it does appear artificial to take the view that “the contract contemplated that the entity would retain the entire amount of rent paid” where half of the rent is to be adjusted on settlement. In reality, there would appear to be little difference between a contract which expressly states that the vendor will only be entitled to retain so much of the monthly rental that relates to the period before settlement and a clause that requires the rental to be adjusted at settlement.