|Ruling number||DUT 021|
|Date issued||16 August 2001|
|Issued by||Peter Achterstraat|
Chief Commissioner of State Revenue
|Effective from||16 August 2001|
|Effective to||31 December 2007|
|Status||Duty on leases was abolished on 1 January 2008|
The introduction of the Commonwealth goods and services tax (GST) has raised questions about duty payable where a lessee under a lease is required to reimburse the lessor for any GST incurred.
Under section 165 of the Duties Act 1997, duty is calculated on the ‘cost’ of the lease, which is the aggregate of the type of payments listed in subsection (1) of section 166. This includes:
the rent payable during the term of the lease or in advance of the lease and any amount paid or payable for the right to use land under the lease; and
any rates and taxes paid or payable on behalf of the lessor in connection with the lease.
Duty is assessed on so much of the cost of a lease as is known at the time of execution of the lease. If the total cost is unascertainable at the date of execution, duty may also be assessed on the increased cost after periodic reviews of the lease. A variation to a lease that increases the cost of the lease also creates a liability to duty on the lease.
This ruling deals with the question of whether lease duty is payable on lessee payments in respect of GST as a component of the cost of a lease.
Most leases now contain a provision dealing with payment of GST, although this can take many different forms. The parties may simply agree that:
the rent is ‘GST-inclusive’ or ‘inclusive of GST’; or
the amount of any GST imposed on the supply of the premises is payable by the lessee to the lessor as rent or additional rent; or
the lessee shall pay any goods and services tax imposed in respect of the premises.
Clearly, the cost of the lease includes any GST amount under any one of these provisions.
More commonly, the parties will agree that all payments or consideration under the lease payable by the lessee to the lessor (including rent) do not include GST, but will further agree that if the GST is payable in respect of a taxable supply under the GST legislation, either:
the lessee must pay an amount equal to the GST to the lessor; or
the lessor may recover the GST from the lessee.
The issue is whether such a reimbursement comes within the cost of a lease as described in subsection 166 (1) of the Duties Act. Any such reimbursement of GST payable on the rent is consideration under the lease for the rights granted under the lease. Consequently, the amount of reimbursement will be taken to be rent or an amount paid or payable for the right to use the land under the lease, and within the definition of the cost of a lease.
However, where GST is payable under a lease in respect of some other supply made or provided under the lease (such as for the provision of goods or services incidental to the use of the premises), that component of the GST would also be incidental. Payments of amounts for matters that are incidental to a lease are generally not characterised as for rent (or payments for the right to use land).
The cost of the lease therefore only includes so much of the reimbursement for GST as is payable in relation to amounts (such as the rent) that themselves comprise the cost of the lease.
A lease becomes liable to further duty on the making of a variation which increases the cost of the lease. When a lease is varied to require a lessee to reimburse a lessor for GST, additional duty will be payable on the basis that the amount of reimbursement is additional rent or a further amount paid for the right to use the land under the lease. No additional duty will be payable if an arrangement for the payment of GST does not constitute a binding term or condition of the lease.
The total amount of GST to be reimbursed by a lessee will generally be unknown at the time of execution of a lease and when the lease is presented for stamping. In such cases, however, an estimate of GST payable will usually be possible.
The declaration form for lease instruments (ODA 013) was reissued in May 2000 to provide for a calculation of the amount of reimbursement by the lessee of any GST payable by the lessor. In determining this amount, a reasonable estimate is acceptable.
If the GST component cannot be estimated, duty will be assessed under section 173 with periodic reviews unless the Chief Commissioner considers that the unascertainable cost of the lease is so minor as to not warrant reassessment.