Property
Lease
A lease is an agreement giving someone the right to occupy or use property for a period in return for rent, and its GST treatment depends on whether the property is residential or commercial.
A lease is a contract under which the owner of property, the lessor or landlord, gives another party, the lessee or tenant, the right to occupy or use it for a set period in exchange for payments, usually called rent. Leases are most often thought of in connection with land and buildings, but the same idea applies to equipment, vehicles and other assets. For GST, the grant of a lease is itself a supply, and so are the regular rent payments under it.
The first question is whether the leased property is residential or commercial. A lease of residential premises to a tenant is input-taxed, so no GST is charged on rent and the landlord cannot claim credits on the related costs. A lease of commercial property by a registered landlord is a taxable supply, so GST is added to the rent. A lease of equipment or a vehicle by a registered business is also generally taxable.
Leases often have extra features that need attention. A landlord might charge outgoings such as council rates, water and insurance to the tenant. If the main lease is taxable, those recoveries are generally part of the taxable supply and attract GST. A landlord might also give an incentive such as a rent-free period or a contribution to fit-out costs, and these can have GST consequences for both sides.
Lease terms can be affected by GST in other ways. Many commercial leases state that the rent is exclusive of GST and that the tenant must pay any GST in addition. Leases that do not clearly deal with GST can cause disputes about whether the rent already includes it. If a landlord later registers for GST, the lease might allow GST to be added. It is wise to include a clear GST clause and to have the lease reviewed.
Lease premiums, assignments and surrenders also count as supplies. If a tenant pays an outgoing tenant to take over a lease, or a landlord pays a tenant to leave early, there may be a taxable supply, depending on who is registered and the type of property. A transfer of a lease as part of the sale of a business as a going concern can be GST-free if the conditions are met. These cases are detailed, so each should be checked.
A finance lease or hire purchase of a vehicle or equipment is treated differently from a simple lease. In some arrangements the lessee is treated as acquiring the asset at the start, and the GST and credits are accounted for accordingly. Operating leases, on the other hand, generally lead to GST on each rental payment. The substance of the contract matters.
A common mistake is assuming that all leases are the same for GST. Another is failing to check whether a landlord is registered before assuming that GST will be added to rent. This is general information only, so confirm the treatment of your lease with the ATO or a registered tax professional.
Worked example
A registered cafe leases a shop from a registered landlord under a lease that states rent is $4,000 per month plus GST. The landlord charges $400 GST, so the tenant pays $4,400 each month. Over a quarter the tenant pays $1,200 of GST and, holding tax invoices, claims it as input tax credits. The landlord reports $1,200 of GST collected on the same BAS period basis.
Practical tips
- Include a clear GST clause in every commercial lease, stating whether rent is GST-inclusive or exclusive.
- Check whether outgoings recovered from the tenant carry GST under the lease.
- Get advice on incentives, premiums and assignments, since each can have GST effects.