GST on lease agreements
Scenario:
West and Associates is a partnership of solicitors that is registered for GST and is planning to move to new rented office premises. The firm was able to negotiate with the landlord to pay the partnership an inducement fee of $30,000 to enter the new lease agreement (use to refurbish the new premises)
What are the GST consequences, if either party enters the lease agreement and includes the inducement payment?
Explanation:
Entering into the lease agreement creates the supply of a service (access to the premises) by the landlord to the solicitor’s partnership. As this is a commercial and not a residential rental agreement it is not input taxed. Presumably, both the landlord and the tenant solicitor’s firm are registered for the GST.
Under GST Act s 9-5 the solicitors’ partnership (the tenant) has made a supply by agreeing to enter the lease contract and the consideration received is the inducement payment.
Under GST Ruling GSTR 2003/16, The lessee partnership is liable to remit GST to the ATO at the rate of $30,000/11= $2,727.27.
In addition, a lessee pays a lease premium in order to secure a lease that will be a supply by the lessor who will be liable to account for the GST on the premium.
Note: It should be noted that lessors and lessees may pay to get out of a lease. If the payment is made by the lessor, the lessee must account for the GST. If the payment is made by the lessee, the lessor must account for the GST.