Imposition of the GST on commercial property sales and leases is likely to represent a significant impost, says Paul Wheeler*, particularly now the States appear reluctant to hasten any reduction in stamp duty
Whether or not one agrees with the concept of a goods and services tax, few would disagree that it appears to be unnecessarily complicated. Commercial leases are a case in point. Not only are there varying rules for when GST becomes payable, but the question of its recovery by lessors from lessees may well provide a continuing series of field days for lawyers. Does a clause which stipulates that the lessee shall reimburse the lessor for "all rates and taxes" give the lessor the right to recover GST? There will be as many opinions as there are variations to the clause concerned. Some clauses will almost certainly require judicial interpretation. One clear factor is that the lessor is liable for the payment of GST. Once understood, the next question is from what date will the liability arise? Normally this will be on 1 July, 2000, for all leases entered into after 8 July, 1999, with non-input taxed tenants, or after 2 December, 1998, with input taxed tenants. GST will not be payable on earlier leases until 1 July, 2005, or the first review opportunity in the lease arising on or after 1 July, 2000, whichever occurs first. However if an opportunity arises whereby the rent can be adjusted prior to 1 July, 2000, to take account of the GST, then GST will be payable from 1 July, 2000.
So far so good, but what constitutes a review opportunity? There is no question that an open market rent review is a review opportunity - and it seems clear that reference to an index such as CPI is not regarded as a review opportunity. However it has been suggested that arrangements which allow a lessor to recover outgoings from a lessee may comprise a review opportunity as defined within Section 13 of the Transition Act. It would seem preferable for "a review opportunity" to be confined to the traditional concept of a rent review - by reference to prevailing market conditions. As yet this issue is unresolved. A further complication arises where a lessor of a multi-tenanted building is entitled to recover GST from the occupiers under the provisions of a standard outgoings recovery clause. Not only might this give rise to some lessees contributing to GST although their leases predated 8 July, 1999, or 2 December, 1998, but the contribution of GST to the lessor might not be proportional to the rent paid or the rental value of the tenancy concerned. In a multi-storey office building outgoings are normally recovered on the basis of floor area occupied and so a recovery of GST for the whole building would imply an equal contribution per square metre from each tenant, whereas rent on the upper floors may be much higher than that on the lower floors.
The Australian Taxation Office should clarify these matters before 1 July, 2000, and, hopefully, any such clarifications will err on the side of simplicity. Indeed, would it not have been easier for GST to have become payable by all commercial lessees from 1 July, 2000, regardless of individual lease provisions? Such an arrangement, although onerous, would avoid the harsh penalty which appears to be awaiting the owners of properties with long leases - beyond 1 July, 2005 - which do not allow for GST payment by the lessee. An interesting side effect of the GST relates to assessment of "open market rental value". Put simply, should the rental value of a property where the lessee is not liable for the payment of GST be grossed up on the basis that the lessees of similar properties are paying GST in addition to the rent? Appealing though this argument may be at first sight, the concept of grossing up is impractical because the net consideration for any goods or services should not increase by 10 percent due to input tax credits and other tax changes. The Australian Property Institute says that a market rental review should result in a grossing up for GST to the extent that market prices reflect the proliferation of leases where the GST has been contemplated - resulting in higher rentals than might otherwise have been the case. One should pity the valuer required to determine the market rent for a three-year term from August, 1999, where the liability of the lessee to pay GST is in doubt.
* Paul Wheeler is a director of A T Cocks Consulting, one of Australia's largest independent property consultancy firms providing property valuation, town planning and corporate advisory services nationally. He may be contacted on (03) 9654 8555
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