When finalising agreements with tenants pursuant to the new Commercial Leasing Code of Conduct (Code), landlords should properly consider the potential GST treatment of the agreement and ensure that any deferral of reduction of rent will operate as intended from a GST perspective.
Under the Code, landlords of tenants whose business has been significantly affected by COVID-19 are required to negotiate with their tenants to agree rental ‘reductions’ – with a view to reducing rent proportionately to the decline in the tenant’s business. However, this ‘reduction’ may be achieved by a combination of waivers and deferrals of rent otherwise due.
Depending on the drafting and structure of such arrangements, they may give rise to unintended GST consequences without proper consideration.
Under the GST Act, where the supplier accounts on an accruals basis, GST is required to be attributed to the period for which (a) any of the consideration for the supply is received, or (b) an invoice relating to the supply is issued. For leases, the supply of the premises each period (i.e. month) is treated as a separate supply.
However for the deferred rent, technically there is no ‘reduction’ in the consideration payable for the supply of the premises each month in relation to this – the parties have just agreed to defer payment of that part of the rent. Ordinarily, the attribution rules will require that an invoice is issued for the rent (including deferred rent) each period, and the GST remitted based on that rental charge (even though some part of the rent will only be paid at the end of the deferral period).
For a rental reduction or abatement, these attribution rules do not usually pose an issue as the parties have agreed that for the relevant periods, the rent will be reduced and GST should only be payable (and the tenant invoiced) for the reduced rent – i.e. ‘net’ rent after the reduction.
In light of this, it may be that the best approach is for the parties to reduce the rent due for the relevant period, and then increase the rent proportionately following the end of the deferral period. This method will allow the landlord to simply invoice for the rent paid each month (whether a lesser, or increased, amount).
This is not the only mechanism available to ensure the appropriate treatment of the altered arrangements and we have seen clients approaching this in a variety of different ways – each suited to their own arrangements. However, GST is one factor which should be considered in agreeing these terms – particularly in an environment where businesses (including landlords) are seeking to conserve cash.