Landlords face real GST risk

LANDLORDS may be at significant risk from the GST, due to come into effect on 1 July 2000 and should immediately review their leases to identify potential traps.

According to Russell Maynard, GST specialist partner in KPMG’s taxation division, lessors and lessees may be adversely effected if care is not taken in drafting lease agreements. Landlords, however, who will have responsibility for remitting any tax payable whether or not it is recoverable from the tenant, may be at risk.

“Take the example where a lease agreement was entered into two years ago, covers a period up to 30 June 2002, and contains an option which allows the tenant to extend the lease for a further five years. This would frequently be on the same terms and conditions and specifies the method of determining the lease payments,” Mr Maynard said.

“In the absence of a GST clause, the landlord may be protected from having a GST liability up until 30 June 2002 provided the tenant could have claimed a full tax credit. However, if the option to extend is taken up, the landlord is likely to have a liability on the lease payments from that time, even though he may not be in a position to increase lease payments,” he said.

In this situation the tenant may get a windfall reduction in lease costs if they are entitled to a GST credit corresponding to the landlord’s liability. While no tax has been raised by the Government, the landlord has lost revenue and the tenant has reduced net cost.

Landlords need to review their leases and assess the impact so that they can take appropriate action to protect themselves or negotiate around the issue.

KPMG and the Property Council of Australia have produced a comprehensive guide for the property industry entitled Build Your Business which is essential reading for those involved in the sector.

KPMG’s GST team in Perth, recently expanded and now the largest senior specialist team in Western Australia, has been actively supporting the property sector advising on this and other issues impacting the industry.

For information contact Russell Maynard on (08) 9263 7171.