Accountant says GST is owned - Commercial Property

John owns a commercial property & is GST registered. John's previous managing agent didn't charge GST to his tenant on top of the council & water rates. John has already changed to a new competent agent that is doing things correctly.

John's accountant is telling him that he should pay over $1,000 in GST for the FY18 and FY19 where the incompetent agent didn't collect GST on council & water rates from his tenant. John's accountant is suggesting him to rectify the issue to avoid any potential conflict with tax office, in case they pick it up.

John doesn't feel he should be stuck paying $1,000 in GST due to the previous agent's incompetent.

Is John stuck with having to pay this $1,000 in GST himself out of our his pocket? Can he get his current agent to bill his (same) tenant for that FY18 and FY19 GST amounts the previous agent didn't charge? What could happen if John just ignores this all?

 

Yes, if he owes it to the ATO.

John could invoice the tenants if they owe him money.

 

Could John instruct his current agent to invoice the tenants for this and the agent would collect it on John's behalf, or does John have to invoice the tenant himself?

 

The agent can do things on behalf of the landlord so yes.

 

This is an area many get wrong.

The on-charging of an Australian tax, fee or charge forms a part of the consideration for a taxable supply where the requirements of section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) are met. GST is payable on taxable supplies.

Whether or not GST should be charged on top of various government taxes, charges and fees or other on the charges for other supplies ultimately depends on the contractual arrangement between a landlord and their tenant.

Payment by the landlord of local council rates, land tax, water charges and other such amounts may not be subject to GST because of Division 81 of the GST Act, which relates to the payment of Australian taxes, fees and charges. If the tenant is required under the terms of the lease to reimburse their landlord for such an amount this is not the 'payment of an Australian tax, fee or charge' by the tenant, and Division 81 of the GST Act does not apply to the tenant's reimbursement of such charges.

If all the other requirements of a taxable supply are met, the supply is a taxable supply and there is a GST liability on the on-charged amount. A supply of premises under a commercial property lease together with the services required by the tenant to use the premises will be a single supply of real property for the purposes of the GST Act. Where such a single supply is made, the reimbursement or payment of the landlord's outgoings is consideration for the supply of the commercial premises under section 9-15 of the GST Act. The payment of this amount forms a part of the overall consideration for the taxable supply to the tenant by way of lease of the property.

Whether a single supply or multiple supplies are made under a lease will depend on the nature of the supply and the terms of the individual agreement. There may be services referred to as outgoings which are provided to the tenant in addition to the premises and which are separate from the supply of the premises. If a payment is for a service that would normally be expected to form part of the supply of the premises and is merely incidental to the supply of the premises, then that payment will be for the supply of the premises.

Other obligations imposed under the lease for the tenant to reimburse the landlord, or pay costs for which the landlord is liable, will also form part of the consideration for the supply of the premises. If the tenant is liable for an expense regardless of the terms of the lease, the payment of the expense will not form part of the consideration for the supply of the premises.

 

Ok thanks

 

Many people will argue and say..."But water and council rates are GST free". However the disbursements are not actually paid by the occupant as water but is paid to the landlord as an element of rent. So GST applies even to GST free costs. Includes land tax too.

There isnt actually a new "cost" in this. What there is, has been avoidance of actual GST due in the past. A decent commercial PM would know this. This isnt actually a role a tax accountant should even be involved in as lease agreeements and their terms are legal work. They may merely just be reporting and preparing the BAS based on what they are given.

Many landlords one of two major ways to address this:
- They charge a annual amount for these outgoings so the tenant pays a fixed amount
- They invoice the extra on top individually.

Can the tenant just pay these costs directly ? Not if they costs are issued to the owner. If they did there is a still a "supply" by paying the cost incurred

 

If John instructs his current agent to collect $1,000 in GST the tenant owes for FY18 & FY19 I presume for the BAS in FY22 he would write it as being collected. For example, if the other GST components collected in FY22 is $5,000, then the total written on the BAS will be $6,000 total for FY22.

Currently John's last financial year FY21 tax return & BAS have not been completed yet. Would John just pay the $1,000 in GST asap or wait till the FY22 and record it on the annual BAS then as being collected?

If he pays it now then his Statement of Accounts with the ATO will show a $1,000 credit. Then next month he writes on the BAS $6,000 collected but only pays $5,000.

Am I understanding this correctly?

 

No

 

depends on the adjustment amount

Fixing BAS mistakes or making adjustments

in your case

Correcting GST errors

 

When was the SUPPLY made ? And what was the date of the tax invoice issued ?
When was the receipt of payment received ?
Is registration cash or accruals ?
Was a BAS prev lodged ? eg is it an adjustment event or not ?