The "honeymoon" period, where old long-term contracts have been allowed to continue to be GST-free since July 1, 2000 will come to an end on June 30 next year.
PricewaterhouseCoopers (PwC) indirect tax partner Ken Fehily says this is great for landlords, but not so great for tenants.
The firm's indirect tax team understands there is new legislation to be introduced by Federal Treasury dealing with the GST-free status of long-term non-reviewable agreements. This legislation, which at the time of press is yet to be tabled in Parliament, will provide the rules for the process required by parties to long-term contracts that are currently treated as GST-free under the existing transitional rules in the GST legislation.
The current legislation was introduced to deal with entities that had long-term arrangements that straddled the introduction of the GST on July 1, 2000. In summary, the legislation provides that if there was no provision in the original agreement to increase the price for GST or otherwise recover GST, then the contract would remain GST-free until the earlier of July 1, 2005 or the point in time at which the GST can be recovered under the agreement.
With this date fast approaching, Fehily says entities need to prepare for the eventuality that GST is to become payable on supplies made under these long-term non-reviewable contracts at the start of the next financial year.
It is anticipated that the new legislation will provide for some form of arbitration to settle any disputes between parties over the renegotiation of price. In addition, it could possibly involve an "assessor", such as accountants, valuers and lawyers, with a potential outcome being that for property leases, the tenant (as opposed to the landlord) has to "reverse charge" itself and pay the GST to the Australian Tax Office (ATO).
Hence, the tenant pays the rent, pays the GST on behalf of the landlord, and then claims back whatever GST it might be entitled to.
Fehily says parties to these agreements will need to have an agreed plan in place and be ready by July 1, 2005.
"Arbitration can often be a lengthy process so companies affected by this legislation should take action now," he says.
"There could be disagreement over terms and commercial negotiation will be more difficult the later parties leave it."