In relation to a lease, rent reserved is defined in s3 of the Act to mean the rent paid or payable during the term of the lease and any amount paid or payable for the right to use the land under the lease, including:
- Legal costs required to be paid by the lessee on behalf of the lessor in relation to the grant of the lease
- Insurance premiums
- Marketing costs
- Car park contributions
This list is illustrative of the types of payments or outgoings under a lease which fall within the definition of rent reserved. The list is not exhaustive and may, depending on the terms of a particular lease, include other amounts, such as:
- A bond or guarantee paid by a lessee to a lessor to secure the lessee's obligations under the lease,
- Amounts paid by a lessee to a lessor in respect of the installation or upgrade of services and utilities (such as gas, water, telephone, electricity),
- Contributions to expenses pertaining to the maintenance of common areas, or
- Other costs required to be paid by the lessee on behalf of the lessor in relation to the grant of the lease
The Commissioner recognises that it may be commercially advantageous for a lessee to make an upfront payment of rent on a discounted basis to a lessor at the commencement of a lease.
An upfront payment of rent reserved by the lessee to the lessor pursuant to a bona fide lease arrangement would not attract duty whereas a premium for the grant of a lease, for example, would attract duty.
In considering whether an upfront payment made by a lessee to a lessor is rent reserved or other consideration in the nature of a premium, the Commissioner will consider the nature and circumstances of the transaction as a whole, including the value of the underlying land the subject of the lease, the amount paid, how the payment is calculated and the duration of the lease.
Where the lessee can satisfy the Commissioner that the upfront payment comprises the net present value of rent payable under the lease for a particular duration of the term of the lease (e.g. the first year of a 20-year lease) and is not referable to the value of the freehold, no duty will be payable.
In considering this, the duration covered by the upfront payment and the term of the lease will often be relevant because, for example, it would not be usual for a lessee to pay all the “rent” in advance on a long-term lease such as a lease for 99 years. In such circumstances, an upfront payment is more likely to be capital in nature and based on the freehold value of the underlying land.
For more information, please refer to s3 of the Act and Revenue Ruling DA.050.