With the uncertain economic environment and the oversupply in the Singapore property market, the availability of cheaper retail/office spaces as well as rising business closures have led to an increase in tenants or landlords requesting for an early termination of lease. It is important for GST-registered businesses ("GRB") to be familiar with the terms within the lease contract in order to manage GST risk.

The lease contract often includes terms that allow the landlord or lessee of a Singapore property to terminate the lease contract early upon payment of a specified sum of money. Based on IRAS' existing guidelines:

  • If terms for an early termination are included in the lease contract, payment received for early termination of lease is not subject to GST.
  • If terms for an early termination are not included in the lease contract, GST applies to the payment received as follows:
    • Early termination of lease initiated by tenant: A GST-registered landlord needs to consider GST on payment received from the tenant for the landlord surrendering the landlord’s rights to continue the tenancy.
    • Early termination of lease initiated by landlord: A GST-registered tenant needs to consider GST on the payment received from the landlord to "surrender" the lease and move out.

 

Potential challenges faced in applying the guidelines:

As there are many scenarios involving early termination of leases, it is challenging for GRB to be sure if payment received from such arrangement is subject to GST.

Examples

  1. If the lease contract only allows the landlord to give early termination (with terms included), will payment made by the tenant to pre-maturely end a lease attract GST?
  2. If the tenant is still required to pay the full term lease amount of the office space despite early termination, will such payment be considered as rental and attract GST?
  3. The leases of residential properties in Singapore are exempt from GST. In this regard, if a residential property lease contract does not include terms for an early termination, will GST still apply on the early termination amount involved?
  4. Where the lease contract also covers a lease of business assets (e.g. equipment or photocopy machine), will the same GST principle apply?

Scenarios like the above necessitate GRB to closely examine the terms of the lease contract and the business arrangement to determine if an early termination payment will be subject to GST. This helps GRB avoid penalization for incorrect GST returns, minimise GST exposure and ultimately, preserve cash.

For further information regarding GST on payment received relating to an early termination of a lease, please contact our team of GST professionals:


Richard Ong, Partner
Accredited Tax Advisor (GST)
T +65 6594 7821
richardong@RSMSingapore.sg

Huang Yanlin, Senior Manager
Accredited Tax Advisor (GST)
T +65 6715 1140
huangyanlin@RSMSingapore.sg

Victor Poon, Manager
Accredited Tax Advisor (GST)
T +65 6715 1141
victorpoon@RSMSingapore.sg

Annie Chan, Assistant Manager
Accredited Tax Practitioner (GST)
T +65 6715 1143
anniechan@RSMSingapore.sg

 

----------

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