In the current economic climate the preservation and maximisation of rental income continues to be crucial as capital values of investment properties achieve slow growth.
Reduction in rental income caused by GST
Under the Goods and Services Tax (Jersey) Law 2007 ("GST Law") a landlord of commercial property in Jersey may be liable to account to the States of Jersey for 5% of its rental income and it is the landlord (as 'supplier') and not the tenant (as 'recipient') who is liable to pay that GST.
This means that if a lease does not oblige the tenant to pay the landlord rent plus GST the landlord will lose 5% of its rental income because it will have to pay the States of Jersey its 5% GST liability out of its rental income without the ability to recover that additional 5% from its tenant. The net effect being that the landlord retains only 95% of its rental income.
The end of the 'grandfathering' provisions in 2012
However, under the GST Law commercial leases entered into before the GST Law was published have been grandfathered.
This means that where a lease was entered into before 17 August 2007 supplies under the lease will not incur a GST liability for a period of 5 years from that date (that is, to 16 August 2012) or until the lease is varied, whichever is the earlier.
Consequently, rental income received under a lease entered into before 17 August 2007 will not be subject to GST liability until 16 August 2012 (unless the lease is varied before that date).
However, come 16 August 2012 all commercial leases will potentially become GSTable supplies attracting a 5% GST liability irrespective of whether the landlord can recover that additional 5% from its tenant or not.
How can a landlord preserve its rental income stream after 16 August 2012?
Therefore, ahead of 16 August 2012 landlords under commercial property leases which commenced before 17 August 2007 should endeavour to ensure that their leases are structured correctly in terms of GST recovery provisions.
If commercial leases are not structured correctly post 16 August 2012 then landlords may lose 5% of their rental income as well as suffer a reduction in the investment value of the property itself as a consequence.
For further advice concerning the end of the 5 year GST grandfathering period in 2012 and GST liability under commercial leases in Jersey and please contact:
Jonathan Hughes - Managing Associate
Ogier
01534 504336
Jonathan.hughes@ogier.com
About Ogier
Ogier is an award winning world leader in the provision of offshore legal and fiduciary services. Our integrated legal and fiduciary approach has proved a winning combination which enables us to secure awards for the quality of our services and our people. The Group employs over 850 people and provides advice on all aspects of BVI, Cayman, Guernsey and Jersey law and fiduciary services through our international spread of offices that cover all time zones and key financial markets. Our network includes Bahrain, BVI, Cayman, Guernsey, Hong Kong, Ireland, Jersey, London, Shanghai and Tokyo.