Compensation is a sum of money the aggrieved party receives from the defaulting party due to certain obligations/conditions not met.
GST treatment for the compensation received depends on whether it is for something which the aggrieved party has done in return, or is punitive in nature:
- If the compensation is punitive in nature, there is no supply. Therefore, the aggrieved party need not charge the defaulting party with GST.
In the case of an early termination of lease, the tenant (the defaulting party) paid the landlord (the aggrieved party) a sum of money as stipulated in the contract without the landlord having to perform any other action. This payment from the tenant is punitive in nature and the landlord does not need to charge or account for GST on the amount received.
- If the compensation is a payment for something which the aggrieved party has done in return, it will be subject to GST.
The tenant damaged the property and the landlord had to repair the damage. Subsequently, the landlord (the aggrieved party) recovers the repair expenses from the tenant (the defaulting party). In this case, the tenant is paying the landlord for the repairs. The landlord needs to charge and account for GST on this payment received.