Property News Alert: The High Court clarifies the GST implications of the MBI Properties case and the sale of leased premises
On 3 December 2014 the High Court unanimously allowed an appeal from the decision of the Full Federal Court of Australia in MBI Properties Pty Ltd v Commissioner of Taxation  FCAFC 112. In doing so, the High Court has reaffirmed the generally held view that a lease, as with other executory contracts, involves the lessor making at least two supplies, namely:
- a supply at the time of entering into the lease - involving the grant of the lease and the creation of contractual rights; and
- a supply which occurs progressively throughout the term of the lease - by means of the lessor observing and continuing to observe the express or implied covenant of quiet enjoyment.
In 2006, South Steyne Hotel Pty Ltd (South Steyne) strata subdivided the Sebel Manly Beach Hotel into 84 separate lots, being 83 apartment lots and 1 management lot. The apartments were leased to Mirvac Management Pty Ltd (MML) under separate lease agreements as part of a serviced apartment business.
South Steyne subsequently sold 15 of the apartments, 3 of which were sold to MBI Properties Pty Ltd (MBI). Each apartment was sold subject to the lease already in place with MML.
MBI was subsequently issued with a GST assessment which included an ‘increasing adjustment’ for GST applicable to the purchase price of the 3 apartments. An increasing adjustment is payable where an entity receives a supply of a going concern and then intends that some or all of the supplies made through the enterprise will be supplies that are neither taxable supplies nor GST free supplies (for example input taxed supplies of residential property).
MBI objected to the assessment, however, in both the decision of the Federal Court and Full Federal Court it was held that the lease of each of the 83 apartments was an input taxed supply of residential premises, rather than a taxable supply of commercial residential premises.
The issue on which the case turned was whether MBI intended that some or all of the supplies made through the enterprise that was the subject of the going concern would be supplies that are neither taxable supplies nor GST-free supplies.
The Full Court held that neither MBI nor the previous owner of the apartments made any new or continuing supply of residential premises to MML following the sale of the properties subject to leases. Therefore, there were no supplies made through the enterprise that MBI intended would be neither taxable nor GST-free.
As a result, the Full Federal Court held that there was only one supply in a lease situation, being the grant of the lease. The Full Court held that the supply did not survive the sale of the property. Therefore, given this result, a purchaser of a tenanted property would not supply anything (in a GST sense) to existing tenants after completion of the purchase. The High Court found that the Full Federal Court was wrong to hold that the only relevant supply was on the grant of the lease by South Steyne to MML and the Full Federal Court was also wrong to conclude that MBI made no supply to MML.
The ATO’s Previously Stated Position
In response to the Full Federal Court decision, the ATO indicated that the ATO did not intend to revise its current published views about the sale of leased residential premises and leased commercial premises, set out in GSTD 2012/1 and GSTD 2012/2 respectively.
Accordingly, taxpayers who lodged returns on the basis of those publications will not face penalties or interest on unpaid tax.
Given the High Court’s decision, taxpayers who obtained refunds of GST on the basis of the Full Federal Court’s decision before 3 December 2014 may be required to pay back to the ATO any refunds paid, together with any accrued interest.
Martyn Tier, Partner