GST implications of the MBI Case and the sale of leased premises
Considerable discussion has recently been generated by the decision of the Full Federal Court of Australia in MBI Properties Pty Ltd v Commissioner of Taxation  FCAFC 112.
Despite the confusion which has arisen in some areas as a result of the decision, the current position of the ATO has been clearly stated.
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 has held that there is only one supply in a lease situation, being the grant of the lease. The supply does not survive the sale of the property. Therefore, given this result, a purchaser of a tenanted property does not supply anything (in a GST sense) to existing tenants after completion of the purchase.
Division 156 of the A New Tax System (Goods and Services Tax) Act 1999 makes provision for the timing of GST payments for supplies that are made on a periodic and progressive basis. Effectively this division provides that where GST is payable in respect of a taxable lease, the GST payments may be dispersed to match each corresponding lease period. Due to the Full Federal Court determining that the leases were of residential premises, this section was considered irrelevant by the Court. As a result, this case has produced quite an unexpected outcome that raises major concerns for all landlords and tenants.
The ATO was granted leave to appeal to the High Court of Australia on 11 April 2014 for it to be determined whether this problematic decision is correct.
The ATO’s Position
Until the outcome of the Commissioner’s appeal to the High Court is known, the ATO does 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 GSTD2012/2 respectively.
Accordingly, taxpayers who lodge returns on the basis of those publications will not face penalties or interest on unpaid tax.
Additionally, pending the outcome of the Commissioner’s appeal, vendors and purchasers of premises that are subject to an existing lease can reply upon the existing ATO position in GSTR2002/5 which treats the sale of leased premises as being a GST-free supply of a going concern.
Taxpayers may consider that the Full Federal Court’s decision means that they are entitled to a refund for tax paid where not necessary. A axpayer’s entitlement to a refund of overpaid GST is limited to tax paid after 1 July 2012, and requires the taxpayer to provide a valid refund notification to the ATO within four years from the end of that tax period.
If the Commissioner is successful in an appeal to the High Court
Taxpayers who obtain refunds before the law is clarified may be required to pay back the Commissioner any refunds paid, together with any accrued interest.
If the Commissioner is not successful in it's appeal to the High Court
In some cases taxpayers may still be required to pay back refunds paid to them, together with any delayed refund interest that may have been paid. Taxpayers who await the outcome of the Commissioner’s appeal can preserve their entitlement to refunds for pre-1 July 2012 transactions by giving notice.
What Should I Do?
Given the ATO will continue to administer the law in accordance with their current published views until the outcome of the Commissioner’s appeal is determined by the High Court, a decision to request a GST refund should not be made lightly.
Martyn Tier, Partner