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21 Nov 13 Interim Decision Impact Statement - MBI Properties Pty Ltd

The ATO has published an interim Decision Impact Statement in relation to the decision of the Full Court of the Federal Court in MBI Properties Pty Ltd v FCT [2013] FCAFC 112; 2013 ATC 20-420.

The Commissioner applied for special leave to appeal to the High Court against the decision on 15 November 2013.

MBI Properties Pty Ltd (MBI) purchased three residential apartments in the Sebel Manly Beach Hotel Complex from South Steyne Hotel Pty Ltd (South Steyne).

Each of the three apartments was sold to MBI subject to a lease granted by South Steyne to Mirvac Management Pty Ltd (MML). Each lease obliged MML to operate a scheme whereby each of the three apartments was, together with other apartments in the complex, operated as part of a serviced apartment business.

As permitted by each contract of sale, MBI elected to participate in a 'Management Rights Scheme', which mirrored the scheme provided for under the lease agreements.

In earlier proceedings, the majority of the Full Federal Court in South Steyne Hotel Pty Ltd v. Commissioner of Taxation [2009] FCAFC 155 (South Steyne) held that the supplies of the three apartments to MML, subject to the respective leases granted by South Steyne, were GST-free supplies of going concerns under section 38-325 of the GST Act.

In South Steyne, the Full Federal Court also unanimously concluded that upon purchase of the reversion in the three apartments, MBI did not make a supply to MML. Instead, the Full Federal Court concluded that there was a continuation of the existing leases granted by South Steyne after the sale of the reversion.

The issue before the Full Federal Court was whether MBI was liable for an increasing adjustment under section 135-5 of the GST Act. The Full Federal Court unanimously allowed MBI's appeal from the primary judge's decision in MBI Properties Pty Ltd v. Commissioner of Taxation [ 2013] FCA 56 and held that MBI was not liable for an increasing adjustment under Division 135 of the GST Act (at [30], [44] & [45]).

The ATO states that it is continuing to carefully consider other potential implications of the Full Federal Court's decision. The ATO acknowledges there is some concern in the community that the Full Court's decision may also have broader impacts. In particular, concerns have been expressed about whether the Full Federal Court's decision might mean that:

  • Following the sale of a reversion, the incoming landlord of commercial premises is not liable for GST on the rent payable by the tenant under the lease granted by the vendor of the reversion.
  • The tenant of commercial premises would not be entitled to input tax credits in relation to rental payments after the sale of a reversion.
  • Alternatively, an entity that grants a lease in, but later sells commercial premises, may remain liable for GST on rental payments received by the purchaser following a sale of the premises.
  • A purchaser of leased residential premises can claim input tax credits for costs associated with the rental of the premises, so far as the lease originally granted by the vendor remains on foot and no new or further lease is granted by the purchaser.
  • Property owners are not able to sell leased premises as a GST-free going concern.

In relation to the administrative treatment that the ATO will apply pending the outcomne of any appeal, the Decision Impact Statement states that the ATO does not intend to revise its current published views about the sale of leased residential premises and leased commercial premises, as set out in:

  • GSTD 2012/1 - Goods and services tax: what are the goods and services tax consequences following the sale of residential premises that are subject to a lease?
  • GSTD 2012/2 - Goods and services tax: what are the goods and services tax consequences following the sale of commercial premises that are subject to a lease?

Additionally, pending the outcome of the Commissioner's application for special leave and any resulting appeal, vendors and purchasers of premises that are subject to an existing lease can rely upon the Commissioner's current published view in GSTR 2002/5 - Goods and services tax: when is a 'supply of a going concern' GST-free? This means, that subject to the required conditions being met, taxpayers can rely upon GSTR 2002/5 to treat a sale of leased premises as being a GST-free supply of a going concern.

The Decision Impact Statement also addresses the issue of potential refunds and the necessity to preserve rights to refunds pending the outcome of any appeal.


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