GST and supply of real property & real property leases - the High Court’s decision in MBI Properties

High Court’s decision in MBI Properties

On 3 December 2014, the High Court handed down its decision in Commissioner of Taxation v MBI Properties Pty Ltd [2014] HCA 49 (MBI Decision). This was shortly followed by the Commissioner of Taxation issuing his Decision Impact Statement on the decision on 22 December 2014 (the MBI DIS).

The MBI Decision is concerned with the treatment, for the purposes of A New Tax System (Goods and Services Tax) Act 1999(Cth) (the GST Act), of the supplies made by a purchaser following the sale and purchase of premises subject to an existing lease and whether there was any increasing adjustment under Division 135 of the GST Act where that sale was treated as a GST-free sale of a going concern.

The High Court’s decision removes the uncertainty following the Full Federal Court’s decision in MBI Properties Pty Ltd v Commissioner of Taxation [2013] FCAFC 112. In that decision, it was held that a lease granted by a vendor over premises sold to a purchaser was not a supply made by the purchaser after the sale and therefore the GST treatment of that lease would not be continued after the sale. It was also held that there could be no increasing adjustment under Division 135 of the GST Act where the sale of premises subject to a lease was treated as a GST-free supply of a going concern.

One consequence of this decision was that a lease subject to GST on rental payments would no longer be subject to GST following a sale of the premises. This was because an incoming purchaser would not be making a supply of an existing lease and therefore not subject to a GST liability. The only supply was the initial grant of the lease. An incoming purchaser of real property subject to a lease does not therefore make a supply when it merely observes the continuance of the lease post-completion.

The Full Federal Court’s decision was at odds with the existing practice regarding real property leases which has been applied since the introduction of the GST. This being that an incoming purchaser after completion of the sale would be liable for GST on rent payments under the lease as was the vendor prior to completion.

The MBI Decision is also noteworthy for its analysis of what is a supply. There are some important insights that the High Court has given in making is decision. These include that a supply does not require the supplier to actively do something to make a supply and that a transaction may comprise more than one supply. An example of this is an existing contract where the entry into the contract is a supply and the performance of that contract through the observance of contractual rights and obligations is another supply. From this perspective, the MBI Decision has broader application beyond real property transactions.

This article examines the MBI Decision, the MBI DIS and some practical implications of the decision.

Summary of the MBI Decision

The taxpayer was the purchaser of three (3) serviced apartments that were part of an eighty-three (83) apartments complex in Manly, New South Wales. The apartments were leased to an operator who conducted a serviced apartment business. The taxpayer purchased the apartments as a GST-free supply of a going concern. The Commissioner raised GST assessments against the taxpayer subsequent to the sale on the grounds of there being an increasing adjustment under Division 135 of the GST Act.

The taxpayer objected to the Commissioner’s assessment on the grounds that the requirements of Division 135 of the GST Act were not met primarily because the taxpayer was not making supplies through an enterprise after the completion of the sale. As the enterprise was largely constituted by the residential leases in favour of the serviced apartment business operator, these leases had previously been supplied and were therefore not being supplied by the taxpayer (as the incoming purchaser). The supply of the leases was made on the grant of the leases, which was done by the vendor. No other supplies were being made by the taxpayer.

The Commissioner argued that while the grant of the lease was a supply, the continued observance of the lease obligations by an incoming purchaser post-sale completion was also a supply. This latter supply was made by the taxpayer as the incoming purchaser.

The High Court agreed with the Commissioner’s argument and held that the taxpayer did make supplies through an enterprise for the purposes of Division 135 of the GST Act and these supplies were the activities constituted by the purchaser’s continued observance of the lease. Accordingly, there could be and was an increasing adjustment occurring for the taxpayer as the identified supplies made through the enterprise were input taxed supplies (this being the residential leases).