As reported during November 2013 the Full Federal Court decision in the case of MBI Properties Pty Limited v Commissioner of Taxation  FCAFC 112 created uncertainty regarding the GST treatment of property that is sold subject to an ongoing lease. The Australian Taxation Office (ATO) has issued an Interim Decision Impact Statement to provide guidance on the interim treatment pending a final resolution of the matter.
As expected, the Commissioner of Taxation filed an application for special leave to appeal to the High Court on 15 November 2013. As yet, no decision on this application has been made.
On 21 November 2013 the ATO issued an Interim Decision Impact Statement (http://law.ato.gov.au/atolaw/view.htm?DocID=LIT/ICD/NSD329-2013/00001).
The Interim Decision Impact Statement (IDIS) reiterates that, pending final resolution of the matter (on appeal to the High Court or if the application for special leave is unsuccessful), taxpayers can continue to rely on the ATO's previous rulings in regards to:
- the application of the going concern exemption to supplies of leased premises (GSTR 2002/5);
- the GST consequences of a sale of residential premises subject to a lease (GSTD 2012/1); and
- the GST consequences of a sale of commercial premises subject to a lease (GSTD 2012/2).
A final decision impact statement will be issued once the matter is finally resolved and, if necessary, these rulings will be amended.
The ATO acknowledges that the MBI Properties case raises queries about:
- For commercial premises:
- whether the incoming landlord is liable for GST on the rent payable by the tenant under the lease granted by the vendor of the reversion;
- whether the tenant is entitled to input tax credits in relation to rental payments after the sale of a reversion;
- whether a vendor remains liable for GST on rental payments received by the purchaser following a sale of the premises;
- For residential premises:
- whether a purchaser of leased premises can claim input tax credits for costs associated with the rental of the premises;
- whether leased premises can be sold as a going concern.
Options open to taxpayers
The IDIS indicates that taxpayers should continue to account for GST on a sale of leased premises in accordance with the current GST rulings pending final resolution of the matter. However, taxpayers who may be entitled to refunds of GST on the basis of the Federal Court decision
relating to a tax period commencing before 1 July 2012
should notify the ATO of that entitlement as soon as possible to ensure that such entitlement does not become time-barred. For tax periods commencing on or after 1 July 2012 a period of review (generally 4 years) applies to amending assessments and this cannot be extended by notification.
The IDIS also states that taxpayers may account for GST on the basis of the Federal Court decision but, if this decision is overturned on appeal (and even if not depending on the ATO's final interpretation of the decision), this may expose them to actions for recovery of GST plus interest by the ATO.
In our view, the Federal Court decision is contrary to the accepted (and practical) operation of the relevant provisions and we expect it to be rectified, if not on appeal, then by way of legislation. Accordingly, we recommend that clients continue accounting for GST in accordance with accepted practice but clients should consider whether they may be entitled to refunds of GST on the basis of the Federal Court decision in respect of a tax period commencing before 1 July 2012 and, if so, notify the ATO of that entitlement. The Corporate Tax team at Gadens can assist with such notifications as required.
In that respect it is worth noting that, although purchasers of leased commercial premises may have continued receiving GST from the tenant and remitting that GST to the ATO, and so theoretically may be entitled to a refund on the basis of the Federal Court decision, the IDIS indicates that if the GST hasn't been refunded to the tenant or the tenant is registered or required to be registered for GST then the ATO is not required to refund the amount under section 105-65 of the GST Act and therefore the ATO will consider such applications for refunds on a case by case basis.
With respect to ongoing and future transactions involving a supply of leased premises, we do not consider the vendor is at risk in such transactions as the vendor can continue to rely on the published ATO rulings. The purchaser may be placed in a difficult position if the tenant takes the position that they are not required to pay GST in relation to the rent from the date of settlement of the sale. Although unlikely for most commercial tenants, tenants not entitled to input tax credits or full input tax credits (e.g. banks) may be more likely to take this position. The strength of the GST clause in the lease, including whether the tenant is liable for any penalties and interest resulting from a breach of the GST Act, is likely to influence how strongly a tenant will push such a view given the current uncertainty. Therefore, we recommend that purchasers seek advice regarding:
- the potential risk of tenants taking this stance; and
- the strength of the relevant GST clause.