High Court will hear appeal in MBI Properties

The High Court of Australia has granted the Australian Taxation Office special leave to appeal the decision in MBI Properties Pty Ltd v Commissioner of Taxation [2013] FCAFC 112 (“MBI Properties”).

Full Federal Court Decision

The Full Federal Court in MBI Properties decided that a purchaser who acquired new residential premises subject to existing leases as a GST-free supply of a going concern was not liable for GST under Division 135 of the GST Act.  This was because the purchaser was not intending to make any input taxed supplies through the enterprise which the purchaser acquired.

Potential impact

For vendors and purchasers of land subject to commercial leases (and the tenants)

The Full Federal Court decision in MBI Properties has a potential impact on all landlords who have sold land subject to any kind of lease where the lease is subject to GST (including leases of commercial premises).  The impact is that based on the Court’s reasoning, it is the landlord who granted the original lease who remains liable for the GST in respect of rent, even after the land is sold.  This potential issue arises where the land sale was a GST-free going concern and where the land sale was a taxable supply.

The Australian Taxation Office has announced that, pending the outcome of the appeal to the High Court, it will continue to administer the GST Act on the basis that it is the incoming landlord who is liable to GST in respect of rent.

Tenants under any lease which is subject to GST where the underlying land has been sold are also potentially impacted by MBI Properties. This is because, in order to correctly claim any input tax credits for GST paid, the tenant will also need to be considered to be making an acquisition and be issued with tax invoices by the entity who makes the supply.

Purchasers of going concerns where land is subject to an input taxed lease

It also impacts all landlords who have purchased land subject to any kind of lease where the lease is an input taxed supply (such as residential premises which are not ‘new residential premises’) and the supply of the land to the incoming landlord was a GST-free going concern.  This is because the Full Federal Court held that the incoming landlord is not to be treated as making a supply through the going concern acquired by the incoming landlord.  Therefore the incoming landlord is not liable under Division 135 of the GST Act as it does not make any supplies under the lease.