The Federal Court created a wave of uncertainty for GST when it held that the only relevant supply in respect of a lease occurs on its grant (see MBI Properties Pty Ltd v FCT  FCA 56, 2 February 2013, upheld on appeal to the Full Federal Court in MBI Properties Pty Limited v FCT  FCAFC 112, 18 October 2013). The High Court has now restored normality in a decision handed down on 3 December 2014 (FCT v MBI Properties Pty Ltd  HCA 49, High Court; French CJ, Hayne, Kiefel, Gageler and Keane JJ).
The High Court held that the assumption by a taxpayer of a lessor's rights and obligations following its purchase of premises subject to an existing lease involved the making of supplies for GST purposes – that is, the supply of a lease involves a continuing supply in addition to the grant itself and the GST legislation does not require the consideration (i.e. the rent) to be attributed exclusively to one or other supply. It is sufficient, and double taxation is avoided, by the attribution of the rent to specific tax periods. The High Court held:
"There will in general be a supply which occurs at the time of entering into the lease. That supply will involve a grant within the scope of s 9–10(2)(d) combined (as contemplated by s 9–10(2)(h)) with the creation of contractual rights within the scope of s 9–10(2)(e) and with the entry into contractual obligations within the scope of s 9–10(2)(g). There will then be at least one further supply which occurs progressively throughout the term of the lease. That supply will occur by means of the lessor observing and continuing to observe the express or implied covenant of quiet enjoyment under the lease. The thing of value which the lessee thereby receives is continuing use and occupation of the leased premises. The special attribution rule in s 156–5, made applicable to a supply by way of lease by s 156–22, does not alter those aspects of the general operation of the GST Act."
This is a welcome return to certainty for all those who have or who are contemplating purchasing premises subject to a lease.
While most taxpayers have relied on the Commissioner’s interim public position and maintained the status quo of charging GST on rent, if any parties did rely on the anomalous Federal Court decision, adjustments will now be necessary and the ATO may seek to impose interest, as indicated in the Interim Decision Impact Statement issued by the ATO on 21 November 2013 (see http://law.ato.gov.au/atolaw/view.htm?DocID=LIT/ICD/NSD329-2013/00001).
For all others, no further action is required and the ATO's previous rulings with 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)