Uncertainty awaits landlords and tenants following the recent decision of the Full Federal Court in the case of MBI Properties Pty Limited v Commissioner of Taxation  FCAFC 112. In that case the Court held that a purchaser of a property subject to a lease does not make any supply to the tenant following completion of the acquisition. It follows that the purchaser has no GST liability in respect of the ongoing lease. This raises many questions regarding the correct GST treatment in such circumstances.
Up until this decision it had generally been accepted that a lease is a continuing and periodic supply for GST purposes and thus, where the freehold is sold, the vendor ceases supplying the property under the lease, and thus ceases to have any GST liability in respect of the lease. The accepted view has been that the purchaser assumes the supply to the tenant of the property under the lease, and therefore the GST liability in respect of the lease. The Australian Taxation Office (ATO) has a public ruling confirming that this is the way in which the ATO will administer the law in such circumstances.
Doubt has now been cast over this accepted practice. Although the facts in the case before the Federal Court revolved around a supply of serviced apartments, the Court’s decision has application to all leases because the Court held that, under Australia’s GST legislation, a lease is supplied in full at the time of grant of the lease and not continually or periodically over time. The Court held that there is no provision in the GST Act that deems continuation of supply during the continuation of a lease. The supply is the grant of the lease and therefore the supply is complete on the lease coming into existence.
This finding by the Court raises a number of questions in circumstances where property is sold subject to a lease:
- Does the vendor remain liable for the GST in respect of the lease after selling a property, even though the vendor is no longer entitled to receipt of the rental payments? Although the Court decision makes this a theoretical possibility, vendors are protected as against the Commissioner by the ATO ruling GSTD 2012/2 which states in paragraph 7: "7. The vendor of the commercial premises is not liable for GST relating to the lease where it is no longer in receipt of or entitled to rent or other consideration for the lease following the sale of the reversion." The Commissioner cannot enforce an assessment against a vendor who acts in reliance on this ruling.
- Should the purchaser of a property subject to a lease continue collecting the GST from the tenant and remitting it to the ATO, even though according to the Full Federal Court decision the purchaser is not making any supply to the tenant?
- What does this mean for adjustments under Division 135 where property has been sold as a going concern but the purchaser is not entitled to full input tax credits for its supply of the lease to the tenant? On the facts before the Court it was held that the ATO could not rely on Division 135 to claw back the GST foregone on the supply of a going concern on the basis that the purchaser is making input taxed supplies of residential premises because, following the sale, the purchaser is not making a supply of any nature to the tenant. This potentially opens the door for new residential properties to be sold as a going concern.
Given the importance of the decision and the uncertainty that it has created, it is to be expected that the ATO and the Government will act quickly to return certainty to the industry. The ATO may seek to appeal the decision to the High Court. Notwithstanding any such appeal, the Government may legislate to overturn the decision retrospectively. Therefore it may be premature to consider structuring transactions to take.
This article first appeared in lexology.com.