1.
Despite sounding a little complex, most transactions
involving the sale of property, even leased property, in reality do not create
any great difficulties for GST purposes.
Recent Federal
Court decision
2. No great difficulties that is until the recent
decision of the Federal Court in the case of MBI Properties Pty
Limited v Commissioner of Taxation.
3. MBI Properties Pty Ltd ("MBI") acquired
three apartments in a hotel complex, each of which was subject to a lease
entered into between the vendor, South Steyne Hotel Pty Ltd ("South
Steyne"), and the operator of the hotel, Mirvac Management Ltd
("MML"). MBI, on acquiring the rights of the lessor, became the
recipient of a "supply of a going concern" within the meaning of the
GST Act. The issue in the case concerned the construction and application of s
135-5(1)(b) of the GST Act and whether, by reason of MBI's assumption of the
lessor's rights and obligations with respect to MML, it was thereafter making
supplies through an enterprise to which the supplies related.
4. In that case the Full Court of the Federal 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 followed that the purchaser has no GST liability in respect
of the ongoing lease.
5. 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 [2013] FCA 56, 2 February 2013, upheld on appeal to the Full Federal
Court in MBI Properties Pty Limited v FCT [2013] FCAFC 112, 18 October 2013).
6. The decision raised many questions regarding the
correct GST treatment in such circumstances.
Position prior to Federal Court decision in MBI
7. Until the Federal Court decision it was generally understood
that a lease is a continuing and periodic supply for GST purposes and as a
result, when the freehold is sold, the vendor ceases supplying the property
under the lease, and ceases to have any GST liability in respect of the lease.
The accepted view was that the purchaser assumed the supply to the tenant of
the property under the lease, and therefore the GST liability in respect of the
lease.
8. The Australian Taxation Office (ATO) had issued a
public ruling confirming that in substance the ATO would administer the GST law
in that way when a sale of a rental property occurred.
9. The Federal Court’s decision applied to all leases
because the Court held that, under the 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.
10. This finding by the Court raised a number of questions
in circumstances where property is sold subject to a lease:
1. 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 Federal Court decision
made this a theoretical possibility, vendors were protected by 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."
2. 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?
11. 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.
12. Tenants under any lease which is subject to GST where
the underlying land has been sold were also potentially impacted by MBI
Properties. This is because, in order to claim any input tax credits
for GST paid correctly , the tenant also needed to be considered to be making an
acquisition and be issued with tax invoices by the entity who makes the supply.
The Commissioner's appeal
13. The Commissioner of Taxation sought (and was granted) leave to appeal to the High Court from the decision of the Full Court of the Federal Court.
The High Court decision
14. The High Court appeal concerned the characterisation,
for the purposes of the GST Act, of observance of obligations of lessor and
lessee continued by operation of law following the sale and purchase of
premises subject to an existing lease.
15. In Commissioner of Taxation v MBI Properties Pty Ltd,
[2014] HCA 49 the High Court (French
CJ, Hayne, Kiefel, Gageler and Keane JJ) unanimously decided in a joint
judgment 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.
16. The High Court held:
36. … 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.
37. In observing and continuing to observe the express or implied
covenant of quiet enjoyment under the lease, the lessor is appropriately
characterised, for the purposes of the GST Act, as engaging in an
"activity" done "on a regular or continuous basis, in the form
of a lease". The result is that, whether or not the lessor might also be
engaged in some other form of enterprise, the lessor makes the supply of use
and occupation of the leased premises in the course of the lessor carrying on
an enterprise as defined in s 9-20(1)(c).
38. Once the general operation of the GST Act is understood in that way,
it is apparent that there is no warrant in the text or policy of the GST Act
for reading the reference in the special rule in s 40-35 to a supply of
"residential premises" that is a supply "by way of lease"
as referring to the supply which occurs at the time of entering into the lease
but not as referring to the further supply which occurs by means of the lessor
observing and continuing to observe the express or implied covenant of quiet
enjoyment under the lease. The reference encompasses both, and both are
therefore input taxed.
…
40. In the circumstances which gave rise to the present appeal, there
was an input taxed supply of residential premises by way of lease which
occurred at the time of the grant of each apartment lease by South Steyne to
MML. There was then a further input taxed supply of residential premises by way
of lease which occurred by means of South Steyne observing its express
obligation under the lease to provide MML with use and occupation of the leased
premises. MBI's assumption of that express obligation by operation of law on
its purchase of the premises from South Steyne resulted in MBI becoming obliged
to continue to make the same further input taxed supply of residential premises
by way of lease to MML throughout the remaining term of the lease. MBI intended
at the time of purchase to observe that ongoing obligation. MBI intended to do
so through an enterprise which was the same enterprise as that in which South
Steyne had previously engaged and which MBI, by purchasing the premises subject
to the lease, had acquired from South Steyne as a going concern.
…
45. MBI's intended supply of residential premises by way of lease to MML
was for a price: the rent to be paid to MBI by MML in observance of MML's
continuing obligation under the apartment lease. That is so whether or not that
rent can be said also to have been payable in connection with South Steyne's
grant of the apartment lease to MML.
Amended GST Ruling
17. As a result
of the High Court decision, the Australian Taxation Office issued Addendum to GSTD 2012/1 regarding the GST consequences following the sale of
residential premises that are subject to a lease.
Conclusion
18. As a result, it seems that the general understanding has now been restored.
19. A lease is a continuing and periodic supply for GST purposes and as a
result, when the freehold is sold, the vendor ceases supplying the property
under the lease, and ceases to have any GST liability in respect of the lease.
20. The purchaser assumes the supply to the tenant of
the property under the lease, and therefore the GST liability in respect of the
lease.
W G Stark
Hayden Starke Chambers
