Full Federal Court’s change of heart - The MBI Properties case
This is an important decision and it would be interesting to see how this interpretation affects property transactions or whether the Commissioner will appeal this decision in the High Court.
What happened?
Generally, a taxpayer may not claim Goods and Services Tax (GST) credits on costs that relate to the making of input taxed supplies (such as leasing out apartments to hotel operators), but may claim GST credits on costs that relate to the making of GST-free supplies (such as selling apartments as a going concern).
However, pursuant to Division 135 of the GST Act, if a taxpayer acquires an item GST-free and then makes input taxed supplies, the taxpayer will have to pay 10% GST on that cost (and won’t qualify for a GST credit).
The Full Federal Court1 recently overturned the MBI Properties decision in the Federal Court2 and held that there should be no Division 135 increasing adjustment where a taxpayer acquired three serviced apartments (that was subject to a lease to a hotel operator to manage the apartments) as a going concern.
Basically the Full Federal Court held that Division 135 would not apply because:
-
MBI Properties did not make any input taxed supplies
(i.e. the input taxed supplies of residential premises were only made once when the leases were originally granted by the original owner and there were no continuing supply for the duration of the leases); and -
an increasing adjustment could only apply to supplies made by the acquirer of the enterprise (i.e. not to supplies that were acquired/assigned such as the leases).
What does this mean for you?
According to the Full Federal Court, there should not be a Division 135 increasing adjustment where a taxpayer acquires property (that is subject to an input taxed supply such as a lease) as a going concern.
It has become very common for property developers to buy old hotels, refurbish the rooms, and then to lease out these new “apartments” to hotel operators to manage the apartments.
Investors who buy such apartments as going concerns should be aware of the various GST pitfalls if these apartments are subject to such reversionary interests (e.g. the input taxed supply of a lease to the hotel operators).
How can Nexia Australia help you?
If you are thinking of investing in the property industry or of buying a property as a going concern, it is important that you are aware of all the GST and income tax issues that may affect your proposed transaction.
To avoid an increasing adjustment of GST when buying a property as a going concern, it is very important to scrutinise the contract of sale to determine whether any input taxed supplies are included in the purchase.
We can assist with this process and help you comply with all your GST and income tax obligations relating to any property investment you may have.
Furthermore, if you have any questions about any property issues in general, please contact your Nexia Advisor.
1 MBI Properties v Commissioner of Taxation [2013] FCAFC 112
2 In the Federal Court decision (reported in February 2013), an increasing adjustment of 10% of GST was made.
