Interim Decision Impact Statement

MBI Properties Pty Ltd v Commissioner of Taxation

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Court Citation(s):
[2013] FCAFC 112
2013 ATC 20-420
(2013) 91 ATR 784

Venue: Federal Court of Australia
Venue Reference No: NSD 329/2013
Judge Name: Edmonds, Farrell and Davies JJ
Judgment date: 18 October 2013
Appeals on foot: The Commissioner applied for special leave to appeal to the High Court on 15 November 2013.
Decision Outcome: Unfavourable

Impacted Advice

Relevant Rulings/Determinations:

• Goods and Services Tax Ruling GSTR 2002/5
• Goods and Services Tax Ruling GSTR 2006/9
• Goods and Services Tax Determination GSTD 2012/1
• Goods and Services Tax Determination GSTD 2012/2

Précis

Outlines the ATO's response to this case involving the application of Division 135 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) following the sale of leased residential premises as a going concern.

Brief summary of facts

MBI Properties Pty Ltd (MBI) purchased three residential apartments in the Sebel Manly Beach Hotel Complex from South Steyne Hotel Pty Ltd (South Steyne).

Each of the three apartments was sold to MBI subject to a lease granted by South Steyne to Mirvac Management Pty Ltd (MML). Each lease obliged MML to operate a scheme whereby each of the three apartments was, together with other apartments in the complex, operated as part of a serviced apartment business.

As permitted by each contract of sale, MBI elected to participate in a 'Management Rights Scheme', which mirrored the scheme provided for under the lease agreements.

In earlier proceedings, the majority of the Full Federal Court in South Steyne Hotel Pty Ltd v Commissioner of Taxation [2009] FCAFC 155 (South Steyne) held that the supplies of the three apartments to MML, subject to the respective leases granted by South Steyne, were GST-free supplies of going concerns under section 38-325 of the GST Act.

In South Steyne, the Full Federal Court also unanimously concluded that upon purchase of the reversion in the three apartments, MBI did not make a supply to MML. Instead, the Full Federal Court concluded that there was a continuation of the existing leases granted by South Steyne after the sale of the reversion.

Issues decided by the court

The issue before the Full Federal Court was whether MBI was liable for an increasing adjustment under section 135-5 of the GST Act. The Full Federal Court unanimously allowed MBI's appeal from the primary judge's decision in MBI Properties Pty Ltd v Commissioner of Taxation [2013] FCA 56 and held that MBI was not liable for an increasing adjustment under Division 135 of the GST Act (at [30], [44] & [45]).

It was common ground between the parties that MBI was the recipient of a supply of a going concern and therefore paragraph 135-5(1)(a) of the GST Act was satisfied. The key interpretative issue in dispute was whether, as required by paragraph 135-5(1)(b) of the GST Act, MBI intended that some or all of the supplies made through the enterprise that was the subject of the going concern would be supplies that are neither taxable supplies nor GST-free supplies.

The Full Court concluded that paragraph 135-5(1)(b) of the GST Act was not satisfied because neither MBI, nor the previous owner of the apartments, made any new or continuing supply of residential premises to MML following the sale of the reversions to MBI. Therefore, there were no supplies made through the enterprise that MBI intended would be neither taxable nor GST-free.

Contrary to the finding of Griffiths J at first instance, the Full Court held that although the lease granted by the previous owner of the apartments continued after the sale of the reversion to MBI, there was not a continuing supply of the apartments by way of lease (being an input taxed supply of residential premises) (at [29]). In this regard, at [24], Edmonds J stated that "the supply is complete on the lease coming into existence. The "supply" constituted by the grant of the lease did not continue beyond the grant; the fact that the lease continued was solely a function of the terms of the grant, not a continuing supply by the grantor."

Although it was not necessary for the Full Court to decide the issue, the Full Court also expressed the view, contrary to that of the primary judge, that the reference to "supplies made through the enterprise" in paragraph 135-5(1)(b) is to supplies made by the acquirer of the enterprise and not supplies made by another entity (at [42]).

ATO view of Decision

The Commissioner filed an application for special leave to appeal the Full Federal Court's decision to the High Court on 15 November 2013.

Subject to that application, the Full Federal Court's decision means that purchasers of leased residential premises as a going concern may not be liable for an increasing adjustment under Division 135 of the GST Act.

The ATO is continuing to carefully consider other potential implications of the Full Federal Court's decision. The ATO acknowledges there is some concern in the community that the Full Court's decision may also have broader impacts. In particular, concerns have been expressed about whether the Full Federal Court's decision might mean that:

•

Following the sale of a reversion, the incoming landlord of commercial premises is not liable for GST on the rent payable by the tenant under the lease granted by the vendor of the reversion.

•

The tenant of commercial premises would not be entitled to input tax credits in relation to rental payments after the sale of a reversion.

•

Alternatively, an entity that grants a lease in, but later sells commercial premises, may remain liable for GST on rental payments received by the purchaser following a sale of the premises.

•

A purchaser of leased residential premises can claim input tax credits for costs associated with the rental of the premises, so far as the lease originally granted by the vendor remains on foot and no new or further lease is granted by the purchaser.

•

Property owners are not able to sell leased premises as a GST-free going concern.

As noted previously, the ATO applied for special leave to appeal the Full Federal Court's decision on 15 November 2013. The ATO is currently developing views about the potential broader impacts of the Full Federal Court's decision. If the Commissioner is not granted special leave and / or is unsuccessful on appeal, those views will be published in a final decision impact statement.

Administrative Treatment

Implications for ATO precedential documents (Public Rulings & Determinations etc)

Overview of administrative treatment

In the interests of providing certainty for the community and to minimise and/or avoid disruption to commercial dealings, until the outcome of the Commissioner's application for special leave and any resulting appeal is known, the ATO does not intend to revise its current published views about the sale of leased residential premises and leased commercial premises, as set out in:

•

GSTD 2012/1 - Goods and services tax: what are the goods and services tax consequences following the sale of residential premises that are subject to a lease?

•

GSTD 2012/2 - Goods and services tax: what are the goods and services tax consequences following the sale of commercial premises that are subject to a lease?

Accordingly, taxpayers may continue to lodge returns on the basis of the published ATO views in GSTD 2012/1 and GSTD 2012/2. Taxpayers who lodge returns on the basis of those published ATO views will be protected from having to pay any underpaid tax, penalty or interest if those views are determined to not correctly state the application of the relevant provisions.

The protection afforded by the ATO's current published views allows taxpayers to continue to account for GST in a manner that does not disrupt commercial dealings between landlords and tenants, pending the outcome of the current High Court proceedings.

The protection afforded by the ATO's current published views may be of particular relevance for vendors and tenants of leased commercial premises. Reliance on those views enables vendors of leased commercial premises to self-assess their net amount on the basis that they are not liable for GST on rent paid by the tenant to the purchaser of the property. It also allows tenants of commercial premises to self-assess their net amount on the basis that they are entitled to input tax credits in relation to rent paid to a purchaser of the premises.

Supplies of leased premises as a GST-free going concern

Additionally, pending the outcome of the Commissioner's application for special leave and any resulting appeal, vendors and purchasers of premises that are subject to an existing lease can rely upon the Commissioner's current published view in GSTR 2002/5 - Goods and services tax: when is a 'supply of a going concern' GST-free?. This means, that subject to the required conditions being met, taxpayers can rely upon GSTR 2002/5 to treat a sale of leased premises as being a GST-free supply of a going concern.

GST refunds

Preserving entitlements to potential refunds for past transactions

Subject to the outcome of the Commissioner's application for special leave and any resulting appeal, taxpayers who have self assessed GST net amounts on the basis of the Commissioner's current published views may consider that the Full Court's decision means that they are entitled to a refund.

A taxpayer's entitlement to a refund of overpaid GST relating to a tax period commencing before 1 July 2012 will generally expire unless, within four years from the end of that tax period, the taxpayer notifies the Commissioner of an entitlement to a refund.^[1]

To preserve any entitlement to refunds for pre-1 July 2012 transactions, pending the outcome of the current High Court application, taxpayers can notify the ATO (through one of the methods outlined below) of their intention to claim the refund at a later date (for example, as soon as possible after the Commissioner's application for special leave and any resulting appeal in the High Court is determined).

Requirements for a valid refund notification

A valid notification of a refund entitlement must:

•

Identify the taxpayer that is entitled to the refund

•

Provide a description of the nature of the refund entitlement which is sufficient to bring to the Commissioner's attention the basis for the entitlement (such that when the refund is subsequently claimed, it can reasonably be identified as being covered by the notification). For example, "the taxpayer purchased leased residential premises and in accordance with the decision in MBI Properties v Federal Commissioner of Taxation, has overpaid a net amount because it is not liable for an increasing adjustment under Division 135 of the GST Act".

•

Specify the tax period or periods that the refund relates to. If the refund relates to a number of consecutive periods, it is sufficient to specify a range only without indentifying each period (for example, "the refunds relate to the quarterly tax periods spanning 1 June 2009 to 30 June 2012").

The notification does not need to quantify the amount of the refund. In the circumstances, the Commissioner will not require a taxpayer to take steps to quantify the amount of the refund until the Commissioner's application for special leave and any resulting appeal have been decided.

Where to send the notification

Notifications of refund entitlements should be sent to:

Australian Taxation Office

PO Box 3524

ALBURY NSW 2640

or faxed to 1300 139 031

Taxpayers will receive a letter from the ATO acknowledging their notification.

Section 105-65 - Restriction on refunds of overpaid GST

The payment of any refunds of GST paid with respect to rental payments received by a purchaser of leased commercial premises will be subject to the restrictions on refunds of overpaid GST in section 105-65 of Schedule 1 of the Taxation Administration Act 1953 ('TAA').

Under section 105-65, the ATO is not required to refund an amount where the conditions for the operation of section 105-65 are satisfied, namely:

(a)

The ATO is not satisfied that a corresponding amount has been reimbursed to the recipient of the supply; or

(b)

The recipient of the supply is registered or required to be registered for GST purposes.

However, section 105-65 provides the Commissioner with the discretion to pay refund in appropriate circumstances, even though the conditions for the operation of section 105-65 are satisfied. Paragraphs 128 to 132 of MT 2010/1 set out the guiding principles that the Commissioner will have regard to when considering whether it would be appropriate to exercise his discretion in a particular case.

Any claims for refunds of GST paid in relation to rental payments received by a purchaser of leased premises, pending the outcome of the High Court proceedings, will be considered on their merits having regard to the above conditions for the operation of section 105-65. Taxpayers should submit the full details of any such refund claims, including reasons why a refund should be paid, to GSTmail@ato.gov.au or by fax to 1300 139 031 or by mail to:

Australian Taxation Office

PO Box 3524

ALBURY NSW 2640

Refunds paid prior to the finalisation of the current High Court proceedings will need to be returned in certain circumstances

The Commissioner may seek to recover refunds obtained by taxpayers who choose not to continue to account for GST in accordance with the ATO's published views and await the outcome of the current High Court proceedings.

If Commissioner is successful in an appeal to the High Court

Taxpayers who obtain refunds before the law is clarified may be required to pay back to the Commissioner any refunds paid, together with any delayed refund interest that may have been paid, if the Commissioner is successful in an appeal to the High Court.

If Commissioner is not granted special leave and/or is not successful in an appeal to the High Court

In circumstances where the Commissioner is not granted special leave and/or is not successful in an appeal to the High Court, in some cases taxpayers may still be required to pay back refunds paid, together with any delayed refund interest that may have been paid. This may be the case where a refund is paid on a basis that is not consistent with the Commissioner's final views about the broader implications of the Full Federal Court's decision.

As noted immediately above, taxpayers who await the outcome of the Commissioner's application for special leave and/or any appeal can preserve their entitlement to refunds for pre-1 July 2012 transactions by giving a notice.

Legislative References:
A New Tax System (Goods and Services Tax) Act 1999 (GST Act)
section 9-10
section 40-35
section 135-5

Taxation Administration Act 1953
section 105-55 of Schedule 1

Case References:
MBI Properties Pty Ltd v Commissioner of Taxation
[2013] FCA 56
2013 ATC 20-372

South Steyne Hotel Pty Ltd v Federal Commissioner of Taxation
[2009] FCAFC 155
(2009) 180 FCR 409
2009 ATC 20-145
74 ATR 41

Westley Nominees Pty Ltd v Coles Supermarkets Australia Pty Ltd
[2006] FCAFC 115
(2006) 152 FCR 461
2006 ATC 4363
62 ATR 682