- Tax Alert: GST update – Commissioner of Taxation v MBI Properties Pty Ltd
Commissioner of Taxation v MBI Properties Pty Ltd
On 3 December 2014, the High Court of Australia handed down its decision in Commissioner of Taxation v MBI Properties Pty Ltd (“MBI Properties”).
The High Court held that a purchaser who acquires a reversionary interest in commercial residential premises subject to a lease will be making an input taxed supply where the purchaser expressly agrees to perform its obligations under the lease. The decision confirms that the purchaser will be liable to an increasing adjustment under Division 135 of the GST Act.
The facts in MBI Properties can be summarised as follows:
- South Steyne Hotel Pty Ltd (“South Steyne”) owned the Sebel Manly Beach Hotel. The hotel was subdivided into individual apartments and a management lot.
- South Steyne entered into a lease agreement with Mirvac Management Ltd (“Mirvac”) in respect of each apartment. Under each apartment lease, Mirvac (as operator) was required to use the apartment as part of a serviced apartment business.
- South Steyne subsequently sold three apartments to MBI Properties Pty Ltd (“MBI”). The apartments were sold subject to the existing lease between South Steyne and Mirvac.
- For GST purposes, each sale was treated as a GST-free supply of a going concern.
The Road to the High Court
The litigious history involved two related decisions: the 2009 Full Federal Court decision of South Steyne Hotel Pty Ltd v Federal Commissioner of Taxation (“South Steyne”) and the Full Federal Court decision of MBI Properties Pty Ltd v Commissioner of Taxation.
In South Steyne, the Court held that the continuation of each apartment lease after the sale of the corresponding apartment by South Steyne to MBI did not result in a supply by MBI to Mirvac.
In the Full Federal Court decision of MBI Properties, the Court confirmed that the acquirer of the reversionary interest does not make a supply to the lessee.
Basis of the appeal and response
In his appeal from the earlier decision of the Full Federal Court, the Commissioner challenged the conclusion of the Full Federal Court in South Steyne.
The Commissioner argued that the continuation of each apartment lease resulted in an input taxed supply of residential premises by way of lease by MBI to Mirvac. This argument was based upon the premise that under the contracts of sale between South Steyne and MBI, MBI agreed to respect Mirvac’s right to use and occupy the apartments – this, the Commissioner argued, was an input taxed supply.
In response, MBI argued that mere passive observance of an existing obligation was insufficient to give rise to a supply. In the alternative, MBI argued that if there was a supply it was not a supply that was made through an enterprise.
The primary issue in the appeal was whether the purchaser of the reversionary estate in land leased to a sitting tenant makes a supply for GST purposes to the tenant during the currency of the lease after completion of the purchase.
The High Court held that in electing to observe the ongoing obligation between South Steyne and Mirvac, MBI made an input taxed supply of residential premises by way of lease to Mirvac throughout the remaining term of the lease. Relevantly, the High Court held that this supply was made through the same enterprise that MBI has previously acquired the premises from South Steyne.
The decision in MBI Properties confirms that a purchaser of a reversionary interest in land where the land is subject to a lease (being input taxed) will be liable to an increasing adjustment under Division 135 of the GST Act where the acquisition consisted of a GST-free supply of a going concern. On this basis, the decision has effectively barred any potential refunds or structuring opportunities for taxpayers that arose from the previous decision of the Full Federal Court – in effect, the status quo of the position prior to MBI Properties has been restored.
The decision will also impact commercial leases and confirms that the purchaser of a reversionary interest in land where the land is subject to a commercial lease (being taxable) will continue to be liable for GST on the ongoing leasing supply.
As an observation, the decision confirms the extremely broad definition of “supply” in the GST Act. The High Court confirmed that the observance of a contractual obligation to refrain from taking some action or to tolerate a situation will amount to a “supply” for GST purposes and that a “positive act” is not always necessary. This appears to be at odds with the Commissioner’s views in GSTR Ruling, GSTR 2006/9 that to make a supply, an entity must do something. It will be interesting to see whether the Commissioner amends GSTR 2006/9 to take into account the High Court’s view.