Leases, GST and the Commissioner’s Last Hurrah

The Commissioner is on the back foot after the recent decision in MBI Properties Pty Limited v Commissioner of Taxation (“MBI”). Unsurprisingly, the Commissioner lodged an application for special leave to appeal to the High Court against that decision on 15 November 2013. The Commissioner also acted quickly by releasing an Interim Decision Impact Statement (released 21 November 2013) outlining how the ATO will approach the risks and potential advantages (depending on which side of the fence you sit on) resulting from the decision in MBI.

In brief terms, if the decision in MBI is not overturned then:

1. there is a risk that after the sale of a commercial property a vendor, who entered into a lease with a tenant, could be liable for GST in respect of the grant of a lease for the whole lease period;
2. there is the potential that a purchaser of a tenanted commercial premises may not be liable for GST in respect of a continuing lease;
3. depending on the relevant agreement, there is the potential for a tenant who has paid GST to a new lessor (that is, the purchaser of the commercial premises) to recoup that amount as a result of the payment being made in error.  Alternatively, there is the risk that the tenant may not be entitled to input tax credits in relation to lease payments made after the sale of the premises;
4. a new lessor (the purchaser) may not be able to claim input tax credits for GST in relation to the costs incurred in respect to the commercial lease (e.g. agent’s fees);
5. purchasers of leased residential premises as a going concern may not be liable for an increasing adjustment under Division 135; and
6. Vendors may not be able to sell their leased premises GST-free as a going concern.

The Commissioner is also confronted with the potential that taxpayers (specifically tenants) may claim to be an entitled to refunds of GST paid in relation to lease payments made to a purchaser of leased premises.  To preserve this entitlement, and to stem the flow of refund applications, the Commissioner has stated that “pending the outcome of the current High Court application, taxpayers can notify the ATO... of their intention to claim the refund at a later date”^[1] -  in order to preserve any entitlement to refunds for pre-1 July 2012.

As evidenced by my comments above, it is not surprising that the Commissioner has lodged an appeal to the High Court.  It is also obvious that the Full Federal Court decision has backed the Commissioner into a corner because of the doubt that has now been placed on the Commissioner’s comments in GSTD 2012/2 (which is still in draft).  Although some of the statements made in GSTD 2012/2 were based on the earlier decision in South Steyne Hotel Pty Ltd v. Commissioner of Taxation (one of the cases relating to MBI), if the Commissioner is not successful in his application to the High Court, GSTD 2012/2 will have little, or no, application. Put simply, the Full Federal Court disagreed with the Commissioner’s statement that following the sale of a reversion in commercial premises, there is a continuing supply by the purchaser to the lessee. In reaching this conclusion, the Full Federal Court agreed with the notion that a purchaser is not liable for GST in respect of a continuing lease following the purchase of a reversion in a tenanted commercial premises.

With this in mind, it is clear that the decision of the High Court will greatly impact how you account for GST in respect to commercial leases if there is a change in ownership of the property.  Landlords acquiring property subject to a lease, and tenants alike, should, at the very least review the GST treatment in the commercial lease market.