This is an important High Court decision that clarifies the confusion created by the Full Federal Court and confirms that GST will be imposed in respect of the sale of a going concern under certain circumstances.
Generally, a taxpayer may not claim 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 (such as on the purchase of a business as a going concern) and then makes input taxed supplies (such as leasing out the apartments to hotel operators), the taxpayer will have to pay 10% GST on that cost (and won’t qualify for a GST credit).
The MBI properties case dealt with such a situation where there was a dispute whether such an increasing adjustment would apply where a taxpayer acquired 3 serviced apartments (that were subject to an existing lease to a hotel operator to manage the apartments) as a going concern.
Recently, the High Court1 confirmed that such an increasing adjustment2 would apply to such a situation – and therefore the purchaser will have to pay another 10% of the purchase price straight to the ATO.
Please note that this is a change from the Full Federal Court’s3 decision and therefore you may have to treat the transaction differently for GST purposes if you were a party to the sale of a going concern that included property that was sold subject to a lease in place.
You may need to make a Division 135 increasing adjustment.
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 leases assigned with the property acquired. By applying the High Court’s reasoning, a Division 135 increasing adjustment will most likely apply to such transactions.
Let us help you identify transactions that may be affected by this High Court decision.
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 therefore very important to scrutinise the contract of sale to determine whether any input taxed supplies will be made subsequent to 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 Edwards Marshall dvisor.
1. Commissioner of Taxation v MBI Properties Pty Ltd  HCA 4
2. The High Court held that although MBI Properties did not conclude the original lease contract, it was still making an input taxed supply because it was allowing the lessee to continue to use and occupy the apartments as per the lease contract.
3. MBI Properties v Commissioner of Taxation  FCAFC 112.
The material contained in this publication is for general information purposes only and does not constitute professional advice or recommendation from Nexia Edwards Marshall. Regarding any situation or circumstance, specific professional advice should be sought on any particular matter by contacting your Nexia Edwards Marshall. This article originally appeared on the Nexia Australia website.