Commissioner of Taxation v MBI Properties Pty Ltd
Document type: Decision Impact Statement
Venue: High Court (S90/2014)
Judgment date: 3 December 2014
Date published: 30 September 2015

Summary of decision:
Outlines the Commissioner'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.

Overview 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 apartment was sold subject to a lease already granted by South Steyne to Mirvac Management Pty Ltd (MML). Each lease obliged MML to operate a scheme under which the three apartments, together with the other apartments in the complex, were to be operated as part of a serviced apartment business. | As permitted by each contract of sale, MBI elected to participate in a 'Management Rights Scheme' that mirrored the scheme provided for under the leases. | In earlier proceedings, the majority of the Full Federal Court held that South Steyne's grant of the leases was an input taxed supply of residential premises by way of lease under section 40-35 of the GST Act, and that its sale of the apartments to MBI subject to the leases, was a GST-free supply of a going concern under section 38-325 of the GST Act: South Steyne Hotel Pty Ltd v Commissioner of Taxation [2009] FCAFC 155 (South Steyne). | In South Steyne, the Full Federal Court unanimously held that on purchase of the three leased apartments, MBI did not make any supply to MML. Instead, the Full Federal Court concluded that after the sale, there was a continuation of the existing leases South Steyne had granted MML. | The Commissioner later assessed MBI's net amount to include an increasing adjustment under section 135-5 of the GST Act. Subsection 135-5(1) of the GST Act provides for an increasing adjustment if an entity is supplied a going concern, and intends that some or all of the supplies made through the enterprise to which the supply of the going concern relates, will be input taxed supplies. Under subsection 135-5(2), the amount of the adjustment is determined by reference to the 'price' of the input taxed supplies as a proportion of the 'price' of all the supplies intended to be made through the enterprise. [1] | MBI appealed to the Federal Court after its objection to the assessment was disallowed. Griffiths J dismissed MBI's appeal at first instance, accepting the Commissioner's argument that continuation of the leases resulted in input taxed supplies of residential premises being made by South Steyne to MML through the enterprise MBI acquired as a GST-free going concern. | The Full Federal Court allowed MBI's further appeal, holding that the only supply by way of lease occurred on grant of the leases by South Steyne to MML, and that that supply did not continue. Therefore, there was no input taxed supply which MBI could have intended would be made through the enterprise it acquired from South Steyne as a going concern. | The Commissioner was granted special leave to appeal to the High Court, MBI contending that it did not make any input taxed supplies by way of lease to MML, and, that there could be no increasing adjustment because there was no 'price' for any input taxed supplies it may have intended to make. | Issues decided by the High Court | The primary questions addressed by the High Court on appeal were: • Did MBI as purchaser of the leased apartments make a supply to MML as tenant during the term of each lease remaining after the sale of the apartments; and • If MBI did make a supply to MML after the sale of the apartments, was there any 'price' for the supply for the purpose of calculating an increasing adjustment under subsection 135-5(2)? | • Did MBI as purchaser of the leased apartments make a supply to MML as tenant during the term of each lease remaining after the sale of the apartments; and • If MBI did make a supply to MML after the sale of the apartments, was there any 'price' for the supply for the purpose of calculating an increasing adjustment under subsection 135-5(2)? | The High Court unanimously held in a joint judgment (at [46]) that MBI was liable for an increasing adjustment under section 135-5. | By assuming the lessor's rights and obligations under the leases, MBI intended to and did in fact make input taxed supplies of residential premises by way of lease to MML through the enterprise it acquired from South Steyne (at [2] & [40]). The High Court also held that the supplies MBI made and intended to make were for a 'price' - that being the rent to be paid by MML to MBI under each apartment lease (at [2] & [45]). | The High Court noted that, by observing the covenant to provide quiet enjoyment under a lease, the lessor engages in an 'activity' done 'on a regular or continuous basis, in the form of a lease'. Whether or not the lessor might also be engaged in some other form of enterprise, it makes a supply of use and occupation of the leased premises in the course of an enterprise the lessor carries on within the meaning of paragraph 9-20(1)(c) of the GST Act (at [37]). The High Court also noted (at [33]), that it was incorrect to consider that the making of a supply must always involve the taking of some action on the part of the supplier, and that one transaction must always involve the making of just one supply.

Issues decided:
The primary questions addressed by the High Court on appeal were: • Did MBI as purchaser of the leased apartments make a supply to MML as tenant during the term of each lease remaining after the sale of the apartments; and • If MBI did make a supply to MML after the sale of the apartments, was there any 'price' for the supply for the purpose of calculating an increasing adjustment under subsection 135-5(2)? • Did MBI as purchaser of the leased apartments make a supply to MML as tenant during the term of each lease remaining after the sale of the apartments; and • If MBI did make a supply to MML after the sale of the apartments, was there any 'price' for the supply for the purpose of calculating an increasing adjustment under subsection 135-5(2)? The High Court unanimously held in a joint judgment (at [46]) that MBI was liable for an increasing adjustment under section 135-5. By assuming the lessor's rights and obligations under the leases, MBI intended to and did in fact make input taxed supplies of residential premises by way of lease to MML through the enterprise it acquired from South Steyne (at [2] & [40]). The High Court also held that the supplies MBI made and intended to make were for a 'price' - that being the rent to be paid by MML to MBI under each apartment lease (at [2] & [45]). The High Court noted that, by observing the covenant to provide quiet enjoyment under a lease, the lessor engages in an 'activity' done 'on a regular or continuous basis, in the form of a lease'. Whether or not the lessor might also be engaged in some other form of enterprise, it makes a supply of use and occupation of the leased premises in the course of an enterprise the lessor carries on within the meaning of paragraph 9-20(1)(c) of the GST Act (at [37]). The High Court also noted (at [33]), that it was incorrect to consider that the making of a supply must always involve the taking of some action on the part of the supplier, and that one transaction must always involve the making of just one supply.

ATO view of decision:
The High Court has decided that the Full Federal Court was wrong to conclude in South Steyne that the purchaser of leased premises makes no supply to the sitting tenant (at [41]). The High Court decision confirms that, for the purposes of section 9-10 of the GST Act, the purchaser makes a supply to the tenant that is by way of lease, for which the rent is consideration within the meaning of section 9-15. The purchaser makes a supply by observing and continuing to observe the obligations imposed on it by law or accepted by agreement. This supply is made progressively in accordance with the general operation of the GST Act, and aside from any application of the special rules in Division 156 (at [36]). | The Commissioner considers that the High Court's decision gives rise to the following GST outcomes: • A purchaser of leased residential premises as a GST-free going concern, with the intention of continuing to observe and act in accordance with the covenants of the existing lease, is liable for an increasing adjustment under section 135-5. • A purchaser of leased residential premises makes an input taxed supply by way of lease, and paragraph 11-15(2)(a) operates so that there is no entitlement to an input tax credit for anything acquired that relates to making that supply. • Where leased premises acquired by a purchaser are not residential premises, the purchaser makes a supply of the premises to the tenant and that supply will be a taxable supply when the other requirements of section 9-5 are met. Therefore, after the sale: • the purchaser is required to pay GST on rent paid by the tenant • where the other requirements of section 11-5 are met, the tenant is entitled to input tax credits with respect to rent paid to the purchaser after the sale • the vendor is not liable for GST on rent paid to the purchaser after the sale,and • where the purchaser or tenant account for GST on a basis other than cash, their respective supply or acquisition of the premises by way of lease will be treated as being made on a progressive or periodic basis for the purposes of Division 156 of the GST Act. | • A purchaser of leased residential premises as a GST-free going concern, with the intention of continuing to observe and act in accordance with the covenants of the existing lease, is liable for an increasing adjustment under section 135-5. • A purchaser of leased residential premises makes an input taxed supply by way of lease, and paragraph 11-15(2)(a) operates so that there is no entitlement to an input tax credit for anything acquired that relates to making that supply. • Where leased premises acquired by a purchaser are not residential premises, the purchaser makes a supply of the premises to the tenant and that supply will be a taxable supply when the other requirements of section 9-5 are met. Therefore, after the sale: • the purchaser is required to pay GST on rent paid by the tenant • where the other requirements of section 11-5 are met, the tenant is entitled to input tax credits with respect to rent paid to the purchaser after the sale • the vendor is not liable for GST on rent paid to the purchaser after the sale,and • where the purchaser or tenant account for GST on a basis other than cash, their respective supply or acquisition of the premises by way of lease will be treated as being made on a progressive or periodic basis for the purposes of Division 156 of the GST Act. | • the purchaser is required to pay GST on rent paid by the tenant • where the other requirements of section 11-5 are met, the tenant is entitled to input tax credits with respect to rent paid to the purchaser after the sale • the vendor is not liable for GST on rent paid to the purchaser after the sale,and • where the purchaser or tenant account for GST on a basis other than cash, their respective supply or acquisition of the premises by way of lease will be treated as being made on a progressive or periodic basis for the purposes of Division 156 of the GST Act. | The High Court's statement (at [37]) that observing covenants to provide quiet enjoyment under a lease amounts to engaging in an 'activity' done 'on a regular or continuous basis, in the form of a lease' confirms that an entity granting a lease or acquiring a reversion makes a supply of the use and occupation of the leased premises in the course of carrying an enterprise: see paragraph 9-20(1)(c) of the GST Act. It remains a question of fact and degree whether the entity may also be engaged in some other or broader enterprise.

Administrative treatment:
Implications for ATO precedential documents (Public Rulings & Determinations etc) | GST consequences following a sale of leased premises | Although the High Court decision is consistent with the Commissioner's views on the GST consequences following a sale of leased premises in GSTD 2012/1 and GSTD 2012/2, those rulings will be reviewed to ensure that they fully reflect what the High Court has said. Entities who have lodged GST returns relying on these rulings will not need to review them following the High Court decision. Those entities are in any event protected from underpaid tax, penalties and interest to the extent the rulings do not correctly state the law. | As the High Court decision is consistent with existing practice, it is not anticipated that any changes made to GSTD 2012/1 and GSTD 2012/2 will materially or adversely impact taxpayers. | Vendors of leased commercial premises can continue to self-assess net amounts on the basis that they are not liable for GST on rent paid by the tenant to the purchaser. Tenants of commercial premises can self-assess net amounts on the basis that they are entitled to input tax credits on rent paid to the purchaser. Purchasers in turn need to account for GST on that rent. | Note: Following the High Court's decision in this case, GSTD 2012/1 and GSTD 2012/2 were amended on 22 July 2015 and 23 September 2015 respectively. | Supplies of leased premises as a GST-free going concern | Vendors and purchasers of premises subject to an existing lease can continue to rely on the Commissioner's views 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, entities can rely upon GSTR 2002/5 to treat a sale of leased premises as being a GST-free supply of a going concern. | Supplies | GSTR 2006/9 includes 16 propositions for characterising and analysing supplies. Proposition 5 is that an entity must do something to make a supply. We intend to review proposition 5 in GSTR 2006/9, given the High Court's statement at [33] about it being incorrect to consider that the making of a supply must always involve the taking of some action on the part of the supplier. | We would welcome comment on whether rulings additional to GSTD 2012/1, GSTD 2012/2 and GSTR 2006/9 require review following the High Court's decision. | Past transactions accounted for in accordance with the Full Federal Court decision | Entities that have self-assessed on the basis of the Full Federal Court's decision in MBI may need to review prior lodgments to determine whether they have an incorrectly reported net amount. Entities in these circumstances that have a tax shortfall may choose to make a voluntary disclosure. | Reduced tax shortfall penalties and interest may apply if voluntary disclosures are made. Further information on making voluntary disclosures can be located by searching for 'voluntary disclosure' on www.ato.gov.au . | The Commissioner will, where appropriate, address non-compliance and seek to recover excess refunds or underpaid net amounts from entities that have: • purchased leased residential premises as a GST-free going concern and not accounted for any increasing adjustment under Division 135; • purchased leased commercial premises and not accounted for GST on rent they have received from the tenant; or • claimed input tax credits for acquisitions related to the leasing of residential premises. | • purchased leased residential premises as a GST-free going concern and not accounted for any increasing adjustment under Division 135; • purchased leased commercial premises and not accounted for GST on rent they have received from the tenant; or • claimed input tax credits for acquisitions related to the leasing of residential premises.

Legislative references: A New Tax System (Goods and Services Tax) Act 1999 section 9-5 section 9-15 section 9-75 section 40-35 section 135-5 section 156-22
Case references: Commissioner of Taxation v MBI Properties Pty Ltd [2014] HCA 49 2014 ATC 20-474 MBI Properties Pty Ltd v Commissioner of Taxation [2013] FCAFC 112 2013 ATC 20-420 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