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The GST trap in buying serviced apartments

04/01/2015

Under the A New Tax System (Goods and Services Tax) Act 1999, a supplier is liable to remit GST on a “taxable supply”, such as the sale of new residential properties.  In this context, serviced residential apartments are considered to be new until they are sold for the first time, even if they have been occupied whilst being marketed for sale.  GST Ruling 2003/3 explains what are new residential premises for the purposes of s.40-75 of the GST Act.

To avoid the GST burden, the vendor may document a sale of new, pre-leased residential premises as a supply of a going concern.  A supply of a going concern is GST-free.  GST Ruling 2002/5 explains what is a “going concern” under subdivision 38-J of the GST Act.

A lease of residential premises is “input taxed”.  That means a landlord is not required to remit GST on rent received under the lease.  Nor can it claim input tax credits for any goods or services it acquires in order to make that supply.  

However, a taxpayer is liable for an “increasing adjustment” under s.135-5 of the GST Act where it acquires a going concern which makes supplies that are neither taxable nor GST-free. That adjustment is one-tenth of the price of those supplies. The Explanatory Memorandum suggests that “you only get a going concern GST-free to the extent that you intend to make taxable supplies with it”  in order “to ensure that you account for GST in proportion to the … input taxed use of a going concern that you acquire” by being subjected to an adjustment which “increases your net amount by an amount equal to the GST you would bear on the acquisition if it had been a taxable supply to you”. 

The High Court held in Commissioner of Taxation v MBI Properties Pty Ltd that the purchaser of leased premises makes a supply which occurs progressively throughout the term of the lease.  That supply is separate to the grant of the lease.  By continuing to observe the covenant of quiet enjoyment, a purchaser supplies the tenant with a right to use and occupy the premises.  The scheme of the GST Act is impose GST in the tax period the price or consideration is paid or accrued, not when a relevant supply is made.  The purchaser supplies the continuing right of use and occupation in return for periodic instalments of rent, even if those amounts could also be said to be the price or consideration for the grant of the lease.  In the result, a purchaser of new, pre-leased, residential apartments acquired as a going concern has to pay GST on rents it receives.

That will come a surprise to many investors and could depress “off-the-plan” sales of serviced apartments.

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