The Government has announced that it will amend the law in relation to the GST treatment of certain types of real property, including serviced apartments and strata title units. The amendments will deny investors GST credits with retrospective effect from 1 July 2000.
The proposed amendments follow the decision of the Full Federal Court in Marana Holdings Pty Ltd v Commissioner of Taxation [2004] FCAFC 307 and, in particular, the Court’s findings in relation to the definition of “residential premises” in the GST Act.
Property Council of Australia chief executive Peter Verwer said he was disappointed with the announcement. “The government seems determined to penalize investors who were simply acting on the Marana Holdings decision and the fact that the ATO implicitly gave the “all clear” by issuing GST credits following the case.” he said.
A lease of ‘residential premises’ is generally input taxed, which means that GST is not payable on the supply by way of lease, but a GST registered lessor is unable to claim GST credits for GST payable on acquisitions that relate to leasing the property (including the acquisition of the property itself).
In Marana Holdings the Full Federal Court decided that premises need to be suitable for long-term occupation in order to qualify as ‘residential premises’. Many serviced apartments and strata title units are not suitable for long-term occupation due to their physical characteristics or restrictions on their use.
Following the decision in Marana Holdings, GST registered investors in these types of properties became entitled to argue that they were entitled to claim a credit for the GST payable on their acquisition of the property, in circumstances where they acquired the property with the intention of leasing it to a commercial operator.
It appears that the Government intends to amend the definition of ‘residential premises’ to ensure that leases of properties such as serviced apartments and strata title units will always be input taxed, except where they qualify as a supply of ‘commercial residential premises’.
As a result of the Government’s proposed amendments, investors in these types of properties will not be required to register for the GST and incur the associated compliance costs. However, any compliance savings are likely to be outweighed by the lost GST credits on the acquisition of the property.
Craig Whatman, Director GST at Pitcher Partners says, “The proposed amendments will result in the GST getting ‘stuck’ at the point the investor acquires the property, which could have a flow on effect in terms of the amount charged to the commercial operator and ultimately the end users of the premises. Some investors will be forced to file amended Business Activity Statements and repay GST credits received from the ATO. Aside from the additional compliance costs they will incur, the investor may also be faced with significant bills from the ATO for internal charges.”
“We recommend that developers, investors and commercial operators consider the impact of the proposed changes on their business operations.”
At this stage, no further details of the proposed amendments are available but we expect draft legislation in the near future.
Pitcher Partners is a full service accounting and advisory firm with specialist expertise in GST and the property industry.
