Surprise — Full Federal Court allows appeal on South Steyne GST Div 135 saga

On 18 October, the Full Federal Court handed down the latest decision (MBI Properties Pty Ltd v Commissioner of Taxation [2013] FCAFC 112) in the long-running goods and services tax (GST) saga associated with the South Steyne Development at Manly Beach.

Somewhat surprisingly, the Full Federal Court allowed the taxpayer’s appeal by accepting that the application of the going concern concession to the sale of a leased residential building did not trigger a Division 135 adjustment for the purchaser in respect of those existing leases. This is a material departure from the ATO’s practice and represents a significant reduction in the impact of Division 135 in relation to residential property transactions.

The court’s affirmation of the principle that a lease is a single supply made at the time that the lease is granted also creates uncertainty as to who is liable for any GST payable on rent payments collected by a purchaser who has acquired a commercial building subject to existing leases. In other words, does a vendor remain liable for GST on existing leases even after it has sold the building to a purchaser who collects the GST-inclusive rent? This has the potential to become a significant issue on commercial property sales and as such it is anticipated that vendors will seek comprehensive indemnities for any such GST liabilities…

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