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March 2006
New law to remove the suggestion from Marana Holdings case that the sale of some residential premises is not input taxed
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 Lawyer in Profile  Michael Taylor-SandsSenior Associate, Commercial Group Phone: 03 9288 0555 Michael joined the Revenue Group of Maddocks in 2005 having previously been a Senior Associate at Baker & McKenzie. Michael has considerable experience in consulting on tax and stamp duty issues to a wide range of corporate and non-corporate clients. He has advised large multi-national and Australian corporate groups in the manufacturing, property development/investment and gaming/casino industries. He advises on the tax implications arising from various forms of transactions, including acquisitions and divestitures, corporate reorganisations and capital raisings. He has had particular experience with inbound investment for both corporate groups and individuals and regularly advises in relation to Capital Gains Tax, CFC/FIF rules, withholding tax and Australia's tax treaty network.  
The Government intends to amend the GST law to make clear that properties used as serviced apartments and strata units are input taxed. The law will apply retrospectively from before the case.
Julian Smith and Jacqueline Partridge
Details of proposed changes announced by TreasuryThe Assistant Treasurer announced on 27 February 2006 that the Government will amend the GST Act to remove the uncertainties created by the Marana decision. He said that: ... the decision of the Full Federal Court in the [Marana Holdings case] has resulted in a blurring of the lines between properties that are subject to GST and those qualifying for input taxed treatment. The new law will continue the tax treatment of property that applied prior to Marana with the effect that: ... supplies involving properties such as serviced apartments and strata units leased to hotel operators remain input taxed. The amendments will apply retrospectively from 1 July 2000. What was the law before the Marana case?Before the Marana case, the accepted view of the law was as follows. The ActThe GST Act states that the sale of real property will be input taxed if the property is a residential premises — that is, premises that are either:
You will recall that the effect of a transaction being input taxed means:
In 2000, the ATO issued a GST Ruling which gave the Commissioner's view that purchased property units that had been rented on a short term occupancy basis (eg motels) were residential premises and therefore input taxed. How did the Marana case change that position?In the Marana case, the Court disagreed with the ATO and held that motel units were not residential. The factsA partnership (registered for GST) purchased a motel for $5.7 million in 2002. Until two days before settlement, the premises had been operated as a motel (before the conversion of those premises to residential units). After settlement, the partnership obtained Council approval to use the premises as residential apartments and the motel was converted to strata title. In 2003, the partnership sold one of the units, as a residential unit, to an individual for $229,000. The partnership applied to the Federal Court for a declaration that:
The court denied the application. The partnership appealed the decision to the Full Court of the Federal Court. The appeal court's decisionThe Full Court of the Federal Court concluded that when the motel was sold, the premises:
Therefore the newly converted premises was classified as a "new residential premises" as at the date of the sale of the unit and consequently the sale was not input taxed. You can read the case at Marana Holdings Pty Ltd & Another v Commissioner of Taxation [2004] FCAC 307 925 November 2004). What uncertainty did the decision in Marana Holdings create?The decision in Marana Holdings left taxpayers uncertain as to whether they should follow the court's decision or adopt the ATO's Ruling. Happily, the new law will clarify that the ATO's ruling is the one to apply — and the "period of uncertainty" is to be "removed" thanks to the law applying retrospectively.
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