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September 2006
Marana and Toyama -- a solution at last
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 Lawyer in Profile  Bernie O'SullivanPartner of Maddocks Phone: 03 9288 0555 Bernie specialises in all areas of superannuation, managed investments, trusts and estate and business succession planning. Before joining Maddocks Bernie was a senior associate in the Melbourne office of Mallesons Stephen Jaques. Prior to this he was State Manager, New South Wales, for a major trustee company. Bernie has a unique combination of extensive practical experience in the marketing and sale of financial and trust services as well as a thorough understanding of the legislation underpinning such services. Bernie specialises primarily in superannuation and managed investments and succession planning and trusts. Bernie advises leading financial institutions, statutory trustee companies, superannuation fund trustees, accountants, financial advisers and high net worth individuals. Bernie is secretary of the ASFA Compliance Discussion Group (Victoria), a member of the Taxation Institute of Australia's Education Committee (Victoria), chair of the Securities Institute of Australia's Graduate Diploma taskforce 'Risk Management and Estate Planning'. He is a lecturer and examiner for the Securities Institute and presents extensively for the Taxation Institute of Australia, Financial Planning Association and Australian Society of CPA's on topics such as superannuation, business and estate succession planning and trust law developments.  
The GST legislation in response to Marana (and Toyama) has arrived! The Government has changed the GST law to (among other things) ensure that certain real estate, such as serviced apartments and strata units which are leased to operators of commercial residential premises, are treated as input taxed.
Michelle Osler and Paul Ellis
State of uncertaintyThe decisions in Marana Holdings1 and Toyama1 created uncertainty in relation to whether the supply of some properties was subject to GST or instead qualified to be input taxed. The decisions created significant uncertainty as to which types of properties could be classified as 'residential premises' and therefore qualified to be input taxed rather than being supplies subject to GST. On 27 February 2006 (prior to the decision in Toyama) the Assistant Treasurer announced that the Government would amend the GST Act1 to remove the uncertainties created by the Marana decision. The legislation containing the changes1 has now arrived. However, the issues do not seem to be any clearer than they were before. The Government's concernThe Government's greatest concern is that, without clarification to GST law (some properties, specifically strata units being used as serviced apartments) cannot be regarded as 'residential premises' for GST purposes. This is because they are only used, or intended to be used, for short term accommodation. The Government's concern is curious given that neither Marana Holdings nor Toyama involved strata units being used as serviced apartments. Toyama did not even involve a strata unit. The changesThe changes are to make it absolutely clear that a property constitutes a 'residential premises' if it is:
In particular, the length of any previous occupation or the intended form of occupation is irrelevant and to be ignored The purpose of the changes is to make sure that the following supplies of property are input taxed rather than subject to GST:
The amendments will apply retrospectively from 1 July 2000. Dangerous side-effectsOn the face of the changes it appears that the Government is attempting to ensure that some purchasers of property do not pay too much GST when they purchase residential premises for short term residential accommodation. The changes achieve this by ensuring that that supply is input taxed rather than subject to 10% GST. However, there appears to be other effects that could be quite expensive for property investors. This is compounded by the retrospectivity of the changes. Many property investors purchase strata units from developers for the purpose of letting them out as serviced apartments. In a number of instances the units sold will be the subject of a lease to an operator of the serviced apartments whose role it is to manage the apartment building. Generally, these purchases are treated as a supply of a 'going concern' (provided that the purchaser is registered for GST) and, as a result not subject to GST. The retrospective changes make the supply of the strata unit to the operator an input taxed supply, whereas before they would have been treated as a taxable supply. Impact of new (clarified) input taxed arrangementsThis will have two impacts on the investor:
Transactions since 1 July 2000Taxpayers who have sold or purchased properties since 1 July 2000 should look at their transactions and determine whether they have paid the appropriate amount of GST. They may need to make adjustments to their activity statements to account for GST shortfalls. Taxpayers who are affected by the changes have until 28 February to amend their activity statements and pay any shortfalls in GST to have any penalties and general interest charges remitted in full. Taxpayers who amend their activity statements after 28 February 2007 will only have the general interest charge remitted to 27 July 2006. More informationFor more information you can:
1 Marana Holdings Pty Ltd & Another v Commissioner of Taxation [2004] FCAC 307, 25 November 2004.
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