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GST: You say Marana, I say Toyama... New case muddies the cloudy water

While we await legislation changes to clarify which residential properties were subject to GST and which qualified for input taxed treatment, the decision in Toyama Pty Ltd v Landmark Building Developments Pty Ltdā?? has added to the confusion. And the ATO is choosing to ignore it. Paul Ellis

State of confusion

In Marana Holdings, the Full Federal Court held that a motel which was sold as a residential development was not a 'residential premises' within the definition of that term in section 195-1 of the GST Act because:

  • as it was originally a motel, it had never been occupied as a 'residential premises'; and
  • it had neither been intended to be, nor was it capable of being, occupied as 'residential premises'.

The motel was therefore classified as 'new residential premises' and could not be input taxed. The case was determined by reference to whether the premises were capable of being used as a residence (rather than the owner's intention for the property to be a residence). The court found that the motel was not residential premises because it had to be modified before it could be used as a residence.

This finding was contrary to the generally accepted view of GST law. On 27 February 2006 the Assistant Treasurer announced that new laws would be introduced to ensure that the GST treatment of property would remain the same with the effect that: involving properties such as serviced apartments and strata units leased to hotel operators remain input taxed.

The new decision: Toyama

In Toyama, the Supreme Court of NSW referred to the decision in Marana Holdings and then went on to hold that the nature of the property was to be determined:

  • not according to the building's design and fit out, but
  • instead by having regard to the purchaser's subjective intention.
The Toyama facts

The dispute concerned the sale of land by trustees appointed to sell the land. There was a building on the land which was originally a residential dwelling — but had most recently been used as a veterinary clinic. The building was unoccupied at the time of the sale.

The land was sold as a development site and therefore was assumed by the trustees and the purchasers to be subject to GST. The property was sold with approval from the local council to develop 14 units and associated infrastructure. There was a dispute concerning rights to use the plans drawn up for the development. On that basis, the right to use the plans were not sold with the land.

One of the beneficiaries of the selling trust argued that the land was residential land and therefore was exempt from GST. This beneficiary alleged a breach of trust, claiming an additional one-eleventh of the property's sale price in damages.

The Toyama decision

The Court found no breach of trust. The purchaser did not intend to use the land as a residence. It only ever intended to develop the land. Therefore, whether the building on the land was capable of being occupied as a residence was irrelevant. On that basis, the land could not be residential premises and therefore could not be treated as being input taxed.

The ATO's view

On 15 August 2006 the ATO issued its view of the Toyama decision. The ATO stated that it does not accept the approach which requires the purchaser's subjective intention to be examined, particularly as this led to significant uncertainty on the part of vendors as to their GST liability. The ATO noted that as it had not been a party to the proceedings it was not bound by the court's decision, and that it would continue to administer the law in accordance with GSTR 2000/20 pending any further judicial clarification, which may occur by way of an ATO-funded test case.

Vendors and Developers need certainty

This case clearly highlights the type of dispute that can arise from uncertainty about how property is characterised. Property vendors need certainty to avoid disputes and the risk that they incorrectly characterise without taking into account GST.

May clarifying legislation arrive soon.


Lawyer in Profile

Paul Ellis
Paul Ellis
Special Counsel
+61 3 9258 3524

Qualifications: LLB, Deakin University, BA (Political Science), Monash University

Paul is a Special Counsel in Maddocks Government and Not-for-Profit Commercial team. He specialises in:

  • the establishment, governance, operations, regulation and administration of charities and other not-for-profit entities,
  • in commercial arrangements for the procurement or supply of goods and services, including technology services, and
  • in compliance and enforcement activities undertaken by government agencies.

Paul is Maddocks' main authority in relation to the Personal Property Securities Act 2009.

He has an in-depth understanding of the government sector, as his experience prior to Maddocks includes 13 years with the Victorian Department of Justice.

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