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New law to remove the suggestion from Marana Holdings case that the sale of some residential premises is not input taxed

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 Treasury

The 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 Act

The 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:

  • used as a residence; or
  • are intended to be, and are capable of being, used as a residence.

You will recall that the effect of a transaction being input taxed means:

  • that no GST is payable on the supply; and
  • there will be no entitlement to an input tax credit for anything acquired to make the supply.
An ATO ruling

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 facts

A 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 sale of the unit was an input taxed supply of 'residential premises'; rather than
  • a 'new residential premises' under section 40-65 of the GST Act.

The court denied the application. The partnership appealed the decision to the Full Court of the Federal Court.

The appeal court's decision

The Full Court of the Federal Court concluded that when the motel was sold, the premises:

  • had not been occupied as residential premises;
  • had not been intended to be occupied as a residential premises; and
  • were not capable of being occupied as a residential 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.


Lawyer in Profile

Jack Coventry
Jack Coventry
Senior Associate
+61 3 9258 3819

Qualifications: BA (Philosophy), Monash University, JD (Juris Doctor), University of Melbourne

Jack is a member of Maddocks Commercial team. He advises a range of corporate and private clients on:

  • M&A transactions,
  • corporate reorganisations, and
  • legal and tax structuring.

Jack acts for clients on both buy-side and sell-side and specialises in founder-owned businesses and Australian subsidiaries of multi-national companies. He works across a number of sectors including information technology, professional services, and property development and management including land lease.

Jack’s structuring work includes assisting multinationals to structure Australian operations, listed companies to achieve regulatory compliance / optimisation and providing general tax structuring. He has also represented clients in tax controversies including before the General Anti-Avoidance Review Panel (GAAR Panel) and the Federal Court of Australia.

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