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.
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:
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.
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 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:
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  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.
Leigh is a partner in the Maddocks Tax & Revenue team.
Leigh regularly provides advice on:
His advice covers both direct and indirect tax considerations.
Leigh advises Australian and multinational companies, high net worth individuals, accountants and financial advisers on all areas of taxation law.
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