Marana and Toyama -- a solution at last

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

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State of uncertainty

The decisions in Marana Holdings[1] and Toyama[2] 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 Act[3] to remove the uncertainties created by the Marana decision. The legislation containing the changes[4] has now arrived. However, the issues do not seem to be any clearer than they were before.

The Government's concern

The 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 changes

The changes are to make it absolutely clear that a property constitutes a 'residential premises' if it is:

• occupied as residential premises or for residential accommodation; or
• intended to be occupied, and is capable of being occupied, as a residence for the purposes of residential accommodation,

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:

• short-term letting of strata titled units as service apartments by owners to guests,
• the leasing of strata titled units to hotel or similar operators, and
• the leasing of display homes and provision of certain short-term employee accommodation

The amendments will apply retrospectively from 1 July 2000.

Dangerous side-effects

On 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 arrangements

This will have two impacts on the investor:

1. GST Liability on purchase price Under section 135 of the GST Act if you intend to make an input taxed supply of something that you acquired as a 'going concern' you need to make an 'increasing adjustment' in relation to the supply. If an investor has acquired the apartment as a going concern, then they will now have a GST liability equal to 10% of the purchase price of the apartment as a result of the balancing adjustment requirement. In effect, the retrospective deeming of the supply of the strata unit to the operator will result in a GST liability to the investor. The investor would not have possibly foreseen this at the time they purchased the apartment; and
2. Input tax credits no longer claimable Any input tax credits that the investor would have been able to claim as a result of purchases of goods and services made for the purpose of the supply of the premises to the operator (such as tradesmen, fixtures and fittings, etc) will no longer be claimable. Those investors who have claimed input tax credits for such supplies of goods or services will have to make adjustments to their business activity statements and will likely have to repay the claimed amounts.

Transactions since 1 July 2000

Taxpayers 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 information

For more information you can:

• see the Tax Laws Amendment (2006 Measures No. 3) Act 2006; or
• contact Michelle Osler at Maddocks on 03 9288 0555.

[1] Marana Holdings Pty Ltd & Another v Commissioner of Taxation [2004] FCAC 307, 25 November 2004.
[2] Toyama Pty Ltd v Landmark Building Developments Pty Ltd [2006] NSWSC 83
[3] A New Tax System (Goods and Services Tax) Act 1999
[4] Tax Laws Amendment (2006 Measures No. 3) Act 2006