South Steyne Decision Impact Statement released

Key point: Purchasers of reversionary interests will be liable for GST on the supplies made for the remaining period of the continuing lease. Even if the purchaser is not the supplier of those supplies, the Commissioner will treat tax invoices issued by the purchaser to the tenant as though those tax invoices were valid.

The decision of the Full Federal Court in South Steyne Hotel Pty Limited v Commissioner of Taxation [2009] FCAFC 155 created unprecedented confusion regarding which entity should be liable to remit GST payable on a taxable supply by way of lease granted by a previous owner of the leased property.

The Full Federal Court held that a purchaser of a property subject to an existing lease does not make a supply to the continuing lessee. If the purchaser is not making a supply it is not clear:

• how the purchaser would be liable to remit GST on the rent paid by the continuing lessee to the purchaser; or
• how the purchaser would be able to issue a tax invoice to the continuing lessee (as a tax invoice should only be issued by the entity making the taxable supply).

In a Decision Impact Statement (DIS) issued by the Commissioner of Taxation on 30 November 2009, the Commissioner stated that:

• it would be "extraordinarily anomalous" if it was the original grantor of the lease (and the vendor of the leased premises) remained liable for GST payable on the supplies made under the lease even though the leased premises had been sold to the purchaser;
• the Full Court did not contemplate such anomalous outcomes – rather, it appears that it considered that Division 156 (dealing with the attribution of GST payable on supplies made for a period) would prevent any "unintended imbalance".

As such, the Commissioner has stated that pending further consideration, the GST Act will be applied such that:

• it is the purchaser that is liable for GST payable on supplies made for the period of the lease after the date the purchaser acquires the reversionary interest;
• the Commissioner will treat a document issued by the owner of leased premises as a tax invoice (provided the document "otherwise qualifies as a tax invoice") even where the lease was granted by a previous owner of the premises;
• even though the purchaser may not be making a supply to the lessee under a continuing lease, where the supply of the lease by the vendor was an input taxed supply of residential premises, the purchaser will be denied input tax credits for acquisitions relating to the lease in the same way as if the purchaser was making an input taxed supply to the lessee.

These conclusions are consistent with what would have been the expected results before the South Steyne decision.

A twist in the tail?

However, there is a risk hidden in the logic that the Commissioner uses to justify his third point above. The Commissioner argues that a taxpayer can be denied input tax credits by section 11-15(2)(a) for acquisitions relating to the making of supplies that would be input taxed – even though those input taxed supplies may not be made "by the acquirer of the relevant acquisition".

This is inconsistent with the Commissioner's previous statements, including statements in GSTR 2008/1 – the Commissioner's public ruling on determining whether or not input tax credits are available for acquisitions. The approach taken by the Commissioner in that ruling is that section 11-15(2)(a) "requires some form of connection to the supplies that the entity makes, made or intends to make"[emphasis added]:

"If an entity does not make, has never made, and does not intend to make, supplies that would be input taxed, there is no need to consider whether paragraph 11-15(2)(a) applies."

It will be a dramatic shift if the Commissioner will now seek to deny taxpayers input tax credits because of a relationship to input taxed supplies being made by a completely different entity.

What next?

Industry groups are already calling for a legislative fix to this uncertainty.

The only decision against which the Commissioner could seek to appeal was the Full Federal Court's conclusion that the supply of the leased apartments qualified as a GST-free supply of a going concern. In the DIS, the Commissioner notes that it is unlikely that such leave will be sought.

It remains to be seen whether the taxpayer will seek leave to appeal to the High Court and whether or not the Commissioner would support such an appeal.