GST on Property Acquisition
With the recent developments in the Commissioner’s appeal to the High Court against MBI Properties Pty Limited (“MBI”), it is more important than ever to ensure that you Dot the I’s and Cross the T’s when acquiring property in Australia.
Generally, the acquisition of Commercial Property in Australia is subject to Goods & Services Tax (GST). A purchaser is required to pay GST on the purchase price of the property (which also increases the stamp duty payable) to the vendor and, subject to meeting certain conditions, can claim a credit on the next quarter Business Activity Statement (BAS).
An exception to the general rule detailed above is where a commercial property is sold subject to a lease (i.e. it is not sold as a vacant possession). Where a lease is in place, and subject to other conditions being met, the property can be sold as a “Going Concern”. Generally, under this scenario the acquisition of the property would be considered to be a “GST – Free supply” with no GST payable on the acquisition.
The issue that is currently being decided by the High Court is whether MBI is subject to an increasing adjustment post the acquisition of the property as the supplies were neither taxable supplies (i.e. subject to GST) or GST – Free supplies as defined by the GST Act.
MBI acquired three residential apartments that were the subject of a lease granted by the vendor to a third party manager. Given this, it was agreed between the purchaser and vendor that the transaction would be treated as a going concern.
Subsequent to the acquisition, the Commissioner issued MBI with an increasing adjustment assessment on the basis that the supplies being made by MBI post the acquisition of the residential apartments were input taxed and not taxable supplies or GST – Free supply as defined by the GST act.
So what does this mean when acquiring property in Australia for investment purposes? Along with all the other commercial, legal & environmental considerations when acquiring a property, you should consider what the intended use of the property will be post settlement. Where there is a change in the type of supply being made, there is a potential for an increasing adjustment to be imposed by the Commissioner.
It should further be noted, when an increasing adjustment event occurs, you will not be entitled to claim a credit on your next BAS for any increasing adjustments. This payment will form part of the cost of the property.
Should you have any questions related to the above or property acquisition in general, please contact your relevant ESV engagement partner on (02) 9283 1666.
Article by Emmanuel Camilleri