Cloud over GST payments on SMSF property

Self-managed superannuation funds (SMSF) that have recently sold or purchased property may have to examine whether they have to pay Goods and Services Tax (GST) after a recent Full Federal Court ruling put the practice under a cloud.

The court ruled in the case of MBI Properties Pty Limited v Commissioner of Taxation that on the transfer of a property to a new owner, the GST component of rental payments did not carry over to the new owner.

The court stated this was because the contractual agreement in which both rent and the GST component were set was taken out by the leasee and the initial owner acting as landlord, and did not extend to new owners during the course of the lease.

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DLA Piper partner Matthew Cridland said the case was relevant for any entity that is GST-registered and which leases commercial premises to tenants.

This could include SMSFs that own commercial premises which produce rent and outgoings in excess of $75,000 per annum, which is the compulsory GST registration threshold. He also stated the case was also relevant to listed and unlisted AREITs that own and lease any commercial premises.

According to Piper, the Federal Court found that an entity which purchases a tenanted property that is subject to an existing lease does not make any "supply" to tenants post-acquisition — meaning that no "increasing adjustment" arises under Division 135 of the GST Act as a result of such an acquisition.

He stated the decision means that purchasers were not liable for GST on any rental income received after the purchase from tenants under leases that were active at the time of the sale, since they were not making any supply of goods or services to tenants.

Cridland said while the Federal Court case dealt with a residential lease there were implications for purchasers of office, commercial, industrial and retail premises, including those held through SMSFs, which are subject to GST when leased.

"If the same logic is followed in the context of taxable leases, it arguably follows that there will be no GST payable by purchasers of a tenanted property, which would be an extraordinary outcome. This decision raises some difficult GST questions for both vendors and purchasers of tenanted properties, as well as for landlords and tenants," Cridland said.

"Vendors may now want an indemnity from purchasers for any ongoing GST liability that could arise in relation to a lease that continues after a property has been sold. Purchasers of tenanted properties may also need to consider whether they are liable for GST in relation to leases that were on foot at completion of a sale. This will be particularly relevant if tenants start to pressure landlords for GST refunds."

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