A potential minefield of legal and tax complications has been avoided with a ruling by the High Court clarifying the GST duties of landlords vis-a-vis offloaded properties.

The Australian High Court has unanimously ruled that landlords will not be required to pay a goods and services tax (GST) on leases once properties are sold, clarifying the implications of a controversial decision that had previously been issued by the Full Federal Court.

The original decision by the Federal Court in Commissioner of Taxation v MBI Properties involved the payment of GST by MBI Property Pty Ltd, following its purchase of 3 apartments in the Sebel Manly Beach Hotel from South Steyne Hotel Pty Ltd., that had already been leased to Mirvac Management under separate lease agreements as part of a serviced apartment business.

The decision triggered widespread anxiety and concern in the property sector, as it implied that following the sale of properties landlords would still be liable for GST assessment on leases, even though they were no longer owners of the property or recipients of associated rent streams.

The implications of decision had the potential to create widespread conflict between landlords, tenants and the tax authorities as a result of the confused nature of the payment obligations it created.

Well aware of the implications of the Federal Court decision, both the Property Council of Australia and the Australian Taxation Office (ATO) worked together to head off the matter, by firstly confirming a freeze on the current law, as well as launching an appeal and cobbling together a contingency tax fix should the appeal fall through.

The appeal proved successful however, with the High Court confirming the generally held view that a lease involves a lessor making supplies at the time that a lease is entered and throughout the term of the lease.

The Property Council of Australia has hailed the High Court’s decision as a major win for the industry, and is currently working with the government to expedite the resolution of any residual issues.