Australia: GST & real property leases – implications of the MBI case

Tax Update (Australia)
Last Updated: 24 October 2013
Article by Matthew Cridland

The Full Federal Court recently handed down its decision in MBI Properties Pty Limited v Commissioner of Taxation [2013] FCAFC 112 ("MBI Case").

The decision supports the view that neither the vendor or purchaser of a tenanted property (a reversionary interest) makes a new or continuing supply to the tenant following the sale of the property. This may have significant GST implications in relation to both tenanted residential premises (the lease of which is input taxed) and tenanted commercial premises (the lease of which is generally a taxable supply and subject to GST).


The case was concerned with whether MBI Properties Pty Ltd ("MBI") had an "increasing adjustment" under Division 135 of the A New Tax System (Goods and Services Tax) Act 1999 ("GST Act"). The adjustment potentially arose as a consequence of MBI having purchased three tenanted residential apartments on a GST–free basis as the supply of a "going concern".

The Full Court unanimously found in favour of MBI and held that a Division 135 adjustment did not arise. This was on the basis that:

  1. neither MBI, nor the previous owner of the apartments, made any new or continuing supplies to the tenant following completion of the apartment sales; and
  2. Division 135 only applies to supplies that are intended to be made by MBI itself – the Division does not apply in relation to supplies are intended to be made by other parties (such as the previous owner of the apartments).

Justice Edmonds delivered the leading judgement, with which Farrell and Davies JJ agreed.

The decision has important implications regarding the interpretation and application of the provisions in Division 135 of the GST Act. However, in this publication we have focussed on the potential implications of this decision for parties engaged in real property leasing transactions.


The facts can be summarised as follows:

  • In August 2006, South Steyne Hotel Pty Ltd ("South Steyne") strata subdivided the Sebel Manly Beach Hotel, creating 83 separate apartment lots and one Management Lot.
  • South Steyne leased each of the 83 apartments to Mirvac Management Pty Ltd ("MML"), under 83 separate lease agreements. Each lease obliged MML to operate a scheme whereby all of the apartments were used together as part of a serviced apartment business.
  • Between September 2006 and October 2007, South Steyne sold 15 of the apartments to investors, including three which were sold to MBI. MBI paid a total price of $2.15 million for the three apartments.
  • Each of the investors that acquired the 15 apartments, including MBI, elected to participate in a "Management Rights Scheme", which mirrored the scheme provided for under the leases.
  • Following the earlier South Steyne Case (discussed below), the Commissioner issued MBI with a GST assessment for the 1 October 2007 to 31 December 2007 tax period ("Assessment"). The Assessment included an "increasing adjustment" of $215,000 (being 10% of the purchase price paid to acquire the three apartments).
  • MBI objected to the Assessment in March 2012. The Commissioner disallowed the objection in full in April 2012.
  • MBI applied to the Federal Court to appeal the Commissioner's objection decision. Justice Griffiths dismissed that application and found in favour of the Commissioner in February 2013.
  • MBI appealed Griffiths J's decision to the Full Federal Court. The Full Court unanimously found in favour of MBI. The Full Court ordered that both Griffiths J's appeal decision and the Commissioner's objection decision be set aside, and that MBI's original objection to the Assessment be allowed in full.


Several parties, including South Steyne and MBI, had applied to the Federal Court in January 2009 seeking declaratory orders regarding the GST treatment of the lease and sale transactions outlined in the Background section above (see South Steyne Hotel Pty Ltd v Federal Commissioner of Taxation (2009) 180 FCR 409) ("South Steyne Case"). The decisions of Stone J in the South Steyne Case were subsequently appealed to the Full Federal Court.

The GST treatment of the supplies was determined to be as follows:

  • Justice Stone held that the lease of each of the 83 apartments by South Steyne to MML was an input taxed supply of residential premises (rather than a taxable supply of "commercial residential premises"). This conclusion was unanimously upheld by the Full Court.
  • Justice Stone held that South Steyne's sale of the 15 apartments to investors were taxable supplies and subject to GST. The majority of the Full Court disagreed and held that the sales were GST–free as the supply of a going concern.
  • Justice Stone also held that MBI's supplies in respect of the leases to MML, as a consequence of MBI's purchase of the reversionary interest in the apartments, were input taxed supplies. The Full Court unanimously held that there was no supply by MBI to MML following the apartment sales.


Section 135–5(1) of the GST Act provides as follows:

"You have an increasing adjustment if:

  1. you are the recipient of a GST–free supply of a going concern, or supply that is GST–free under section 38–480; and
  2. you intend that some or all of the supplies made through the enterprise to which the supply relates will be supplies that are neither taxable supplies nor GST–free supplies."

The Commissioner was of the view that an increasing adjustment arose for MBI following its purchase of the apartments. This was on the basis that the apartments, which had been acquired GST-free as the supply of a going concern, were intended to be used to make input taxed supplies to MML.

Given the Full Federal Court had unanimously held in the South Steyne Case that MBI does not itself make any supplies to MML, it was necessary for the Commissioner to establish that:

  1. South Steyne (as the previous owner and grantor of the leases) was treated as continuing to make an input taxed supply to MML following the sale of the apartments; and
  2. for the purposes of section 135–5(1)(b) of the GST Act, a third party (such as South Steyne) could have the intention of making an input taxed supply through the acquired enterprise. That is, it is not necessary for the purchaser (ie MBI) to intend on making an input taxed supply.

The Commissioner was unsuccessful on both issues before the Full Federal Court.


Justice Edmonds addressed the nature of the supply that is made by a landlord at paragraph 24 of the judgment where he stated:

"... The lease is the subject of the supply, not the 'supply'; the 'supply' is the grant of the lease: see s 9–10(2)(d) of the GST Act. The act of grant does not continue for the term of the lease; the 'supply' is complete on the lease coming into existence. The 'supply' constituted by the grant of the lease did not continue beyond the grant; the fact that the lease continued was solely a function of the terms of the grant, not a continuing supply by the grantor."

His Honour further stated at paragraph 29 of the judgement:

"In my view, the primary judge erred in concluding that, following the sale of the reversion from South Steyne to MBI, there was a continuing supply by South Steyne to MML; there was no continuing supply, merely a continuation of the lease, the subject of the supply made by South Steyne to MML by the grant."

The Commissioner had argued that an earlier Full Federal Court decision, Westley Nominees Pty Ltd v Coles Supermarket Australia Pty Ltd (2006) 152 FCR 461 ("Westley Nominees Case"), supported his view that South Steyne's supplies in connection with the leases to MML continued following the sale of the reversions. This argument was rejected by both Edmonds and Davies JJ on the basis that the Westley Nominees Case concerned transitional provisions in the A New Tax System (Goods and Services Tax Transition) Act 1999, rather than the provisions of the GST Act.


Division 156 of the GST Act contains "special rules" which deal with the timing of GST payments for supplies that are made on a "periodic and progressive" basis. Where the rules apply, GST payments can be spread out to match each periodic or progressive component of the supply.

In relation to leases, section 156–22 states:

"For the purposes of this Division, a supply or acquisition by way of lease, hire or similar arrangement is to be treated as a supply or acquisition that is made on a progressive or periodic basis, for the period of the lease, hire or arrangement."

The effect of this section is that where GST is payable in respect of a taxable lease, the GST payments should be spread out to match each corresponding lease period, rather than all of the GST being payable upfront at the time that the lease is granted. For example, GST is payable on a monthly basis if the rent and outgoings are invoiced and payable monthly.

Because the above section only applies to taxable leases, and is not relevant for residential leases which are input taxed, the Commissioner was not able to rely on this section in the MBI Case to support the proposition that South Steyne made a continuing supply in respect of the leases to MML.

In any event, even if the relevant supplies had been taxable, it is arguable that Division 156 merely addresses GST timing issues, without going so far as to deem or treat a lease as being supplied on a periodic or progressive basis. This view may be supported by the opening words in section 156–22, which limit the operation of the section to the purposes of Division 156. If it was intended that section 156–22 should deem a lease to be treated as a periodic or progressive supply for all purposes of the GST Act (including for the purposes of the provisions dealing with "supply" concepts), such a limitation would not be necessary.


Generally speaking, the lease of commercial premises is a taxable supply and subject to GST (assuming the landlord is GST registered, or required to be GST registered).

The Commissioner's view as set out in a GST Determination, GSTD 2012/2, is that following the sale of tenanted commercial premises:

  1. the purchaser is liable for GST in respect of the continuing lease, with the timing of the GST payments to be determined in accordance with Division 156; and
  2. the vendor is no longer liable for GST in respect of the continuing lease, where the vendor is no longer entitled to the rent or other consideration payable under the lease.

It is clear from GSTD 2012/2 that the Commissioner is of the view that there is a "continuing supply of the leased commercial premises" following the sale of such premises. This view is supported by reference to the Full Federal Court decisions in both the Westley Nominees and South Steyne Cases.

However, as outlined above, Edmonds J is clear in his decision in the MBI Case that there is no "continuing supply" in relation to a lease. Rather, the "supply" is the grant of the lease which does not continue for the term of the lease. In contrast, Edmonds J considers the continuing lease to be the subject of the supply (refer extracted paragraph 24 above).

On the basis that there is no continuing supply, it is arguable that the Commissioner's views in GSTD 2012/2 is incorrect and the purchaser does not have any GST liability in respect of a continuing lease following the purchase of a reversionary interest in a tenanted commercial premises. As discussed above, section 156–22 may not assist the Commissioner in respect of this issue, given that the section arguably only addresses GST payment timing issues (and not "supply" issues more broadly).


It is presently unclear whether the Commissioner may apply to the High Court for special leave to appeal the decision in the MBI Case. The following comments assume that the decision is not appealed (or is not overturned on appeal).

Issues for vendors

It is unclear whether an entity that grants a lease will continue to be liable for GST in respect of that lease after the property has been sold. On the one hand, it is clear that the Full Court considers the grantor to be the only party that makes a taxable supply (being the grant) in respect of a lease. However, it would also seem to be the Full Court's view that the supply made by the grant "did not survive the sale of the reversion" (refer paragraph 25 of Edmond J's decision).

Some vendors may be concerned that they could potentially have an ongoing GST liability in respect of the grant of the lease for the whole lease period, even after a property has been sold. To address this risk, vendors may want to seek indemnities from purchasers. It should be noted that vendors may also have protection if they can demonstrate reliance on the Commissioner's views in GSTD 2012/2, which clearly state that a vendor is not liable for GST in respect of a lease following the sale of a reversion (where the vendor ceases to be entitled to rent or other consideration).

Issues for purchasers

Purchasers that acquire a tenanted commercial premises will need to consider whether they are liable for GST in respect of any leases (that were on foot at the time of sale) following completion of the sale. This will particularly be the case if tenants begin to demand refunds for GST amounts that may have been paid under a lease.

As a practical matter, a tenant will likely only seek a refund for GST amounts that have been paid under a lease if the tenant is not entitled to full input tax credits for its acquisition of the lease. This will generally only be the case for tenants are not GST registered, or for tenants that make input taxed supplies (such as banks or other financial institutions).

Purchasers may also need to consider whether they may be entitled to refunds of GST that they have remitted in prior tax periods in respect of continuing leases following the acquisition of a reversionary interest. There are time limits that apply to restrict such refunds. The provisions in section 105–65 in Schedule 1 of the Taxation Administration Act 1953 ("section 105–65") would also need to be considered. Those provisions provide the Commissioner with the discretion to not pay GST refunds in certain circumstances.


The following comments again assume that the decision in the MBI Case is not appealed (or is not overturned on appeal).

Issues for vendors

Vendors that are marketing new residential premises for sale to investors may want to consider whether such sales can be structured as GST–free going concern sales (if this will provide a pricing benefit to the vendor). This approach is likely only going to be of interest to sophisticated investors that understand the risks and who are purchasing one or more expensive properties.

Previously there has been little incentive to structure sales of residential premises as a going concern, given the likelihood that the purchaser would have a Division 135 increasing adjustment. While there has always been a stamp duty benefit, it is generally seen as immaterial and not worth the associated costs.

Issues for purchasers

Purchasers that have previously acquired a residential premises as a going concern, and then included a Division 135 adjustment in a subsequent GST return, may now be entitled to a refund in respect of that adjustment. There are time limits that can restrict entitlements to refunds (generally being a four year time limit). Affected purchasers should consider whether they may need to be taking any steps now to preserve their refund entitlements (subject to any appeals or legislative amendments following the MBI Case).

Purchasers that are contemplating acquiring a new residential premises as a going concern following the decision in the MBI Case should exercise caution until it is clear whether the decision will be appealed, or whether the Government may look to introduce amending legislation. It may be advisable for purchasers to base their purchasing decision on the assumption that a Division 135 adjustment will be payable if they proceed with a going concern purchase.


We would be pleased to assist if you have any queries regarding the GST issues discussed in this publication.

© DLA Piper

This publication is intended as a general overview and discussion of the subjects dealt with. It is not intended to be, and should not used as, a substitute for taking legal advice in any specific situation. DLA Piper Australia will accept no responsibility for any actions taken or not taken on the basis of this publication.

DLA Piper Australia is part of DLA Piper, a global law firm, operating through various separate and distinct legal entities. For further information, please refer to

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions