On 20 November 2009 the Full Federal Court of Australia handed down its decision in South Steyne Hotel P/L & Ors vs FC of T, covering questions about GST on supplies relating to serviced apartments.

The facts are important to the decision. The story starts with a purchase of the property by South Steyne in 2000, followed by the creation of separate strata lots in August 2006 in respect of each apartment unit, car park, management lot, offices and so on.

In September 2006 South Steyne granted 83 separate leases to Mirvac Management P/L for apartments, each of which obliged MM to carry on a serviced apartment business. On the same day, South Steyne transferred the management lot to Mirvac Hotels P/L and MH took control of the operation of the serviced apartment business pursuant to an agreement with MM, which gave MH the advantage of MM’s rights under the leases.

South Steyne then sold three apartments to a specific purchaser MBI, with the sales being subject to the leases to MM. The sales allowed the purchaser to participate in the management arrangement, which was the same as the arrangement under the MM leased.

Shortly before the last of the sales to MBI, an individual stayed in an apartment and used various services available to guests of the serviced apartments.

Because GST is a tax on supplies, the court needed to look at each category of supplies.

First, the grant of the individual apartment leases by South Steyne to MM was found to be, in each case, an input taxed supply because each single apartment could not constitute a hotel but was itself no more than a residential premise. The result was that South Steyne did not have to pay GST on the grant of the leases but it could not claim input credits for the costs of those grants.

The second supply considered was the sale of the three apartments by South Steyne to MBI, being sales subject to the leases previously granted to MM. The Full Federal Court held that this was a supply of a going concern and therefore GST free, as the parties had agreed in writing that the supply was of a going concern and the other requirements for going concern treatment were met.

The ATO then raised a question as to whether the continuation by the purchaser of the leases was, in itself, a taxable supply. The court said this was not taxable, since the purchaser acquired the freehold apartments subject in each case to the applicable lease.

There was no supply to the purchaser of the lease simply because it acquired an apartment with a lease in place.

The final GST question considered by the court was the provision of accommodation in one of the apartments to an individual for which a charge was made. In this case the question was whether the provision of accommodation by MH was as a principal or as agent for MM, and whether it was taxable or input taxed. The court held that the supply was by MH as it controlled the premises as part of its serviced apartment business, and that this was done as principal rather than as agent for the freehold owners. This was held to be a taxable supply. However this aspect very much turned on the wording of the agreement.

The Australian Tax Office has issued a statement saying that it will continue to treat purchasers of leased property as liable to GST in respect of the use of the premises after completion of the purchase and that it would be unreasonable to assume that that liability remained with the vendor. The ATO also took the view that if the premises were residential premises, the continuing supply would be input taxed (so that the current owner/purchaser would not be entitled to input tax credits on acquisitions relating to that supply – such as legal costs, insurance, cleaning, maintenance and commissions, even where the lease was granted by the previous owner). The ATO also thought that even where the sale to a purchaser was GST free as a going concern, the recipient would have an increasing adjustment for GST under Division 135, where the continuing lease is an input tax supply (as the ATO believes is the situation).

Readers may find the description of the apartments as residential premises puzzling.

However the relevant GST law defines “residential premises” as land or building that is occupied as a residence or for residential accommodation or intended to be occupied and is capable of being occupied as a residence or for residential accommodation (regardless of the term of the occupation or intended occupation). The court found that once one had to disregard the term (even short term), it was not difficult to find that the premises were occupied for residential accommodation. The court went on to find that each individual apartment was not “commercial residential premises” because a single apartment is not a hotel, motel, inn, hostel or boarding house, or similar to one.

The distinction between a serviced apartment, and residential premises, arises under laws apart from the GST laws, including for example in planning laws and instruments. In each case, the result will depend on the particular definition.

So, GST continues to be a mine field and it is best to presume that what looks like a hotel or serviced apartment operation, may not necessarily be one for GST purposes.


Selwyn Black
Parry Carroll Lawyers