One particular investment opportunity for property developers is to buy old hotels and refurbish the rooms. The rooms are then leased out as new “apartments” and it is the responsibility of the hotel operators to manage the apartments.
Investors who buy these types of apartments as a going concern should be aware of various GST pitfalls. These apartments may be subject to reversionary interests (e.g. the input taxed supply of a lease to the hotel operators).
In a recent court case, MBI Properties Pty Ltd v Commissioner of Taxation, an increasing adjustment of 10% of GST was made to the GST-free purchase price that the property developer had paid for when buying three serviced apartments as a going concern.
In brief, the Court held that such an increase was warranted because the serviced apartment business was making input taxed supplies (because the purchase included an assigned lease in favour of a hotel operator to manage the apartments). Therefore, MBI Properties was required to make a GST adjustment and pay the additional 10% of the purchase price.
If you are thinking of investing in the property industry or of buying a property as a going concern, it is important that you are aware of the GST and income tax issues that may affect your proposed transaction.
To avoid an increasing adjustment of GST when buying a property as a going concern, it is important to scrutinise the contract of sale to determine whether any input taxed supplies are included in the purchase.
If you have any questions relating to your GST or income tax obligations, please contact Murray Howlett of our Taxation Services Division on (07) 3023 1300.