No GST following purchase of leased apartments
The Full Federal Court has overturned an earlier decision and unanimously held that a taxpayer, who had purchased three residential apartments that were subject to leases, did not have an increasing adjustment within the meaning of Div 135 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) as there was no continuing supply in terms of s 135-5(1).
Background
The Full Federal Court noted that the relevant factual context in which the issue on appeal arose had already been covered by the Court in South Steyne Hotel Pty Limited v FCT (2009) 74 ATR 41. Broadly, the taxpayer had purchased three apartments in a hotel complex from South Steyne, which were subject to leases that had been granted to a hotel management company (MML) that was obliged to essentially operate a serviced apartment business. The taxpayer had also elected to participate in a "management rights scheme", which mirrored the scheme provided for under the lease agreements.
At first instance, in MBI Properties Pty Ltd v FCT [2013] FCA 56, the Federal Court held that the taxpayer had an "increasing adjustment" in the amount of $215,000, which represented 10% of the total purchase price for the three apartments it purchased from South Steyne in October 2007. In doing so, the Court affirmed the Commissioner's assessment of a net amount within the meaning of the GST Act for the quarterly period 1 October 2007 to 31 December 2007 ("the relevant quarter").
The Full Federal Court noted that the primary judge had concluded (at [38]) that:
"Having regard to all these matters, I consider that the requirements of [s 135-5(1)(b)] are satisfied in circumstances where there is a supply that is treated as a continuing supply (namely the supply of the residential premises by lease) which continues to be made through the enterprise constituted by the serviced apartment business after its supply as a going concern. Moreover, for reasons given above in [35], I find that MBI as recipient of the going concern intended that that be the case.” [Full Federal Court's emphasis.]
It was common ground, before both the primary judge and the Full Federal Court, that the taxpayer was the recipient of a supply of a going concern, such as to satisfy the requirements of s 135-5(1)(a). The dispute between the parties concerned the proper construction of s 135-5(1)(b) and its application to the facts of the case.
Decision
The Full Court said that, on appeal, the taxpayer had identified, as the principal error in the primary judge's decision, his Honour's conclusion that South Steyne was "treated" by the GST Act as continuing to make input taxed supplies to MML after it had ceased to have any interest in the units.
The Full Court rejected the Commissioner's proposition that "if there is a continuing lease, there must be a continuing supply". In response to this submission, the Court said 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".
The Full Court then went on and said that "[i]f the 'supply' constituted by the grant of the lease did not survive the grant, it certainly did not survive the sale of the reversion from South Steyne to MBI. The idea that South Steyne continued to supply the lease to MML following the sale of the reversion to MBI is self-evidently flawed".
The Full Court noted that the Commissioner sought to gain support for his proposition from comments made by the Full Federal Court in Westley Nominees Pty Ltd v Coles Supermarket Australia Pty Ltd (2006) 62 ATR 682 at paras [20] and [21]:
[20] It was put to senior counsel for the appellants that it would be an odd result if a "supply" by way of lease of real property were to come to an end when the owner of the property and grantor of the lease sold the reversion to a third party purchaser so that, while the third party purchaser of the reversion and the lessee would remain bound in terms of the lease and entitled to enjoy the respective benefits therefrom, there would no longer be a "supply" upon which a liability to GST could be founded. Surely, that could not have been the intention of parliament. Senior counsel's response was that it is not an odd result. First, it is entirely revenue neutral; no GST is payable, but then nobody gets an input tax credit. Secondly, this is new legislation and gaps like this are to be expected; if parliament intends that the purchaser of a reversion is to be regarded as continuing to make the supply which its predecessor in title contracted to make, then it would be easy enough to enact a deeming provision. As indicated below, we take the view that the existing legislation discloses such an intention.
[21] With respect, the revenue neutrality argument does not neutralise the oddness of the result for which senior counsel for the appellants contended. At one moment GST would be payable in respect of what is an undoubted taxable supply and, at the next instant, GST would not be payable because the lessee is no longer paying rent to the grantor of the lease, but to the grantor's successor in title, the purchaser of the reversion. True, the lessee will not be entitled to an input tax credit, but that is consistent with the operation of the taxing regime if the rent is not consideration for a supply. The appellants' argument leads to a curious result because it entails that the lease of the real property to the lessee ceases to be a "supply", notwithstanding that the lease is still on foot and the lessee is paying rent, albeit to the purchaser of the reversion, in accordance with the lease. One could understand that result where the lessee purchases the reversion and there is a merger: the lease being absorbed into the reversion and destroyed. But that is not the case here.
However, the Full Court said Westley turned on the question of whether there was a "supply" by the taxpayer on which s 12 of the A New Tax System (Goods and Services Tax Transition) Act 1999 (Transition Act) operated, and the passages at [20] and [21] on which the Commissioner relied are to be understood in that statutory context. In said the "continued supply" by way of lease that resulted from the grant depended in that case on the treatment of the relevant supply as a progressive or periodical supply within s 12(3) of the Transition Act. Furthermore, it noted that Westley concerned "taxable supplies" and not, as in this case, an "input taxed supply".
In the Full Court's view, the primary judge erred in concluding that, following the sale of the reversion from South Steyne to the taxpayer, there was a continuing supply by South Steyne to MML. It said there was no continuing supply, merely a continuation of a lease, the subject of the supply made by South Steyne to MML by the grant. The Court noted that the Commissioner had not contended that there was any other supply and had conceded that in such circumstances, the appeal must be allowed.
Although not required to, the Full Court also responded to the taxpayer's submission that it was wrong for the primary judge to have concluded that the "supplies" to which s 135-5(1)(b) referred may be supplies made by a person other than the person to whom the section speaks. That is, the primary judge had held that the section may apply where a person who acquires an enterprise intends that some "third party" will make supplies through that enterprise. The Court agreed with the taxpayer's submission that the relevant "supplies" are those that the purchaser of the enterprise intends to make in carrying on that enterprise.
Accordingly, the orders of the primary judge were set side and the taxpayer's objection to the Commissioner's assessment of a net amount for the relevant quarter was allowed in full.
MBI Properties Pty Limited v FCT [2013] FCAFC 112, www.austlii.edu.au/au/cases/cth/FCAFC/2013/112.html.
