Decision impact statement

South Steyne Hotel Pty Ltd & Ors v Commissioner of Taxation

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Court Citation(s):
[2009] FCAFC 155
2009 ATC 20-145
74 ATR 41
(2009) 180 FCR 409

Venue: Federal Court of Australia
Venue Reference No: NSD 97/2009
Judge Name: Finn, Emmett and Edmonds JJ
Judgment date: 20 November 2009
Appeals on foot:
No.

Impacted Advice

Relevant Rulings/Determinations:

• GSTR 2000/20
• GSTR 2008/1

Subject References:
Residential premises
Residential accommodation
Commercial residential premises
Supply by way of lease

Précis

Outlines the interim Tax Office response to this matter which concerned various GST issues arising out of a strata titled hotel development, in particular whether the purchaser of a reversionary interest makes a supply by way of lease to the tenant.

Decision Outcome

Partially adverse

Brief summary of facts

(a)

On 8 December 2000, the first applicant ("South Steyne") purchased the Sebel Complex;

(b)

On 10 August 2006, each apartment in the Sebel Complex was individually strata-titled;

(c)

On 29 September 2006, South Steyne:

(i)

sold the 'Management Lot' - which included the reception area, offices and car parking spaces - in the Sebel Complex to Mirvac Hotels Pty Ltd ("MHL"); and

(ii)

leased each of the 83 Apartments to Mirvac Management Pty Ltd ("MML") under individual lease agreements. Each lease obliged MML to operate a scheme whereby the apartment was, together with the other apartments, operated as part of a serviced apartment business;

(d)

From at least 29 September 2006, MHL had exclusive control of the operation of the serviced apartment business pursuant to an agreement with MML, which agreement also conferred upon MHL the benefit of MML's rights under the lease agreement;

(e)

Between 29 September 2006 and 31 October 2007, South Steyne sold 15 Apartments to various investors, including the second applicant ("MBI").

(f)

Each Apartment was sold subject to the applicable lease to MML.

(h)

The contracts of sale to MBI included the following clause:

47.6.6 if page 1 of the Contract says that the supply is GST-free because the sale is the supply of a going concern but the supply of the Property under the Apartment Lease is a supply of residential premises (but not commercial residential premises), and the premises are also to be used predominantly for residential accommodation (regardless of the term of occupation), then the sale of the Property is a taxable supply and the parties agree that the margin scheme applies or, if completion has already occurred, the margin scheme is taken to have applied. For the avoidance of doubt, the Vendor acknowledges that if the margin scheme applies to the sale of the Property, the price is inclusive of any GST.

(h)

Each contract for sale permitted the purchaser to participate in a 'Management Rights Scheme', which mirrored the scheme provided for under the lease agreements. Each purchaser elected to participate in the Scheme;

(i)

On 17-18 October 2007, Ms Emily Young, an employee of the third applicant, stayed at Apartment 403 and made use of various services available to guests of the Sebel Complex.

Issues decided by the court

At issue in the proceeding was the treatment of four categories of alleged supplies under the A New Tax System (Goods and Services Tax) Act 1999 ("GST Act"). Those 'supplies' are:

1.

The supply by way of lease from South Steyne of each hotel room to MML ("the first supply");

2.

The sale of hotel rooms to investors, including the sale of rooms 111, 304 and 604 by South Steyne to MBI ("the second supply");

3.

The continuation of the leases of hotel rooms 111, 304 and 604 by MBI which, as purchaser of those rooms, took title subject to the ongoing lease of those rooms to MML ("the third supply"); and

4.

The supply of accommodation in hotel room 403 to Emily Young as a guest ("the fourth supply").

The Commissioner submitted that the following GST treatment applied:

1.

The first supply - input taxed pursuant to s 40-35 as a supply by way of lease of residential premises to be used predominantly for residential accommodation and which were not commercial residential premises.

2.

The second supply - taxable supply, on the basis that clause 47.6.6 of the contract had the effect that the parties did not agree that the sale was a supply of a going concern.

3.

The third supply - input taxed pursuant to s 40-35 as a supply by way of lease of residential premises to be used predominantly for residential accommodation and which were not commercial residential premises.

4.

The fourth supply - taxable supply because the accommodation was supplied by an entity (MHL) which relevantly controlled the Sebel Complex.

The applicants' primary position was that none of the supplies is input taxed and that the second supply is GST-free. However, the applicants put two alternative propositions: (i) if the third supply is input taxed, then the second supply is also input taxed; (ii) if both the first and third supplies are input taxed, then the fourth supply is also input taxed. The applicants sought declarations reflecting these submissions.

Stone J at first instance accepted the Commissioner's submissions and dismissed the application.

On appeal by the taxpayer, the Full Court decided as follows:

1.

The first supply - input taxed (Finn, Emmett and Edmonds JJ).

2.

The second supply - GST-free (Finn and Emmett JJ, Edmonds J in dissent on this issue deciding that the sales of the units were taxable supplies.

3.

The third supply - there is no supply by MBI to the tenant.

4.

The fourth supply - taxable (Finn and Emmett JJ, Edmonds J in dissent on this issue deciding that the supply of accommodation to the guest was input taxed).

The Court therefore declared that the second supply was GST-free and otherwise dismissed the appeal.

Only Edmonds J considered the applicants' alternative submission that the sales of the apartments were input taxed under s 40-65(2)(b) on the basis that they were 'used for residential accommodation (regardless of the term of occupation) before 2 December 1998'. His Honour rejected that submission on the basis that the policy of the provision was to input tax supplies of residential premises where the use before 2 December 1998 is a use which, if the subject of a current supply, would be input taxed.

Tax Office view of Decision

In respect of the fourth supply, it is the Tax Office's view that the decision turned upon the conclusion of the Court that, having regard to the particular terms of the agreement, MHL made the supply to the guest as principal rather than as agent. The decision does not lay down any principles of law regarding the application of GST in agency situations and, in particular, does not result in an agent being liable for GST on supplies of its principal. Rather, the Court concluded in the particular circumstances MHL made the supply in its capacity as principal for MML.

The Court rulings in respect of the first and fourth supplies are consistent with the submissions made by the Commissioner, as is the conclusion of Edmonds J rejecting the applicants' alternative submission that the sales of the units were input taxed under s 40-65(2)(b).

The Commissioner's view in respect of the second supply, as submitted to the Court, was that, because on the Commissioner's submission both the first and third supplies were input taxed, clause 47.6.6 of the contract had the effect that the parties did not agree that the supply was a supply of a going concern.

The continuing lease issue

The Commissioner's submissions to the Full Court noted previous decisions of the Full Federal Court which recall that GST is a 'practical business tax' and that transactions are to be characterised according to their social and economic reality. Taking that approach, and noting that s 40-35 requires only a supply 'by way of lease' and not 'by way of grant of lease', the Commissioner submitted that where a freehold estate is purchased subject to a continuing lease, the new owner makes a supply by way of lease to the tenant.

The Court rejected that submission. Emmett J, with whom Finn J agreed, stated that:

'there was no further supply, merely by reason of the continuation of the leases after the sale of the reversion. Rather, the situation is provided for by Division 156.' (at [32])

His Honour then sets out the operation of aspects of Division 156, emphasising that it contains attribution rules, before reiterating that:

'there is no supply by [MBI - the new owner] to [MML - the continuing tenant]. Rather, there was a supply by South Steyne to which the attribution rules apply.' (at [34].

Finn J also states that the sale of the apartments subject to their respective leases 'did not constitute a new or further supply' and notes that the benefit and burden of the lease covenants ran with the reversion by virtue of real property legislation 'and not by virtue of a distinct supply agreement or arrangement' (see[2]).

Similarly, Edmonds J states at [76] that 'there was no new supply by MBI to MML but merely a continuation of the first category of supply'.

It might be thought to follow from these remarks that the original grantor of a lease of premises, rather than a new owner of the premises, remains liable for GST on a continuing lease of the premises, which is attributed in accordance with Division 156. In that regard, it is noted that s156-5 refers to the attribution of 'GST payable by you' and does not expressly impose liability for GST. It is also noted that, in accordance with s 156-25, Division 156 generally does not apply to taxpayers who account for GST on a cash basis; however, Division 29 operates in respect of leases with broadly the same effect for taxpayers that account for GST on a cash basis.

On the other hand, it would be extraordinarily anomalous if the GST Act had the effect that the original owner of premises remained liable for GST on the lease when a new owner has assumed the obligations under the lease and is in receipt of the rent. Likewise, it would be anomalous if, in respect of an input taxed supply of residential premises, the continuing supply ceased to be input taxed upon a change of ownership of the reversion. If such anomalous results were to follow, it is to be expected that the Court would have made some observations in that regard.

There is nothing in any of the judgements which directly suggests such anomalous outcomes were contemplated by the Court. On the contrary, Edmonds J, without dissent from Finn J or Emmett J, concludes that the attribution provisions of Division 156 'prevent any unintended imbalance between successive reversionary owners over the term of the lease' (see [76]).

The Full Federal Court in Westley Nominees Pty Ltd v Coles Supermarkets Australia Pty Ltd [2006] FCAFC 115 at [21] concluded that the purchaser of a reversion 'assumed the obligation of [the former owner] to honour the lease according to its terms and in that sense entered into an obligation to tolerate an act or situation and in consequence, made a 'supply' by virtue of s 9-10(2)(g)'.

Our preliminary view is that, considered together, the decisions in South Steyne and Westley Nominees lead to the conclusion that the provisions should be applied in the manner set out below.

Administrative Treatment

The five numbered paragraphs in this section are a public ruling for the purposes of s 105-60 of Schedule 1 to the Taxation Administration Act 1953.

Pending further consideration of the decision, the Tax Office will apply the GST Act in the following way in relation to leases:

1.

The purchaser of a reversion is liable for GST relating to the lease for the remaining period of the continuing lease to be attributed in accordance with the attribution rules. The former owner of the property that granted the lease is not liable for GST on the supply of the lease to the extent that the supply relates to the period of the lease occurring after completion of the sale of the reversion.

2.

There is some tension in the conclusion that the purchaser of a reversion does not make a new or further supply by way of lease, but that there is a continuing supply by way of lease, and the requirement for the supplier of a taxable supply to issue a tax invoice. Noting the conclusion in Westley Nominees that a reversionary owner makes a supply by way of entering into an obligation to honour the terms of the lease, the Tax Office will treat a document issued by the current owner of leased premises as a tax invoice if it otherwise qualifies as a tax invoice, including where the lease was granted by a previous owner.

3.

If the premises are residential premises, the continuing supply remains input taxed in accordance with s 40-35. Further, s 11-15(2)(a) denies input tax credits on acquisitions by the current owner that relate to the continuing supply by way of lease, including where the lease was granted by a previous owner. The Full Court's decision does not directly address this issue. Paragraph 11-15(2)(a) ordinarily applies only if the acquirer makes input taxed supplies. However, in the particular context of reversionary owners, where lease covenants run with the land and having regard to the evident policy in respect of leases of residential premises, the Tax Office view is that input tax credits are not available to lessors of residential premises to the extent that the continuing lease of the premises is an input taxed supply.

4.

The Tax Office will continue to administer the GST Act in relation to strata titled hotel developments in accordance with the principles set out in GSTR 2000/20. While the decision indicates that there is no new or further supply by way of lease by an investor who purchases a unit that is leased to an operator, it also indicates that there is a continuation of the original supply by way of lease upon the grant of the lease. The investor, even if registered, is not entitled to input tax credits on acquisition of the unit or associated acquisitions, such as legal services, insurance, cleaning, maintenance and commissions.

5.

If a supply of a reversion is GST-free, either because the parties agree that it is a supply of a going concern or because section 38-480 applies, the recipient of the supply has an increasing adjustment under Division 135, where the continuing lease of the premises is to any extent an input taxed supply.

Implications on current Public Rulings & Determinations

If the preliminary views above are confirmed, consideration will be given to revising GSTR 2008/1, paragraphs 102-106, to confirm that input tax credits are not available to a purchaser of a reversion to the extent that the lease of the premises is an input taxed supply. GSTR 2004/4, paragraph 35, will also be reviewed to ensure consistency with the Court's decision.

Implications on Law Administration Practice Statements

None identified.

Application for special leave to appeal to the High Court

The Commissioner did not seek special leave to appeal to the High Court in relation to the Full Court's decision on the second issue. The taxpayer's application for special leave to appeal was dismissed by the High Court on 23 April 2010.

Legislative References:

A New Tax System (Goods and Services Tax) Act 1999 (Cth)

Case References:
Carminco Gold and Resources Ltd v Findlay & Co Stockbrokers (Underwriters) Pty Ltd
[2007] FCAFC 194
(2007) 243 ALR 472

Denman College v Commissioners of Customs and Excise
[1998] v & DR 399
[1998] BVC 2259

International Harvester Co of Australia Pty Ltd v Carrigan's Hazeldene Pastoral Co
[1958] HCA 16
(1958) 100 CLR 644

Lilyvale Hotel Pty Ltd v Commissioner of Taxation
[2009] FCAFC 21
2009 ATC 20-094
175 FCR 491

Marana Holdings Pty Ltd v Commissioner of Taxation
[2004] FCAFC 307
(2004) 141 FCR 299
(2004) 2004 ATC 5068
(2004) 57 ATR 521

Owen v Elliott (Inspector of Taxes)
[1990] 1 Ch 786

Urdd Gobaith Cymru v Commissioner of Customs and Excise
[1997] v & DR 273

Westley Nominees Pty Ltd v Coles Supermarkets Australia Pty Ltd
[2005] FCA 839
2005 ATC 4484
60 ATR 52

Westley Nominees Pty Ltd v Coles Supermarkets Australia Pty Ltd
[2006] FCAFC 115
(2006) 152 FCR 461
2006 ATC 4363
(2006) 62 ATR 682