Decision impact statement

Westley Nominees Pty Ltd v Coles Supermarkets Australia Pty Ltd

Court Citation(s):
[2006] FCAFC 115
2006 ATC 4363
62 ATR 682

Venue: Federal Court of Australia
Venue Reference No: VID 719 of 2005
Judge Name: Ryan, Heerey and Edmonds
Judgment date: 10 July 2006
Appeals on foot:
No

Impacted Advice

Relevant Rulings/Determinations:

• GSTR 2000/16

Subject References:
Goods and Services Tax
transitional legislation
existing agreements
lease
where landlord sells reversion
whether incoming landlord makes a supply to existing tenant
where tenant obliged under lease to pay rent and other amounts variously described for enjoyment of premises
whether other amounts part of consideration for the supply
whether separate supplies
where market rent review available only in respect of rent so-called
whether opportunity to conduct market rent review constituted opportunity to conduct general review of consideration for the supply
whether a review opportunity for the purposes of transitional provision
whether supply was GST-free

Brief summary of facts

1. Coles Supermarkets Australia Pty Ltd ("Coles") operated a supermarket as a tenant in a Queensland shopping centre owned by Westley Nominees Pty Ltd (Westley) and Paul J Spira (hereafter collectively referred to as "Westley"). Westley was not the original owner of the Centre, having bought the property from another entity in 1993. Coles' lease was already in effect when Westley bought the centre.

2. Under the lease agreement Coles paid to Westley the following amounts: a "base amount" of rent, the "annual percentage rent" calculated as a function of the supermarket's turnover, a contribution to the lessor's operating expenses, after-hours charges and a "promotion fund contribution". The base amount of rent for the supermarket was subject to review to the market rate on 4 March 2004 under the lease agreement. But the other amounts were not. For the 12 months before 4 March 2004 the various amounts represented approximately the following proportions of the total payments under the lease:

•

Base amount of rent: 51.94%

•

Annual percentage rent: 21.27%

•

Contribution to outgoings: 18.46%

•

After hours charges: 7.8%

•

Promotion fund contribution: 0.51%.

3. Coles and Westley were in dispute as to whether Westley's supply to Coles was GST-free under s 13 of the A New Tax System (Goods and Services Tax Transition) Act 1999 (Cth) (the "GST Transition Act"). Coles contended that the supply became taxable because a review opportunity arose in March 2004. Westley disagreed, and gave Coles a notice purportedly under section 15K of the GST Transition Act. Westley's purpose in doing so was in effect to pass on the GST liability for the supply to Coles under the process in Division 2 of Part 3 of the Act. But that process was only available for supplies that were GST-free under section 13 immediately before 1 July 2005.

4. Coles reacted by seeking a declaration from the Federal Court that, as a review opportunity arose in March 2004, the supply became taxable from that time and therefore the purported section15K notice was of no effect. At first instance the Court granted Coles the declaratory relief sought: Coles Supermarkets Australia Pty Ltd v Westley Nominees Pty Ltd [2005] FCA 839. The Commissioner was not a party to this proceeding.

5. Westley appealed to the Full Federal Court. On application, the Commissioner was joined as a party to the appeal.

Issues decided by the court:

1. Did Westley make a supply to Coles under the lease even though Westley did not originally grant the lease but merely acquired the reversionary interest in the property when it bought the centre?

2. If so, did Westley make a single supply of the supermarket premises so that all of Coles' payments under the lease were part of the consideration for that one supply?

3. Given that not all of the consideration was subject to a market review in March 2004, did a review opportunity nevertheless arise under paragraph 13(5)(b) of the GST Transition Act?

Answers:

1. Yes. The ordinary meaning of "supply" is arguably extended by pars (f) and (g), if not by pars (a) to (e), of subsection 9-10(2) of the A New Tax System (Goods and Services Tax) Act 1999 (the "GST Act") [16]. The legislation discloses an intention of Parliament that the purchaser of a reversion is to be regarded as continuing to make the supply which its predecessor in title contracted to make [20].

2. Yes. Amounts for the base amount of rent, annual percentage rent, operating expenses, after-hours charges and the promotion fund contribution are part of the consideration in money for the supply of the supermarket premises by Westley to Coles on its assumption of the former landlord's obligations under the original lease [61].

3. No. The Full Court found that no review opportunity arose because Westley did not have the opportunity to conduct a general review of the consideration for the supply [66]. Only the base amount of the rent for the supermarket was able to be reviewed on 4 March 2004. Had all of the components of the consideration other than a very small component such as the promotion fund contribution (0.51%) been able to be reviewed it would have been open to conclude that there was a review opportunity.

Implications of the decision

Issue 1

The Tax Office agrees with the Full Court's conclusion on issue 1. The conclusion accords with the general understanding of the design of the GST. The Court recognised that Parliament would be unlikely to have enacted a broad-based indirect tax that might apply to rent received by an original lessor but not to rent received by the original lessor's successor in title. Westley's argument may now be regarded as discredited. In that we perceive that most taxpayers would have already been complying with the GST law on the basis endorsed by the Court, the decision on issue 1 will not require changes to current practices.

We took the view that Westley made a supply within the very broad terms of subsection 9-10(1). Although concluding by way of obiter that the indications pointed away from a construction that the supply fell within subsection 9-10(1), it was unnecessary for the court to come to a concluded view on this. The court held that there was a supply within subsection 9-10(2). We expect that the Courts will consider these sub sections and other aspects of the interpretation of section 9-10 further in future cases.

Issue 2

The Tax Office agrees with the Full Court's conclusion on issue 2. The decision accords with the view taken in GSTD 2000/10 ("Goods and Services Tax: Are outgoings payable by a tenant under a commercial property lease part of the consideration for the supply of the premises?"). The Court noted at [59] that its conclusion is consistent with the approach of the English cases on composite and mixed supplies. The Tax Office's view on this question also draws on the English cases: see GSTR 2001/8 ("Goods and services tax: apportioning the consideration for a supply that includes taxable and non-taxable parts"). To that extent we take the decision to be support for the principles expressed in GSTR 2001/8. In view of the UK experience though, more difficult questions of composite versus mixed supplies can be expected to arise in future cases.

Issue 3

The Tax Office accepts the Full Court's decision on issue 3, though it was contrary to the Commissioner's submissions. The Commissioner took the view that it was enough if most, meaning more than 50%, of the consideration were subject to review.

The Full Court's decision was consistent with its decision in Commissioner of Taxation v DB Rreef Funds Management Limited [2006] FCAFC 89. GSTR 2000/16 ("Goods and Services Tax: transitional arrangements - GST-free supplies under existing agreements") has already been amended to reflect this decision and the related decision of the Court in DB Rreef.

Administrative Treatment

Issues 1 and 2 do not require any changes to current administrative practices. As mentioned in the Decision Impact Statement for DB Rreef, the Tax Office will consider taxpayers' circumstances in relation to the Full Court's decision on issue 3 on a case-by-case basis.

Implications for current Public Rulings & Determinations:

The Tax Office does not consider that any other Rulings or Determinations need to be revised following Westley v Coles.

Implications on Law Administration Practice Statements

None

Legislative References:
A New Tax System (Goods and Services Tax) Act 1999
section 9-5
section 9-10
section 9-20
section 156-22
section 195-1

A New Tax System (Goods and Services Tax Transition) Act 1999
section 6
section 12
section 13

Case References:
DB Rreef Funds Management Ltd v Commissioner of Taxation
(2005) 218 ALR 144
2005 ATC 4302
59 ATR 388

Case M58
(1990) 12 NZTC 2,333