GST Act s135-5 - Commissioner v MBI Properties - High Court Grants Special Leave

Wednesday 16 April 2014 @ 11.40 a.m. | Taxation | Trade & Commerce

The High Court of Australia on Friday 11 April 2014 granted the Commissioner of Taxation's application for Special Leave to Appeal the decision of the Full Court of the Federal Court of Australia in MBI Properties Pty Limited v Commissioner of Taxation [2013] FCAFC 112 (see transcript, Commissioner of Taxation v MBI Properties Pty Ltd [2014] HCATrans 76 (11 April 2014)).

Background - Facts and Issues in Federal Court Case

MBI Properties Pty Ltd (MBI) had purchased three residential apartments in a complex known as the Sebel Manly Beach Hotel Complex from South Steyne Hotel Pty Ltd (South Steyne). Each of the three apartments was sold to MBI subject to a lease granted by South Steyne to Mirvac Management Pty Ltd (MML).

Each of the leases obliged MML to operate a scheme where each of the three apartments were operated as part of a serviced apartment business. Further each contract of sale permitted permitted MBI to elect to participate in a 'Management Rights Scheme' mirroring the scheme provided for under the lease agreements.

In earlier proceedings, the Full Federal Court had held that the supplies of three apartments to MML, subject to the respective leases granted by South Steyne, were GST-free supplies of going concerns under section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (No 55 of 1999) (Cth) (the GST Act) (see South Steyne Hotel Pty Ltd v Commissioner of Taxation [2009] FCAFC 155 (the South Steyne Case).

In the South Steyne Case, the Full Federal Court also unanimously concluded that upon purchase of the reversion in the three apartments, MBI did not make a supply to MML. Instead, the Full Federal Court concluded that there was a continuation of the existing leases granted by South Steyne after the sale of the reversion.

The main issue before the Full Federal Court was whether MBI was liable for an increasing adjustment under section 135-5 of the GST Act. The Full Federal Court unanimously allowed MBI's appeal from the primary judge's decision in MBI Properties Pty Ltd v Commissioner of Taxation [ 2013] FCA 56 and held that MBI was not liable for an increasing adjustment under Division 135 of the GST Act (see paras [30], [44] and [45] of that case).

The key matter for interpretation was whether, as required by paragraph 135-5(1)(b) of the GST Act, MBI intended that some or all of the supplies made through the enterprise that was the subject of the going concern would be supplies that are neither taxable supplies nor GST-free supplies.

The Full Federal Court concluded that paragraph 135-5(1)(b) of the GST Act was not satisfied because neither MBI, nor the previous owner of the apartments, made any new or continuing supply of residential premises to MML following the sale of the reversions to MBI. Therefore, there were no supplies made through the enterprise that MBI intended would be neither taxable nor GST-free.

Further, the Full Federal Court also expressed the view, contrary to that of the primary judge, that the reference to "supplies made through the enterprise" in paragraph 135-5(1)(b) of the GST Act is to supplies made by the acquirer of the enterprise and not supplies made by another entity (see para [42] of the case).

The Commissioner filed an application for special leave to appeal the Full Federal Court's decision to the High Court of Australia on 15 November 2013.

Commissioners case before the High Court

In his argument before the High Court counsel for the Commissioner of Taxation Mr A.H. Slater, QC (counsel for the Commisioner) argued the following in seeking Special Leave:

  • Counsel for the Commissioner asserted that the central question in the appeal was, whether the Full Court was correct to hold that for GST purposes that a purchaser of real property who receives rent from the sitting tenant makes no supply whatsoever to the tenant in return for the rent received.
  • Counsel for the Commissioner also argued that if the Full Court was right to hold as it did then the Federal Court's ". . . decision produces the curious result that a tenant carrying on business in a rented factory must go on paying to the purchaser of the freehold a rent calculated to recover the GST on the rent, but the purchaser is not liable to pay the GST and the tenant obtains no input tax credit in respect of the GST component of the rent". A result said by Counsel for the Commissioner to be "so remarkable and, with respect, so implausible that it suggests that there is an error in the Full Court’s reasoning".
  • Counsel for the Commissioner then argued that ". . . the error lies in the Full [Federal] Court’s reasoning that the only supply made between landlord and tenant is the creation of the leasehold estate," saying:
"Our argument is that by making the premises available to the tenant and observing the covenants in the lease after the acquisition, the new owner goes on making a supply – not the same supply as was made by the grant of the lease, but a supply which is sufficient to attract GST".

In response to these arguments the High Court  granted Special Leave to Appeal with the Court also noting the Commissioner’s undertaking to pay the costs of MBI, such costs  ".  .  .  to be funded from the Commissioner’s test case funding program".

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