On Friday 11 April 2014 the High Court granted the Commissioner’s application for special leave to appeal the decision of the Full Federal Court in MBI Properties Pty Limited v Commissioner of Taxation  FCAFC 112. The transcript can be accessed here.
The Full Court allowed the taxpayer’s appeal against the decision of the Federal Court in MBI Properties Pty Ltd v Commissioner of Taxation  FCA 56.
The Full Court agreed with the taxpayer that it did not have an increasing adjustment pursuant to Division 135 of the GST Act where it acquired, as a going concern, residential premises which were leased. This was because the supply was made on the grant of the lease and that while the lease (being the subject of the supply) may have continued, the supply made on the grant did not. The Full Court also agreed that on its proper statutory construction, s 135-5(1)(b) only applied to supplies made by the acquirer of the enterprise. My analysis of the decision of the Full Court can be accessed here.
The opening paragraphs of the Commissioner’s submissions set out below helpfully outline his central argument in the application for special leave:
Your Honours, the central question in this appeal is whether the Full Court was correct to hold that for GST purposes 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. If the Full Court is right to so hold, the 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. That is a result so remarkable and, with respect, so implausible that it suggests that there is an error in the Full Court’s reasoning. In our submission, the error lies in the Full Court’s reasoning that the only supply made between landlord and tenant is the creation of the leasehold estate.
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.