MBI Properties update – Commissioner’s submissions now available online

The Commissioner’s written submissions to the High Court in his appeal of the Full Federal Court’s decision in Commissioner of Taxation v MBI Properties Pty Ltd [2013] FCAFC 112 are now available on the High Court website. They can be accessed here.

The critical issue in the appeal is clearly outlined at paragraph 2 of the Commissioner’s submissions as follows:

The principal issue in the appeal is whether the purchaser of the reversionary estate in land leased to a sitting tenant makes a “supply” (as defined in the A New Tax System (Goods and Services Tax) Act 1999 “the GST Act”) to the tenant during the currency of the lease after completion of the purchase.

The essence of the Commissioner’s submissions is that the performance of the landlord’s obligations under the lease by the purchaser of the reversionary interest in the land comprises a “supply” for the purposes of s 9-10 of the GST Act. Interestingly, this did not appear to be the principal issue before the Full Federal Court, but it is clearly what this appeal is now about. This brings into question the conflicting analysis of this very issue by the Full Federal Court in Westley Nominees Pty Ltd v Coles Supermarkets Australia Pty Ltd [2006] FCAFC 115 and South Steyne Hotel Pty Ltd v Commissioner of Taxation [2009] FCAFC 155.

In Westley Nominees, the Full Court found as follows (at [22]):

While the matter is not entirely free from doubt, we have concluded that when the appellants purchased the reversion they assumed the obligation of [the vendor] 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 9-19(2)(g). The fact that the obligation arises by operation of law does not, in our view, impede this conclusion; after all, the reference to ‘obligation’ in s 9-10(2)(g) must be a legal obligation, although not necessarily one sourced in contract.

In South Steyne, the judgments were as follows:

  • Finn J (at [2]): …the sales of three apartments to MBI Properties subject to their respective leases did not constitute a new or further supply. The covenants of the initial leases remained but the benefit of the respective tenants’ covenants and the burden of the landlord’s covenant “ran” with the reversion by virtue of real property legislation…and not by virtue of a distinct supply agreement or arrangement…
  • Emmett J (at [32]): There is a real question as to whether the Continuation Category involves any supply at all. Properties acquired from Sough Steyne the legal estate in respect of apartments in the Sebel Hotel, being the reversion of the leases in favour of Management. It is common ground that there was a supply on the grant of the leases. The better view is 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 by Division 156.
  • Edmonds J (at [76]): I have come to the view that when MBI purchased the reversionary interest in the three apartments there was no new supply by MBI to MML but merely a continuation of the first category of supply…

The taxpayer’s written submissions are due on 6 June 2014, and the Commissioner’s reply on 20 June 2014.

My analysis of the decision of the Full Court can be accessed here. The transcript of the hearing of the special leave application before the High Court can be accessed here.

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