Today the High Court handed down its decision in Commissioner of Taxation v MBI Properties Pty Ltd [2014] HCA 49 where the Court unanimously allowed the appeal brought by the Commissioner.

The fundamental issue put by the Commissioner in the appeal is that the decision of the Full Federal Court in South Steyne that there is no supply by the purchaser of a reversion made to the tenant sitting at the time of purchase was wrong and that the Court below was wrong to follow it.

The High Court found that the Full Court in MBI Properties was wrong to reason that the only “relevant supply” was on the grant of the lease by the lessor to the lessee, and that the Full Court in South Steyne was wrong to conclude that MBI (as the purchaser of the reversionary interest) made no supply to the lessee.

The High Court observed that a transaction which involves a supplier entering into and performing an executory contract will in general involve the supplier making at least two supplies: a supply which occurs at the time of entering into the contract, in the form of both the creation of a contractual right to performance and the corresponding entering into of a contractual obligation to perform; and a supply which occurs at the time of contractual performance, even if contractual performance involves nothing more than the supplier observing a contractual obligation to refrain from taking some action or to tolerate some situation during a contractually defined period.

That observation applies to leases and there will in general be a supply which occurs at the time of entering into the lease. That supply will involve a grant within the scope of s 9-10(2)(d) combined (as contemplated by s 9-10(2)(h)) with the creation of contractual rights within the scope of s 9-10(2)(e) and with the entry into contractual obligations within the scope of s 9-10(2)(g). There will then be at least one further supply which occurs progressively throughout the term of the lease. That supply will occur by means of the lessor observing and continuing to observe the express or implied covenant of quiet enjoyment under the lease. The thing of value which the lessee thereby receives is continuing use and occupation of the leased premises.