In MSAUS Pty Ltd as Trustee for the Melissa Trust and Commissioner of Taxation  AATA 1408 the Tribunal handed down yet another GST decision flowing out of the development of the Sebel Manly Beach Hotel by South Steyne Pty Ltd. The stream of litigation culminated in the High Court decision in Commissioner of Taxation v MBI Properties Pty Ltd  HCA 49, where the High Court found that the purchasers of apartments in the complex who acquired the apartments as GST-free going concerns were liable to an increasing adjustment under Division 135 of the GST Act.
The issue in this case was whether the supply was a GST-free supply of a going concern. The taxpayer contended that pursuant to the terms of the contract, the sale was not a GST-fee supply of a going concern but was a taxable supply for which the parties had agreed to apply the margin scheme. The Tribunal agreed.
The decision provides an interesting insight into the construction of contracts. The heart of the issue was not whether the sale could have been a sale of a going concern, but whether the parties had actually agreed that this would be the case.
To add further complexity to the case, the Tribunal observed that the taxpayers were effectively re-agitating questions dealt with by the Full Federal Court in South Steyne Hotel Pty Ltd v Federal Commissioner of Taxation (2009) 180 FCR 409 (South Steyne Hotel) and by the Tribunal in The Hotel Apartment Purchaser and Commissioner of Taxation  AATA 567 (The Hotel Apartment Purchaser) in relation to other purchasers in the same complex – the contractual provisions in those cases were effectively identical. The taxpayers contended that the earlier decisions were not determinative of the outcome because the High Court’s decision in MBI Properties changed the game, or because these taxpayers had addressed gaps that were identified in the arguments in the earlier cases.
At a superficial level, the taxpayers appeared to face a difficult task. The contract was a “tick the box” contract. Against the statement “GST: Taxable supply”, the parties checked the ‘No’ box. They also checked the ‘yes’ box indicating the purchase was “GST-free because the sale is the supply of a going concern under section 38-325”. Further, the parties checked the ‘No’ box alongside the statement “Margin scheme will be used in making the taxable supply”.
The Commissioner contended that these matters disposed of the issue – the parties had agreed in writing that the sale was GST-free as a going concern.
The taxpayer relied on the special conditions in the Contract. Clause 47.6.3 repeated and recorded the parties’ agreement “…that the sale of the Property comprises a supply of a going concern for the purposes of section 38-325 of the GST Act”. The Tribunal observed that this clause tended to reinforce the Commissioner’s argument. However, the taxpayer contended that clause 47.6.6 changed things. That clause read as follows:
47.6.6 if page 1 of the Contract says that the supply is GST-free because the sale is the supply of the going concern but the supply of the Property under the Apartment Lease is a supply of residential premises (but not commercial residential premises), and the premises are also to be used predominantly for residential accommodation (regardless of the term of the occupation), then the sale of the Property is a taxable supply and the parties agree that the margin scheme applies or, if completion has already occurred, the margin scheme is taken to have applied. For the avoidance of doubt, the Vendor acknowledges that if the margin scheme applies to the sale of the Property, the price is inclusive of any GST: MSAUS T-documents at T6-95.
The applicant led evidence from both parties as to the intention of this special condition. The Tribunal observed that a problem with this evidence was that the parol evidence rule makes clear that evidence of pre-contractual negotiations should not be used to inform the interpretation of the meaning of the contract. The Tribunal set aside that evidence and focused on the interpretation of the contract as it was drafted.
The Commissioner relied on the decision of the Full Federal Court in South Steyne Hotel. In that case, the Full Court considered identical provisions in a contract involving another purchaser in the same hotel complex. Emmett and Finn JJ concluded there was an agreement (effectively a complete agreement) in writing within the meaning of s 38-325. The plurality was not persuaded clause 47.6.6 effectively qualified the other provisions of the contract. The Tribunal noted that the plurality’s reasoning was subsequently adopted by the Tribunal in The Hotel Apartment Purchaser at - per DP Frost. Nevertheless, the taxpayer contended that the Tribunal was not obliged to follow the reasoning in South Steyne Hotel in light of the High Court’s conclusion in MBI Properties. The Tribunal agreed.
The taxpayer contended that the decision of the High Court in MBI Properties provided a belated explanation of the risk that the taxpayer sought to avoid by agreeing to a clause such as clause 47.6.6. The taxpayer acknowledged that there were shortcomings in the drafting of the clause, but said that the lawyers were trying to draft a clause that anticipated the risk of events that did not take final shape until the High Court made its decision in MBI Properties. The Tribunal was satisfied that the clause achieved this purpose – the clause as drafted was tolerably clear on its face and it provided for a contingency plan that was activated if something happened that triggered a liability to pay GST. In that event, the parties agreed the margin scheme would apply. Further, the the conditional agreement in clause 47.6.6 to apply the margin scheme was an agreement made on or before the making of the supply. The fact the contingency was not activated until a later event was beside the point: the clause embodying this aspect of the agreement was in place ‘on or before the making of the supply’ .
In conclusion, the Tribunal observed that the reasoning of the High Court in MBI Properties made the purpose of clause 47.6.6 apparent in hindsight. For all of its awkwardness of drafting, the clause turned out to be the produce of “prescient lawyering”.
The taxpayer also sought to rely on a Deed of Rectification entered into by the parties. The Tribunal did not need to address that issue.
We wait to see whether the Commissioner appeals to the Federal Court.