Introduction

The decision of the Federal Court in MBI Properties Pty Ltd v Commissioner of Taxation [2013] FCA 56 is related to the decision of the Federal Court in South Steyne Hotel Pty Ltd v Commissioner of Taxation [2009] FCA 13 (and on appeal [2009] FCAFC 155).

The facts can be summarised as follows:

• South Steyne purchased a hotel and pursuant to a strata plan the hotel was subdivided into 83 individual apartments and the management lot (comprising the reception area, offices and car parking spaces).
• South Steyne transferred the management lot to Mirvac Hotels and granted to Mirvac Management a 10 year lease in identical terms in respect of each of the 83 apartments. Under the lease Mirvac Management was obliged to operate a scheme whereby each apartment was, together with all other apartments, to be operated as part of a serviced apartment business.
• By three separate contracts South Steyne sold 3 of the 83 apartments to MBI (a related company of South Steyne). Each apartment was sold subject to the lease and was stated to be the sale of a going concern.  Each contract permitted MBI to participate in the serviced apartment business. MBI elected to participate.

In South Steyne the majority of the Full Federal Court made the following findings:

• the supply of the 83 individual apartment leases was the input taxed supply of residential premises, rather than the taxable supply of commercial residential premises.
• the sales of the 3 apartments to MBI were GST-free as the supply of a going concern
• MBI did not make any supply to Mirvac Management (whether under s 40-35 of the GST Act or otherwise) following its acquisition of the reversionary interests in each of the 3 apartments. Rather, the supply relating to the grant of the initial leases by South Steyne to Mirvac Management merely continued after MBI purchased the reversionary interest. Further, the GST treatment of the continuation of the initial lease was dealt with by Division 156 of the GST Act.
• The supply of a hotel room to a guest was a taxable supply of accommodation in commercial residential premises by Mirvac Hotels acting as principal and not as agent of Mirvac Management

In MBI the issue was whether MBI had an increasing adjustment pursuant to s 135 of the GST Act in respect of the 3 apartments it acquired as a going concern on the basis that it intended to make input taxed supplies of residential premises. The essential argument of MBI appears to have been as follows:

• s 135 is limited to where the acquirer of the enterprise intends to make input tax supplies under the enterprise acquired as a going concern; and
• given the finding of the Full Court in South Steyne that MBI did not make a supply to Mirvac Management when it purchased the reversionary interest in the 3 apartments, s 135 had no application.

No supply by MBI upon the purchase of the reversionary interests in the apartments

Under Division 156, the GST payable on a taxable supply that is made for a periodic or progressive basis and for consideration that is provided on a progressive or periodic basis is attributable, in accordance with s 29-5, as if each progressive or periodic component of the supply were a separate supply. S 156-22 makes it clear that these provisions apply to a supply or acquisition by way of lease. The Court observed that Division 156 applies only in respect to taxable supplies, and had no application to input taxed supplies.

The Court also observed that it was evident that the Full Court in South Steyne considered that Division 156 applied to the facts there and to the situation where there was seen to be merely a continuation of the initial supply under the lease from South Steyne to Mirvac Management when MBI purchased the reversionary interest in the 3 apartments. The Court noted that the Full Court made this finding notwithstanding that they also determined that the initial grant of the leases were not taxable supplies, but rather input taxed supplies. The Court saw this finding as “curious” given that Division 156 only applies to taxable supplies, but nevertheless considered that it was bound to follow the Full Court’s finding that the initial supply on the grant of the lease continued on MBI’s purchase of the reversion.

The Commissioner acknowledged that the Full Court’s observations on Division 156 created some difficulties, but contended that Division 156 had no application to this case.

The legislation and the arguments of the parties

S 135-5 provides as follows:

You have an increasing adjustment if:

(a) you are the recipient of a supply of a going concern, or a supply that is GST-free under section 38-480; and

(b) you intend that some or all of the supplies made through the enterprise to which the supply relates will be supplies that are neither taxable supplies nor GST-free supplies.

The contentions of MBI are outlined at [24], and the essential arguments appeared to be as follows:

• For the purposes of s 135-5 it should not be concluded that MBI intended to make supplies that were neither GST-free nor taxable through the enterprise acquired as a going concern because the section refers to the taxpayer’s intention in respect of its own activities and not the activities of another entity – this is supported by the reference in s 135-5(1)(b) to supplies that “will be” supplies that are neither taxable nor GST-free
• MBI had no intention of making supplies of any character through the enterprise acquired by it (being the 3 apartments with leases to Mirvac Management) – its mere toleration of those leases did not constitute the making of a new or fresh supply
• Division 156 has no application to s 135-5 – the Commissioner’s case effectively invites the Court to create a similar regime to that created by Division 156, but in respect of input taxed supplies.

The contentions of the Commissioner are outlined at [25], and the essential arguments appeared to be as follows:

• the intention in s 135-5(1)(b) is to be objectively determined and ascertained by reference to the nature of the enterprise to which the supply of the going concern relates and through which the supplies will be made
• if the character of an enterprise that is to be supplied as a going concern is such that input taxed supplies are made through it, the recipient of that enterprise as a going concern is objectively taken to have intended that input taxed supplies will be made through that enterprise because that is the character of the supplies which the enterprise makes
• there is no warrant to read into s 135-5(1)(b) a requirement that the relevant supplies have to be made only by MBI
• it is not determinative that South Steyne made no further supplies after it supplied the serviced apartment business to MBI because, by their very nature, input taxed supplies of residential premises by lease are continuous or progressive supplies – it is sufficient that the supply continues to be made “through the enterprise” after its supply as a going concern

Decision

The Court accepted the Commissioner’s submissions.

The Court found that s 135-5(1)(b) should not be construed so that it only applies to supplies made by the recipient and not a third party. This construction required the provision to be read as though it referred to “supplies made by you through the enterprise” – there was no basis to read those words into the provision. The Court acknowledged that practical difficulties may arise for recipients in ascertaining details to quantify the adjustment, but these theoretical practical difficulties did not provide a sufficient basis to read words into the paragraph which were simply not there.

The Court did not consider that the presence of the words “will be” in s 135-5(1)(b) advanced MBI’s case. All the paragraph required was that the recipient intend that some or all of the supplies made through the enterprise to which the supply of the going concern relates will be supplies that are neither taxable nor GST free supplies. Further, the words “will be” were sufficiently broad to cover the situation where supplies continue to be made through an enterprise, as in this case.

Finally, the Court accepted the Commissioner’s contention that the issue of MBI’s intention was to be determined objectively and by reference to the nature of the enterprise to which the supply of the going concern relates.

In the context of Division 156, the Court found that the non-application of Division 156 in the circumstances had no particular bearing on the determination of the relevant issues. The Court observed that the scheme of the GST Act is such that, in the case of an input taxed supply to which Division 135 applies, adjustments under that Division are to be calculated without reference to the attribution rules in Division 29 or the special rules in Division 156. The Court acknowledged that this meant that there was potential for “imbalance” to arise between successive reversionary interest owners over the term of the lease, but that practical possibility did not preclude acceptance of the Commissioner’s position. In this context, it appeared that the legislature was content to have the basis rules apply to leases other than those specifically covered by Division 156.

Concluding thoughts

A lesson in statutory construction

The case is an important example of statutory construction and of how difficult it is to convince a Court to effectively insert words into a statute that are not there.

The Court noted the observations of Stone J in Saga Holidays Ltd v Commissioner of Taxation (2006) 156 FCR 256 at[29] and [30] to the effect that, while it is appropriate to take into account that the GST Act imposes “a practical business tax” which provides relevant context under a purposive approach to interpretation, there is no special canon of construction that should be applied when interpreting the GST Act by reference to the phrase “a practical business tax”. The Court also referred to the recent decision of the High Court in Commissioner of Taxation v Consolidated Media Holdings [2012] HCA 55 at [39] where the High Court reiterated the fundamental proposition that the task of statutory construction must begin and end with a consideration of the text. At [39], the High Court stated as follows:

The statutory text must be considered in its context. That context includes legislative history and extrinsic materials. Understanding context has utility if, and in so far as, it assists in fixing the meaning of the statutory text. Legislative history and extrinsic materials cannot displace the meaning of a statutory text. Nor is their examination an end in itself.

The uncertain position of the acquirer of a reversionary interest in land

The decision does not resolve the vexed question of how the GST Act applies where an entity acquires the reversionary interest in land (ie, land which is the subject of a lease). It is clear that the Full Court in South Steyne found that the acquirer makes no fresh supply and that the supply made on the initial grant of the lease simply continues.

Section 156-5(1) provides as follows:

The GST payable by you on a taxable supply that is made:

(a) for a period or on a progressive basis; and

(b) for *consideration that is to be provided on a progressive or periodic basis;

is attributable, in accordance with section 29-5, as if each progressive or periodic component of the supply were a separate supply.

As appears to have been observed by the Court in MBI, where the supply of the lease was taxable, Division 156 may provide the solution as the GST treatment simply continues over the term of the lease. However, there are many unanswered questions, two of which are discussed below.

Issue 1  – What if the purchaser of the reversion is not registered for GST and not required to register?

The purchaser of the reversion makes no supply under the lease, but the effect of Division 156 appears to be that the taxable supply made on the grant of the lease continues upon the purchaser acquiring the reversion. Does Division 156 make the purchaser liable to pay GST on  the continued supply under the lease? Interestingly, s 156-5(1) simply refers to “the GST payable by you on a taxable supply that is made“. The section is not limited to taxable supplies “made by you“. It would seem a strange result if a purchaser of the reversion who is not registered for GST incurs an ongoing GST liability.

Further, if the purchaser was liable to pay GST, to whom would the lessee need to look to for a tax invoice – being a document which is to be provided by the supplier?

Issue 2 – What if a registered entity acquires the reversion from an unregistered entity?

If the lease was granted by an unregistered entity, GST would not be payable on the lease. If the reversion was purchased by a registered entity, the purchaser would not make a fresh supply and the supply under the initial lease would simply continue.  Division 156 would have no application because it only applies to taxable supplies. This appears to lead to the strange outcome that the purchaser has no liability to pay GST on rental received under the lease.