Introduction

The decision of the Federal Court earlier this year in MBI Properties Pty Ltd v Commissioner of Taxation could be described as the “son of South Steyne”. Earlier this week the Tribunal handed down its decision in The Hotel Apartment Purchaser and Commissioner of Taxation [2013] AATA 567 which involves the same apartment complex  and a decision which could be described a the “grandson” of South Steyne.

The case involved the taxpayer’s liability to “increasing adjustments” under Division 135 of the GST Act with regards to the purchase of two apartments in the Sebel Manly Beach Complex. This was the same apartment complex at issue in South Steyne Hotel Pty Ltd v Commissioner of Taxation [2009] FCA 13 (the South Steyne case), South Steyne Hotel Pty Ltd v Federal Commissioner of Taxation [2009] FCAFC 155; 180 FCR 409 (the South Steyne appeal) (together, the South Steyne litigation) and, later, MBI Properties Pty Ltd v Commissioner of Taxation [2013] FCA 56 (the MBI case).

The purchase was treated as a going concern and the Commissioner claimed that the taxpayer had increasing adjustments because of continuing input taxed supplies made in relation to the apartments. A further issue was whether the Commissioner was too late in making the assessment. The Tribunal affirmed the Commissioner’s decision.

The Facts

The relevant facts are similar to those considered by the Federal Court in South Steyne and MBI:

• On 8 December 2000, South Steyne Hotel Pty Ltd (South Steyne) purchased the Sebel Manly Beach Hotel
• On 10 August 2006, each of the 83 individual apartments in the hotel, together with the “management lot” (consisting of the reception area, offices and car parking spaces), became separate lots of a strata plan (the Strata Plan)
• On 29 September 2006, South Steyne transferred to Mirvac Hotels Pty Ltd (Mirvac Hotels) the management lot of the Strata Plan. On the same day, South Steyne granted to Mirvac Management Pty Ltd (Mirvac Management) a separate lease in respect of each of the 83 apartment lots of the Strata Plan. Each lease was in identical terms. Under each 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
• Pursuant to a separate Serviced Apartment Management Agreement entered into by Mirvac Hotels and Mirvac Management on 11 January 2006, Mirvac Hotels assumed exclusive control of the operation of the serviced apartment business. Also pursuant to the terms of the agreement Mirvac Management conferred upon Mirvac Hotels the benefit of its rights under the leases entered into on 29 September 2006
• By Contract for the Sale of Land dated 1 September 2006, South Steyne sold one of the 83 apartments (the First Apartment) to the Applicant for $508,000. The First Apartment was sold subject to the applicable lease that had been granted to Mirvac Management. The contract of sale permitted the Applicant to participate in a “Management Rights Scheme” (the Scheme) which mirrored the scheme provided for under the leases granted to Mirvac Management
• A Product Disclosure Statement (PDS) dated 16 March 2006 – which marketed the Scheme under the heading “The Sebel Manly Beach” – identified the following characteristics of the Scheme:

(a) Owners of apartments that were the subject of a lease to Mirvac Management could elect to participate in the Scheme by allowing Mirvac Management to use the apartment for “letting purposes in a Serviced Apartment Business”;

(b) Owners who elected to participate in the Scheme would receive a “Fixed Owner’s Return Amount” for a period up to two years from 1 July 2006 until 30 June 2008, calculated by reference to a “percentage of the Purchase Price”

(c) After the Fixed Return Period owners would receive income from the “Gross Pooled Apartment Revenue generated by the Serviced Apartment Business”.

• The Applicant elected to participate in the Scheme
• By Contract for the Sale of Land dated 18 January 2008, South Steyne sold a second apartment (the Second Apartment) to the Applicant, also for $508,000. Like the First Apartment, the Second Apartment was sold subject to the applicable lease that had been granted to Mirvac Management. As with the First Apartment, the Applicant elected to participate in the Scheme.
• Each contract of sale provided that the parties agreed that the Property comprised a supply of a going concern for the purposes of s 38-325 of the GST Act

The issues in the proceeding

Was there an increasing adjustment?

Section 135-5 of the GST Act provides as follows:

(1) 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.

(2) The amount of the increasing adjustment is as follows:

where:

proportion of non-creditable use is the proportion of all the supplies made through the *enterprise that you intend will be supplies that are neither *taxable supplies nor *GST free supplies, expressed as a percentage worked out on the basis of the ^*prices of those supplies.
supply price means the ^*price of the supply in relation to which the increasing adjustment arises

A number of questions were identified by the Tribunal. The initial questions dealt with whether there was a going concern at all (if not, s 135-5 could not apply). Given the decision of the Federal Court in MBI Properties the Applicant conceded that if there was a supply of a going concern, there was an increasing adjustment

The going concern issue raised the following questions:

1. Was s 38-325(2)(b) satisfied – namely, did the supplier, South Steyne, carry on a relevant enterprise until the day of the supply of each of the apartments to the Applicant? If so, what was the nature of that enterprise?
2. Was s 38-325(2)(a) satisfied – namely, did South Steyne supply to the applicant all of the things necessary for the continued operation of the enterprise?
3. Was s 38-325(1)(c)  satisfied – namely, did the parties agree in writing that the supply was of a going concern

In respect of the first two questions, the Tribunal noted that it was not bound by the South Steyne decision as it was common ground in that case that the supply was of a going concern, the Court did not make a finding on that question.

The Tribunal found that the Commissioner’s contention that South Steyne was carrying on a “serviced apartment business” difficult to sustain because it seemed clear that any such business was being carried on by Mirvan Management or Mirvac Hotels. However, by identifying the “activities, or series of activities” being done by South Steyne, the Tribunal found that an enterprise was being carried on and that it was carried on until the day of the supply. The relevant enterprise was characterised as follows (at [44]-[45]):

Owning an apartment (as South Steyne did) and leasing it to a company (as South Steyne did) that was obliged to include the apartment in the operation of a serviced apartment business, in the expectation of a regular income flow, in respect of that apartment, from the lessee, are, in South Steyne’s circumstances, not only activities done in the form of a business, but also activities done on a regular or continuous basis in the form of a lease.

When South Steyne sold the First Apartment, and then again when it sold the Second Apartment, it supplied all the things necessary for the continued operation of each relevant enterprise. This is because, upon sale of each apartment, it was no longer possible for South Steyne to undertake the “continued operation” of the identified enterprise since all of the things necessary for that to happen had been disposed of. That is precisely the state of affairs contemplated by s 38-325(2)(a) and it is precisely the state of affairs achieved.

 In respect of the third question, the Tribunal found that the parties had agreed in writing that the sale was of a going concern and that later special conditions in the Contract seeking to make the agreement taxable did not override that agreement. In doing so, the Tribunal noted that the majority of the Full Federal Court in South Steyne had come to the same conclusion and also noted as follows (at [58]):

The fact is that the parties agreed in writing, in each case, that the supply was “a supply of a going concern for the purposes of section 38-325 of the GST Act”. If it was in fact a supply of a going concern (as I have found) under s 38-325(2), then it was GST-free under s 38-325(1). But what clause 47.6.6, in each case, purports to do is to turn a supply that is a GST-free supply into a taxable supply. The problem with that approach is that parties cannot, by agreement, make a supply a taxable supply (South Steyne appeal, at [49], per Emmett J). Nor, for that matter, can parties, by agreement, determine that a supply is GST-free. As Greenwood J said inAurora Developments at [5]:

Plainly enough, the parties to an agreement cannot, by agreement, determine that a particular supply is GST-free for the purposes of the GST Act. That is a conclusion which arises as a matter of law having regard to the factual foundation for the operation of the statutory integers properly construed.

Was the Commissioner out of time?

Section 105-50 of Schedule 1 to the TAA relevantly provides that “[a]ny unpaid net amount … ceases to be payable 4 years after it became payable by you” and subsection (3) provides that subsection (1) does not apply to any such amount if “within those 4 years the Commissioner has required payment of the amount … by giving a notice to you”.

On or about 15 February 2011 the Commissioner gave the Applicant a Notice to Repay with respect to the increasing adjustment for the December 2006 quarter. This was more than four years after the end of the tax period, but less than four years after the period in which any net amount was required to be paid by the applicant (being 28 February 2007).

The Commissioner submitted that , for the purposes of s 105-50 in Schedule 1 to the TAA, the net amount did not become “payable” until 28 February 2007, and so the Notice to Repay was given within the 4 year period.

The Applicant submitted that the net amount became “payable” on 31 December 2007 (albeit it did not become “due” until 28 February 2007). The Applicant relied on the following extract from the Commissioner’s practice statement PSLA 2012/2:

For GST purposes, a liability arises at the end of a tax period notwithstanding that payment of a net amount becomes due and payable at a later time (generally on the 21st day of the month following the end of a tax period).

The Tribunal observed that this statement appeared to support the Applicant’s position, but noted that the source of the proposition was not identified and also that s 7-15 (nor indeed any legislative provision) does not support the proposition.

In the end, the Tribunal appeared to take the pragmatic approach of equating the concepts of “payable” with “capable of being recovered” (at [74]):

It seems clear that the purpose of s 105-50 in Schedule 1 to the TAA is to give the Commissioner 4 years to recover unpaid net amounts. It is consistent with that purpose for the word “payable” to be given a meaning equivalent to “capable of being recovered” on the two occasions on which it is used in the section. The unpaid net amount for the December 2006 quarter was not capable of being recovered by the Commissioner until immediately after 28 February 2007, in accordance with the instruction in s 33-3 of the GST Act requiring that a taxpayer “must pay” the net amount on or before that date (and it follows that if the taxpayer did not do so, then the Commissioner was entitled to recover it).

Part IVC proceedings and partnerships

The Tribunal noted that the applicant, being a partnership, was an “entity” for the purposes of the GST law and that it was also entitled to object against an assessment of its net amount: s 105-40(1) in Schedule 1 to the TAA. However, the Tribunal found that the statutory fiction that turns the partnership into an “entity” ended there. The law did not take the next step of making the partnership a “person”, and it is only a “person” who may apply to the Tribunal for review of an objection decision: s 14ZZ of the TAA. As the application was made in the name of the husband and wife, the Tribunal was satisied that it had jurisdiction to review the objection decision.