High Court to hear MBI Properties in the week commencing 9 September 2014

The Commissioner’s appeal of the Full Federal Court’s decision in Commissioner of Taxation v MBI Properties Pty Ltd [2013] FCAFC 112 is scheduled to be heard by the High Court in the week commencing Tuesday 9 September 2014. Also, the reply submissions filed by the Commissioner are now available and can be accessed here.

For completeness, the documents filed by the parties are as follows:

 

Taxpayer’s submissions in the MBI Properties appeal now available online

The taxpayer’s (respondent) written submissions to the High Court in the Commissioner’s 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 Commissioner’s submissions were filed in May and my post discussing those submissions can be accessed here.

In my post I observed that the principal issue identified by the Commissioner in his submissions brought into question the decision of the Full Federal Court in South Steyne Hotel Pty Ltd v Commissioner of Taxation [2009] FCAFC 155 and whether the purchaser of a reversionary estate in land leased to a sitting tenant makes a “supply” to the tenant after completion of the purchase.

The taxpayer’s submissions (at [3]) contend that the relevant statutory questions in the appeal are not properly reflected in the “principal issue” as stated by the Commissioner. Also, the taxpayer makes the following contentions (at [8]-[9]):

  • prior to the special leave application, the Commissioner had not at any point contended that MBI made a separate supply to Mirvac in the form of a separate supply of residential premises by way of lease.
  • before the primary judge and the Full Court the Commissioner submitted that South Steyne was correctly decided
  • the appeal is in substance an appeal from the decision of the Full Court in South Steyne

The taxpayer contends that the relevant statutory questions are as follows:

  • did MBI intend to make any “supply” as a consequence of acquiring the reversionary interest in the residential premises?
  • if so, was any such supply intended to be made “through the enterprise” that was the subject of the acquisition by MBI from South Steyne for the purposes of s 135-5?
  • if so, what was the character of any such supply? In particular, was it an input taxed supply of residential premises by way of lease within the meaning of s 40-35?
  • what was the “price” of any such supply for the purpose of applying the formula in s 135-5(2)?

The Commissioner’s reply is due on 20 June 2014.

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.

Commissioner issues Interim Decision Impact Statement for ATS Pacific; taxpayer applies for special leave

Today the Commissioner issued an Interim Decision Impact Statement for the decision of the Full Federal Court in ATS Pacific Pty Ltd v Commissioner of Taxation [2014] FCAFC 33. I also note that on 23 April 2014 the taxpayer lodged an application to the High Court for Special Leave against the decision.

The case involved the proper characterisation of the supply by Australian travel agents or tour operators to non-resident travel agents or tour operators in booking or arranging accommodation, goods and services for the customers of the non-resident travel agents or tour operators, namely the non-resident tourists. My analysis of the decision of the Full Federal Court can be accessed here. I published an analysis of the decision of the primary judge at the time of judgment and I have extended that analysis to include the appeal.

The Full Federal Court allowed the Commissioner’s cross-appeal against the finding of the primary judge that there were two supplies, the supply of a promise to ensure that the products would be supplied to the tourists (taxable) and the supply of arranging or booking services (GST-free), and found that the taxpayer made only one supply which was wholly taxable.

In the Decision Impact Statement the Commissioner notes that some taxpayer have lodged GST returns based on the primary judge’s decision (i.e., not paying GST on the margin) and confirms that he will only seek to recover under paid GST if, after finalisation of the High Court proceedings, the decision of the Full Court stands. The Commissioner does note that taxpayers have the option to self-revise their GST returns now and voluntarily paying GST, pending the High Court appeals – and if this is done, any GIC will be fully remitted.

The Commissioner also states that he will cease to consider taxpayers’ requests to exercise the discretion under s 105-65 of Schedule 1 to the TAA for refunds of GST paid in previous tax periods pending the outcome of the High Court appeal.

The issue of s 105-65 and refunds may also be relevant if a taxpayer elects to take up the Commissioner’s offer and amends their GST returns and voluntary pays GST. The Decision Impact Statement is unclear as to whether the Commissioner would seek to apply s 105-65 to restrict the refund of those voluntary payments if the High Court allows the taxpayers appeal.

Comments on the Interim Decision Impact Statement are due by 30 May 2014.

 

 

Commissioner issues draft Ruling on GST and motor vehicle incentives

Today the Commissioner published GSTR 2014/D1 ‘Goods and services tax: motor vehicle incentive payments’ which explains the Commissioner’s view on the GST consequences of incentive payments made by motor vehicle manufacturers, importers and distributors to motor vehicle dealers.

The stated purpose of the draft ruling is to provide practical guidance to the motor vehicle industry following the decision of the Full Federal Court in AP Group Limited v Federal Commissioner of Taxation (2013) 214 FCR 301; [2013] FCAFC 105. The Commissioner acknowledges that as a result of the decision, the previous ATO view concerning the GST consequences of motor vehicle incentive payments can no longer be maintained.

The Commissioner also recognises (at paragraph 18) that determining the GST consequences of motor vehicle incentive payments is more complex following AP Group than it was under the previous ATO view, and that the Commissioner is committed to assisting the industry to implement the AP Group decision in the most practical way possible.

The draft ruling is extensive, running to some 259 paragraphs. I hope to provide my analysis of the draft ruling soon.

Full Federal Court hands down decision in ATS Pacific appeal

Yesterday the Full Federal Court handed down its decision in ATS Pacific Pty Ltd v Commissioner of Taxation [2014] FCAFC 33. The Court dismissed the taxpayer’s appeal and allowed the Commissioner’s cross-appeal.

Justice Edmonds (who delivered the lead judgment – Pagone and Davies JJ agreed with his Honour) observed that the case involved the proper characterisation of the supply by Australian travel agents or tour operators to non-resident travel agents or tour operators in booking or arranging accommodation, goods and services for the customers of the non-resident travel agents or tour operators, namely the non-resent tourists. His Honour also noted that this issue had previous come before the Federal Court in Saga Holidays Ltd v Commissioner of Taxation [2005] FCA 1892; (2005) 149 FCR 41 (Conti J); on appeal Saga Holidays Ltd v Commissioner of Taxation [2006] FCAFC 191; (2006) 156 FCR 256 and observed that:

The advent of these two cases so early in the life of the GST says something about the difficulty of drafting legislation to give effect to the policy design of the GST, in the factual context of the way in which tours to Australia are packaged and sold to non-resident tourists, where the policy design is, undeniably, that “[g]oods and services consumed by tourists in Australia, such as meals and hotel accommodation are subject to GST under the general rules” (Explanatory Memorandum, A New Tax System (Goods and Services Tax) Bill 1998 (Cth) at 12).

Critically, the Full Federal Court rejected the appellant’s contention that the characterisation of the supply was to be determined having regard to the terms of the contract and considered that, at the end of the day, the determination of the characterisation of the supply in a case such as the present was a matter of practical or business reality. This approach can be compared with the recent decision of the UK Supreme Court earlier this month in Revenue & Customs v Secret Hotels2 Ltd [2014] UKSC 16 (considered in an earlier post) where the Supreme Court appeared to rely more heavily on contract law principles to characterise the supply made under similar circumstances.

My analysis of the decision can be accessed here. I published an analysis of the decision of the primary judge at the time of judgment and I have extended that analysis to include the appeal.

Commissioner publishes Decision Impact Statement for AP Group

Today the Commissioner published his Decision Impact Statement for the decision of the Full Federal Court in AP Group v Commissioner of Taxation [2013] FCAFC 105 which considered the GST treatment of various incentive payments made by motor vehicle manufacturers to dealers. The Full Federal Court heard an appeal by the taxpayer and a cross appeal by the Commissioner against the decision of the Tribunal in AP Group Limited and Commissioner of Taxation [2012] AATA 617 (decision on principles [2012] AATA 409).

The majority of the Full Federal Court (Edmonds and Jagot JJ) dismissed both appeals on the basis that they did not raise an error of law because the Tribunal properly applied the statutory test in s 9-5. Bromberg J dismissed the taxpayer’s appeal for the same reason, but dismissed the Commissioner’s cross-appeal for different reasons. The Full Court made detailed obiter statements and it is clear that the Court agreed with the Tribunal’s decision and would have confirmed those decisions if the appeals had raised an error of law.

The Decision Impact Statements states that the Commissioner is giving further consideration to what impact the decision has on his existing public views on “supply” and “consideration”. The preliminary views of the Commissioner are as follows:

  • The Commissioner’s existing views on nexus to the effect that there must be a “sufficient” connection are not inconsistent with the Court’s observations on the term “for” in the phrase “supply for consideration”.
  • Caution is required when determining whether the one set of actions give rise to more than one supply, but that does not necessarily require a change to GSTR 2006/9.

The Commissioner also notes as follows with respect to incentive payments:

  • He is giving further consideration as to how the decision applies to other types of motor vehicle incentive payments
  • He considers that the decision supports the view in GSTD 2005/4 that wholesale motor vehicle holdback payments are not consideration for supplies. However, the decision raises doubt as to whether retail holdback payments should continue to be treated as ‘out of scope’. On balance, the Commissioner considers that they remain out of scope.

My analysis of the decision of the Full Court can be accessed here.

Full Federal Court decision in AP Group appeal – case analysis now available

As noted in my post last night, the Full Federal Court has handed down its decision in AP Group v Commissioner of Taxation [2013] FCAFC 105. The decision is still not available on Austlii, but my analysis of this important decision can be accessed here.

While the Court dismissed both appeals on the basis that no error of law of the Tribunal was identified, the judgment provides a detailed analysis of the construction of the phrase “supply for consideration” in s 9-5(a) of the GST Act and the interaction between sections 9-5, 9-10 and 9-15 of the GST Act. As noted in my earlier post, the Court considered that s 9-5(a) requires two elements to be satisfied, namely that:

  • the consideration must be “in connection with” the supply; and
  • the supply must be “for” the consideration.

The Court rejected the Commissioner’s contention that only first element needed to be satisfied. Accordingly, the Court appeared to support a narrower view of the requisite “nexus” between supply and consideration, so as to found a taxable supply.

News Flash! – Full Federal Court hands down decision in AP Group – appeals dismissed

Today the Full Federal Court handed down its decision in AP Group v Commissioner of Taxation [2013] FCAFC 105. This case involved an appeal by the taxpayer and a cross appeal by the Commissioner against the decision of the Tribunal in AP Group Limited and Commissioner of Taxation [2012] AATA 617 (decision on principles [2012] AATA 409).

In an ironic twist, given the  anticipation that this decision would provide clear guidance as to the interaction between sections 9-5, 9-10 and 9-15 of the GST Act and the relevant “nexus” between supply and consideration, the majority of the Full Federal Court (Edmonds and Jagot JJ) dismissed both appeals on the basis that they did not raise an error of law because the Tribunal properly applied the statutory test in s 9-5. Bromberg J dismissed the taxpayer’s appeal for the same reason, but dismissed the Commissioner’s cross-appeal for different reasons.

Nevertheless, the Court made detailed obiter statements and it is quite clear that the Court agreed with the Tribunal’s decision and would have confirmed those decisions if the appeals had raised an error of law.

It is noteworthy that the Court rejected the Commissioner’s contention that the word “for” in the phrase “supply for consideration” in s 9-5(a) had no work to do when you considered the definitions of “supply” and “consideration”. The Court observed as follows (emphasis added):

The consideration must be “in connection with” the supply but the supply must also be “for” the consideration….It ensures that not every connection between the giving of consideration and the provision satisfy the first condition of making taxable supply. If it were otherwise, any form of connection of any character between the making of a supply and the payment of consideration would suffice.

This view appears to represent a fundamental shift away from the Commissioner’s view on the construction of  s 9-5(a) and how that section interacts with ss 9-10 and 9-15.

While not binding on future Courts and Tribunals (and indeed taxpayers and the Commissioner), these statements will likely be very persuasive going forward. It will be interesting to see whether one or both parties seeks to take the matter further and seek special leave to appeal to the High Court.

Commissioner publishes ATO ID on the supply of leased commercial premises part way through a tax period

On Friday the Commissioner published ATO ID 2013/30 “GST and the sale of commercial premises that are subject to a lease’. The Commissioner takes the view that the vendor of leased commercial premises is liable for GST on the entire prepaid rent it receives for the month when the supply occurs part-way through that month. Interestingly, the Commissioner takes this view notwithstanding that the rent is adjusted at settlement.

In the facts considered, the vendor receives pre-paid rent of $110,000 for a month and the sale takes place half-way through the month. The terms of the contract provide for the entire amount of the rent to be retained by the vendor, but under the contract the entity is obliged to allow for an adjustment to the purchase price at settlement to take into account the rent referable to that part of the month after settlement. Accordingly, at settlement the price is adjusted by $55,000.

The Commissioner notes that paragraph 7 of GSTD 2012/2 states that “the vendor of the commercial premises is not liable for GST relating to the lease where it is no longer in receipt or entitled to rent or other consideration for the lease following the sale of the reversion”. Similarly, paragraphs 9-11 of the determination are to the effect that the purchaser is liable for GST in respect of the lease to the extent that rent or other consideration is paid to it in connection with the lease.

The Commissioner takes the view that the vendor was entitled to receive all the monthly rent “and the contract contemplated that the entity would retain the entire amount of rent paid” for the month. Further, notwithstanding the rent is adjusted, the purchaser does not receive and is not entitled to receive any of the rent for the month. The Commissioner views this adjustment as a reduction to the consideration paid by the purchaser for the supply of the premises.

While I can understand the reasoning of the Commissioner, it does appear artificial to take the view that “the contract contemplated that the entity would retain the entire amount of rent paid” where half of the rent is to be adjusted on settlement. In reality, there would appear to be little difference between a contract which expressly states that the vendor will only be entitled to retain so much of the monthly rental that relates to the period before settlement and a clause that requires the rental to be adjusted at settlement.