The Full Federal Court has handed down its decision in South Steyne Hotel Pty Limited v Commissioner of Taxation [2009] FCAFC 155 which has serious implications for the treatment of supplies made by the purchaser of a reversionary interest in a leased property.
The case concerned the operation of the GST law in the context of four different supplies:
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the grant of leases over apartments within a serviced apartment complex;
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the sale of those apartments subject to those leases;
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the continuation of the leases over those apartments by the purchaser to the original lessee; and
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the supply of accommodation to an individual staying at the serviced apartment complex.
Many detailed articles will be written on this decision in coming months. However, the Court's approach to two of the issues above is of immediate relevance to the property market.
Firstly, the treatment of dealings with individual apartments within a serviced apartment complex has been clarified. Secondly, and more seriously, the treatment of supplies made by the purchaser of a reversionary interest in a leased property has yet again been thrown into confusion.
Individual apartments are "residential premises"
The first supply involved the grant of 83 leases over individual apartments by the owner of the hotel to a management entity. While in aggregate this involved a significant proportion of the hotel, it did not include the common areas or the management lots.
The Court expressly rejected an argument that aggregating all 83 leases together could change the character of the supply. Each individual supply must be construed separately. The character of each supply was that of an individual apartment and not something similar to a hotel or motel. As such, the supply effected by each of the leases was input taxed.
This is an important point. The result in this case is consistent with the views expressed at first instance and also consistent with the Commissioner's views in GSTR 2000/20, and should put to rest any doubts about the breadth of the concept of "residential premises". Following the 2006 amendments that expressly removed the "length of occupation" from any assessment of whether or not premises will be residential premises, the requirements for residential premises are minimal. As Justice Stone said at first instance, the amendments left as "necessary only the element of shelter and basic living facilities such as are provided by a bedroom and bathroom" . The fact that the premises may be located within a commercial residential complex is entirely irrelevant if the apartment is being sold or leased separate from the management lot and common areas.
No continuation supply
In this case, South Steyne originally granted a lease to Management and South Steyne subsequently sold the apartments subject to the lease to Properties. A key question therefore was the GST treatment of the supplies made by way of lease when the reversion (the interest in the property subject to the lease) is sold.
This is best considered using an example. A owns a commercial building and leases it to B. A then sells the building to C. The title C acquires will be subject to B's interest as lessee. B does not get a new set of rights from C, but continues to hold the rights that it acquired when A first granted the lease. On completion of the sale, C does not obtain a right to possession of the building (because that has already been granted to B by way of lease) but C becomes entitled to receive the rent paid by B.
From a GST perspective, the desired result is obvious. When B pays rent to A, it should be A that is liable to remit GST on any taxable supply being made. Following the sale of the building and when rent is paid to C, it should be C that is liable to remit GST on any taxable supply.
Whilst the desired result is obvious, the means by which that result is able to be achieved is more obscure. There are two important questions:
- is there a supply by C to B at all? and
- if there is a supply, can the character of C's supply to B be different to the character of the supply A made to B?
On these facts, the Full Court said that there would be no supply by Properties to Management (C to B in the above example).
No continuation supply?
The most surprising aspect of the Full Court's decision is the view that all three judges took about the supplies made by way of lease when the reversion (the interest in the property subject to the lease) is sold.
Justice Emmett concluded that "there was no further supply, merely by reason of the continuation of the leases after the sale of the reversion" and then said:
"Thus, there is no supply by Properties to Management. Rather, there was a supply by South Steyne to which the attribution rules apply."
Similarly, Justice Edmonds states:
"Its lease, originally granted by South Steyne, continued uninterrupted by the change in the owner of the reversionary interest. In other words, there is no third category of supply, merely a continuation of the first category of supply."
Thus, there was no supply made by the purchaser of the reversion to the continuing tenant – a conclusion that comes as something of a surprise, and that is wholly at odds with Justice Edmonds' own conclusions in a previous Full Court decision, Westley Nominees Pty Ltd v Coles Supermarkets Australia Pty Ltd (2006) 152 FCR 461
These statements indicate that there was no supply made by the purchaser of the apartments to the continuing lessee. In this case, the original supply by South Steyne was input taxed. As such, there was no need to consider the liability for GST on the supplies made under the lease.
Can Div 156 avoid anomalies?
But what would have happened if the supply under the South Steyne lease had been a taxable supply? Would the original owner have been liable for the GST, or the new owner?
It seems that Justices Emmett and Edmonds thought Division 156 of the GST Act would "prevent any unintended imbalance as between successive reversionary owners over the term of the lease".
Without going into the legislative detail of Div 156, it changes the way in which GST payable on a taxable supply is attributable to tax periods. It operates where a supply is made progressively or for a period and where the consideration for that supply is also to be provided over time. It does not, however, deem there to be a new supply.
If South Steyne's supply to Management had been a taxable supply, Div 156 would operate to make South Steyne liable to remit GST each time Management paid rent. This is consistent with the conclusions of Justices Emmett and Edmonds that Div 156 is an "attribution provision".
However, when South Steyne sold the reversionary interest to Properties, Justices Emmett and Edmonds concluded that there was no supply from Properties to Management. If there is no supply, there can be no taxable supply. Division 156 does not operate to make a new supply. Thus, no taxable supply could be made by Properties. In their view, the only entity making a supply of the apartments by way of lease was South Steyne.
The consequence of this approach is that the original owner South Steyne would have continued to be liable to remit GST on the taxable supply being made to the tenant Management even after the completion of the sale of the apartments to Properties, notwithstanding that the rent would have been payable by Management to Properties.
This would clearly by an anomalous result and clearly contrary to current practice.
Alternatively, it is possible that their Honours were contending for a result that is more consistent with common practice. This would require a rather unusual reading of section 156-5 – that it not only "attributes" the tax period to which GST is payable, but that is also capable of attributing GST payable to an entity other than the entity making the supply.
That section refers to "GST payable by you on a taxable supply that is made" [emphasis added]. The section does not state that the entity ("the you") for whom the GST is payable must be the entity that made the taxable supply. This is for very good reason. Many provisions of the GST law may make one entity liable for GST payable on a supply being made by another entity (agency rules, grouping rules etc).
However, it is possible that Justices Emmett and Edmonds read into the operation of section 156-5 the possibility that Properties could have been made to be liable for GST payable on the taxable supply made by South Steyne because, in accordance with section 156-22, the supply by way of lease is "treated as a supply … that is made on a progressive or periodic basis".
Thus, if South Steyne's supply had been a taxable supply, Properties would have been liable for GST payable on that taxable supply from the date of its purchase of the apartments.
While this would produce an outcome consistent with current practice and the desired outcome from an economic perspective, it requires a strained view of the operation of section 156-5 and runs counter to the approach taken to the interpretation of the GST law adopted by Justice Logan in Deputy Commissioner of Taxation v PM Developments Pty Ltd [2008] FCA 1886.
What now?
It is understood that the Commissioner is hurriedly preparing a Decision Impact Statement regarding how the law will be administered following this decision. However, whatever approach the Commissioner takes in that statement, it is likely that the uncertainty regarding the status of the purchaser of the reversion and liability for GST on supplies made by way of lease will only be resolved by a definitive statement from the High Court or by legislative amendment. Perhaps we will see one or other (or perhaps both) as a consequence of this decision.