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03 Dec 14 High Court upholds Commissioner's appeal - MBI Properties Pty Ltd

The High Court (French CJ, Hayne, Kiefel, Gageler and Keane JJ) has unanimously allowed an appeal from the decision of the Full Court of the Federal Court of Australia in MBI Properties Pty Limited v FCT [2013] FCAFC 112 (18 October 2013).

The High Court held that the assumption by the taxpayer ("the respondent") of a lessor's rights and obligations following its purchase of premises, subject to an existing lease, involved the making of supplies which were neither taxable supplies nor GST-free supplies. The making of those supplies subjected the respondent to assessment for GST under the increasing adjustment provision in s 135-5 of the GST Act.

The High Court summary of the decision states as follows.

"Section 135-5 of the GST Act sets out the circumstances in which the recipient of a supply of a going concern is subject to liability for GST under the "increasing adjustment" for which that section provides. That increasing adjustment applies where an entity is the recipient of a supply of a going concern and the entity intends that some or all of the supplies made through the enterprise to which the supply relates will be supplies that are input taxed supplies, and that are therefore neither taxable supplies nor GST-free supplies.

The respondent, MBI Properties Pty Ltd, acquired three apartments in a hotel complex each of which was subject to a lease between the vendor, South Steyne Hotel Pty Ltd ("South Steyne"), and the operator of the hotel, Mirvac Management Ltd ("MML"). The respondent, on acquiring the rights of the lessor, became the recipient of a supply of a going concern. The Commissioner assessed the respondent to GST on the basis of it having an increasing adjustment under s 135-5.

On disallowance of its objection to that decision, the respondent appealed to the Federal Court.

At first instance, the respondent's appeal was dismissed, with the primary judge accepting the Commissioner's argument that the continuation of the apartment leases resulted in a continuation of an input taxed supply of residential premises by way of lease from South Steyne to MML.

The Full Court allowed the respondent's appeal, holding that the only relevant supply occurred, and was completed, on the grant of the leases by South Steyne to MML and, therefore, there was no input taxed supply which the respondent could have intended would be made through the enterprise it acquired from South Steyne as a going concern.

Allowing the appeal, the High Court held that each apartment lease, as an executory contract, obliged the respondent to give MML use and occupation of the apartment throughout the term of the lease in consideration for the periodic payment of rent. The respondent's observance of this continuing obligation was properly characterised as an intended supply of residential premises by way of lease by the respondent to MML which was input taxed under s 40-35 of the GST Act. The Court also rejected the respondent's argument, raised by a notice of contention, that no increasing adjustment could be calculated in accordance with s 135-5 because the rent paid by MML was exclusively the price for the grant of the lease by South Steyne to MML and could not also be the price for the supply made by the respondent to MML. The respondent was therefore subject to assessment for GST under s 135-5 of the GST Act."

Specifically, the High Court said, at para 40 of its judgment:

"In the circumstances which gave rise to the present appeal, there was an input taxed supply of residential premises by way of lease which occurred at the time of the grant of each apartment lease by South Steyne to MML. There was then a further input taxed supply of residential premises by way of lease which occurred by means of South Steyne observing its express obligation under the lease to provide MML with use and occupation of the leased premises. MBI's assumption of that express obligation by operation of law on its purchase of the premises from South Steyne resulted in MBI becoming obliged to continue to make the same further input taxed supply of residential premises by way of lease to MML throughout the remaining term of the lease. MBI intended at the time of purchase to observe that ongoing obligation. MBI intended to do so through an enterprise which was the same enterprise as that in which South Steyne had previously engaged and which MBI, by purchasing the premises subject to the lease, had acquired from South Steyne as a going concern."

As a necessary consequence of its decision, the High Court over-ruled that part of the decision of the Full Federal Court in South Steyne Hotel Pty Limited v FCT [2009] FCAFC 155 in which the Full Court held that the "continuation of each apartment lease by operation of law...was insufficient to result in a supply by MBI to MML".

The Commissioner's appeal was allowed.

FCT v MBI Properties Pty Ltd [2014] HCA 49 (High Court; French CJ, Hayne, Kiefel, Gageler and Keane JJ; 3 December 2014).


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