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21 Oct 13 Taxpayer's appeal on GST increasing adjustment allowed - MBI Properties

The Full Court of the Federal Court (Edmonds, Farrell and Davies JJ) has allowed the taxpayer's appeal from the decision of Griffiths J in MBI Properties Pty Ltd v FCT [2013] FCA 56 and held that the taxpayer did not have an increasing adjustment in the amount of $215,000 (representing 10% of the total purchase price for three apartments it purchased from South Steyne Hotel Pty Limited ("South Steyne") in October 2007) within the meaning of Div 135 of the GST Act for the relevant quarter.
The taxpayer purchased 3 apartments that were subject to leases previously granted by South Steyne to Mirvac Management Pty Limited (Mirvac). Under the terms of the leases, Mirvac 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. In South Steyne Hotel Pty Ltd v FCT [2009] FCAFC 155, the Full Federal Court had held that the supplies of the leases by South Steyne were supplies of residential premises for residential accommodation and were thus input taxed. In contrast, the Full Federal Court held that no further or separate supplies were made by the taxpayer to Mirvac following its acquisition of the reversionary interests in the each of the 3 apartments.

It was common ground that the taxpayer was the recipient of a supply of a going concern, such as to satisfy the requirements of s 135-5(1)(a) of the GST Act. The dispute between the parties concerned the proper construction of s 135-5(1)(b) which provides as follows:

"(1) You have an increasing adjustment 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."

Griffiths J did not accept that s 135-5(1)(b) should be construed such that the reference "supplies made through the enterprise to which the supply relates" referred only to supplies made by the recipient and not a third party (that is, South Steyne on the grant of the lease to Mirvac). The taxpayer contended that the provision should be read as though it referred to "supplies made by you [in this case MBI]" through the enterprise. Griffiths J accepted the Commissioner’s contention that there is no basis for reading those words into the provision.

Further, Griffiths J did not consider that the taxpayer’s construction was advanced by the presence in s 135-5(1)(b) of the words "will be". Even if it were accepted that those terms indicate that the supplies to which the relevant intention relates are supplies made through the enterprise after the supply of the going concern, according to Griffiths J there was no warrant for construing the provisions as requiring that the supplies have to be made by the acquirer of the enterprise. Specifically, Griffiths J held that all s 135-5(1)(b) requires in the circumstances is that the taxpayer intend that the leases granted by South Steyne to Mirvac in relation to the three apartments (constituting the input taxed supplies of residential premises) would continue to be made through the enterprise of the serviced apartment business which the taxpayer acquired from South Steyne as a going concern.

On appeal, counsel for the Commissioner argued:

"The proposition, if one can boil it down as much as possible, is simply this: If there is a continuing lease, there must be a continuing supply."

Edmonds J, with whom the other judges agreed, said in response to this argument, at paras 24-25:

"With respect, the proposition is flawed. The lease is the subject of the supply, not the 'supply'; the 'supply' is the grant of the lease: see s 9-10(2)(d) of the GST Act. The act of grant does not continue for the term of the lease; the 'supply' is complete on the lease coming into existence. The 'supply' constituted by the grant of the lease did not continue beyond the grant; the fact that the lease continued was solely a function of the terms of the grant, not a continuing supply by the grantor...If the 'supply' constituted by the grant of the lease did not survive the grant, it certainly did not survive the sale of the reversion from South Steyne to MBI. The idea that South Steyne continued to supply the lease to [Mirvac] following the sale of the reversion to MBI is self-evidently flawed; as observed by counsel for MBI, following the sale of the reversion, South Steyne may go out of existence, be wound up or, in a case where the original lessor is a natural person, be dead, and yet on the Commissioner’s contention, accepted by the primary judge, the original lessor would be deemed or treated as continuing to make a supply."

Edmonds J distinguished what had been said by the Full Court in Westley Nominees Pty Ltd v Coles Supermarket Australia Pty Ltd [2006] FCAFC 115 in relation to the continuing liability to GST of a third party purchaser of a property the subject of a lease granted by the vendor of the property. As Davies J also noted, Westley concerned a taxable supply, whereas the supply of the lease by South Steyne to Mirvac was an input taxed supply.

Davies J said at para 50:

"As the Full Court in South Steyne held that the acquisition by MBI of the reversion did not constitute a new or further supply to MML, the only relevant 'supply' was the grant of lease by South Steyne to MML. That 'supply' by the grant of lease was complete on the lease coming into existence because it was an input taxed supply. Whilst there appears to be some tension between Westley and South Steyne as to whether there is a further 'supply by way of lease' by reason of the continuation of the leases after the sale of the reversion, that tension need not be resolved here. Either way, there was no continuing 'supply by way of lease' here, whether by grant or by the acquisition of the reversion, because Division 156 does not apply to an input taxed supply. As there was no continuing supply, the terms of s 135-5(1) of the GST Act are not met."

MBI Properties Pty Limited v FCT [2013] FCAFC 112 (Full Federal Court; Edmonds, Farrell and Davies JJ; 18 October 2013).

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