South Steyne Hotel Pty Ltd & Ors v Commissioner of Taxation
Document type: Decision Impact Statement
Venue: Federal Court of Australia (NSD 97/2009)
Judgment date: 20 November 2009
Date published: 13 June 2012
Decision outcome: Partially adverse

Summary of decision:
Outlines the Tax Office response to this matter which concerned various GST issues arising out of a strata titled hotel development, in particular whether the purchaser of a reversionary interest makes a supply by way of lease to the tenant.

Overview of facts:
(a) On 8 December 2000, the first applicant ("South Steyne") purchased the Sebel Complex; (b) On 10 August 2006, each apartment in the Sebel Complex was individually strata-titled; (c) On 29 September 2006, South Steyne: (i) sold the 'Management Lot' - which included the reception area, offices and car parking spaces - in the Sebel Complex to Mirvac Hotels Pty Ltd ("MHL"); and (ii) leased each of the 83 Apartments to Mirvac Management Pty Ltd ("MML") under individual lease agreements. Each lease obliged MML to operate a scheme whereby the apartment was, together with the other apartments, operated as part of a serviced apartment business; (d) From at least 29 September 2006, MHL had exclusive control of the operation of the serviced apartment business pursuant to an agreement with MML, which agreement also conferred upon MHL the benefit of MML's rights under the lease agreement; (e) Between 29 September 2006 and 31 October 2007, South Steyne sold 15 Apartments to various investors, including the second applicant ("MBI"). (f) Each Apartment was sold subject to the applicable lease to MML. (h) The contracts of sale to MBI included the following clause: 47.6.6 if page 1 of the Contract says that the supply is GST-free because the sale is the supply of a going concern but the supply of the Property under the Apartment Lease is a supply of residential premises (but not commercial residential premises), and the premises are also to be used predominantly for residential accommodation (regardless of the term of occupation), then the sale of the Property is a taxable supply and the parties agree that the margin scheme applies or, if completion has already occurred, the margin scheme is taken to have applied. For the avoidance of doubt, the Vendor acknowledges that if the margin scheme applies to the sale of the Property, the price is inclusive of any GST. (h) Each contract for sale permitted the purchaser to participate in a 'Management Rights Scheme', which mirrored the scheme provided for under the lease agreements. Each purchaser elected to participate in the Scheme; (i) On 17-18 October 2007, Ms Emily Young, an employee of the third applicant, stayed at Apartment 403 and made use of various services available to guests of the Sebel Complex. | (a) On 8 December 2000, the first applicant ("South Steyne") purchased the Sebel Complex; (b) On 10 August 2006, each apartment in the Sebel Complex was individually strata-titled; (c) On 29 September 2006, South Steyne: (i) sold the 'Management Lot' - which included the reception area, offices and car parking spaces - in the Sebel Complex to Mirvac Hotels Pty Ltd ("MHL"); and (ii) leased each of the 83 Apartments to Mirvac Management Pty Ltd ("MML") under individual lease agreements. Each lease obliged MML to operate a scheme whereby the apartment was, together with the other apartments, operated as part of a serviced apartment business; (d) From at least 29 September 2006, MHL had exclusive control of the operation of the serviced apartment business pursuant to an agreement with MML, which agreement also conferred upon MHL the benefit of MML's rights under the lease agreement; (e) Between 29 September 2006 and 31 October 2007, South Steyne sold 15 Apartments to various investors, including the second applicant ("MBI"). (f) Each Apartment was sold subject to the applicable lease to MML. (h) The contracts of sale to MBI included the following clause: 47.6.6 if page 1 of the Contract says that the supply is GST-free because the sale is the supply of a going concern but the supply of the Property under the Apartment Lease is a supply of residential premises (but not commercial residential premises), and the premises are also to be used predominantly for residential accommodation (regardless of the term of occupation), then the sale of the Property is a taxable supply and the parties agree that the margin scheme applies or, if completion has already occurred, the margin scheme is taken to have applied. For the avoidance of doubt, the Vendor acknowledges that if the margin scheme applies to the sale of the Property, the price is inclusive of any GST. (h) Each contract for sale permitted the purchaser to participate in a 'Management Rights Scheme', which mirrored the scheme provided for under the lease agreements. Each purchaser elected to participate in the Scheme; (i) On 17-18 October 2007, Ms Emily Young, an employee of the third applicant, stayed at Apartment 403 and made use of various services available to guests of the Sebel Complex. | (i) sold the 'Management Lot' - which included the reception area, offices and car parking spaces - in the Sebel Complex to Mirvac Hotels Pty Ltd ("MHL"); and (ii) leased each of the 83 Apartments to Mirvac Management Pty Ltd ("MML") under individual lease agreements. Each lease obliged MML to operate a scheme whereby the apartment was, together with the other apartments, operated as part of a serviced apartment business; | Issues decided by the court | At issue in the proceeding was the treatment of four categories of alleged supplies under the A New Tax System (Goods and Services Tax) Act 1999 ("GST Act"). Those 'supplies' are: 1. The supply by way of lease from South Steyne of each hotel room to MML ("the first supply"); 2. The sale of hotel rooms to investors, including the sale of rooms 111, 304 and 604 by South Steyne to MBI ("the second supply"); 3. The continuation of the leases of hotel rooms 111, 304 and 604 by MBI which, as purchaser of those rooms, took title subject to the ongoing lease of those rooms to MML ("the third supply"); and 4. The supply of accommodation in hotel room 403 to Emily Young as a guest ("the fourth supply"). | 1. The supply by way of lease from South Steyne of each hotel room to MML ("the first supply"); 2. The sale of hotel rooms to investors, including the sale of rooms 111, 304 and 604 by South Steyne to MBI ("the second supply"); 3. The continuation of the leases of hotel rooms 111, 304 and 604 by MBI which, as purchaser of those rooms, took title subject to the ongoing lease of those rooms to MML ("the third supply"); and 4. The supply of accommodation in hotel room 403 to Emily Young as a guest ("the fourth supply"). | The Commissioner submitted that the following GST treatment applied: 1. The first supply - input taxed pursuant to s 40-35 as a supply by way of lease of residential premises to be used predominantly for residential accommodation and which were not commercial residential premises. 2. The second supply - taxable supply, on the basis that clause 47.6.6 of the contract had the effect that the parties did not agree that the sale was a supply of a going concern. 3. The third supply - input taxed pursuant to s 40-35 as a supply by way of lease of residential premises to be used predominantly for residential accommodation and which were not commercial residential premises. 4. The fourth supply - taxable supply because the accommodation was supplied by an entity (MHL) which relevantly controlled the Sebel Complex. | 1. The first supply - input taxed pursuant to s 40-35 as a supply by way of lease of residential premises to be used predominantly for residential accommodation and which were not commercial residential premises. 2. The second supply - taxable supply, on the basis that clause 47.6.6 of the contract had the effect that the parties did not agree that the sale was a supply of a going concern. 3. The third supply - input taxed pursuant to s 40-35 as a supply by way of lease of residential premises to be used predominantly for residential accommodation and which were not commercial residential premises. 4. The fourth supply - taxable supply because the accommodation was supplied by an entity (MHL) which relevantly controlled the Sebel Complex. | The applicants' primary position was that none of the supplies is input taxed and that the second supply is GST-free. However, the applicants put two alternative propositions: (i) if the third supply is input taxed, then the second supply is also input taxed; (ii) if both the first and third supplies are input taxed, then the fourth supply is also input taxed. The applicants sought declarations reflecting these submissions. | Stone J at first instance accepted the Commissioner's submissions and dismissed the application. | On appeal by the taxpayer, the Full Court decided as follows: 1. The first supply - input taxed (Finn, Emmett and Edmonds JJ). 2. The second supply - GST-free (Finn and Emmett JJ, Edmonds J in dissent on this issue deciding that the sales of the units were taxable supplies. 3. The third supply - there is no supply by MBI to the tenant. 4. The fourth supply - taxable (Finn and Emmett JJ, Edmonds J in dissent on this issue deciding that the supply of accommodation to the guest was input taxed). | 1. The first supply - input taxed (Finn, Emmett and Edmonds JJ). 2. The second supply - GST-free (Finn and Emmett JJ, Edmonds J in dissent on this issue deciding that the sales of the units were taxable supplies. 3. The third supply - there is no supply by MBI to the tenant. 4. The fourth supply - taxable (Finn and Emmett JJ, Edmonds J in dissent on this issue deciding that the supply of accommodation to the guest was input taxed). | The Court therefore declared that the second supply was GST-free and otherwise dismissed the appeal. | Only Edmonds J considered the applicants' alternative submission that the sales of the apartments were input taxed under s 40-65(2)(b) on the basis that they were 'used for residential accommodation (regardless of the term of occupation) before 2 December 1998'. His Honour rejected that submission on the basis that the policy of the provision was to input tax supplies of residential premises where the use before 2 December 1998 is a use which, if the subject of a current supply, would be input taxed.

Issues decided:
At issue in the proceeding was the treatment of four categories of alleged supplies under the A New Tax System (Goods and Services Tax) Act 1999 ("GST Act"). Those 'supplies' are: 1. The supply by way of lease from South Steyne of each hotel room to MML ("the first supply"); 2. The sale of hotel rooms to investors, including the sale of rooms 111, 304 and 604 by South Steyne to MBI ("the second supply"); 3. The continuation of the leases of hotel rooms 111, 304 and 604 by MBI which, as purchaser of those rooms, took title subject to the ongoing lease of those rooms to MML ("the third supply"); and 4. The supply of accommodation in hotel room 403 to Emily Young as a guest ("the fourth supply"). 1. The supply by way of lease from South Steyne of each hotel room to MML ("the first supply"); 2. The sale of hotel rooms to investors, including the sale of rooms 111, 304 and 604 by South Steyne to MBI ("the second supply"); 3. The continuation of the leases of hotel rooms 111, 304 and 604 by MBI which, as purchaser of those rooms, took title subject to the ongoing lease of those rooms to MML ("the third supply"); and 4. The supply of accommodation in hotel room 403 to Emily Young as a guest ("the fourth supply"). The Commissioner submitted that the following GST treatment applied: 1. The first supply - input taxed pursuant to s 40-35 as a supply by way of lease of residential premises to be used predominantly for residential accommodation and which were not commercial residential premises. 2. The second supply - taxable supply, on the basis that clause 47.6.6 of the contract had the effect that the parties did not agree that the sale was a supply of a going concern. 3. The third supply - input taxed pursuant to s 40-35 as a supply by way of lease of residential premises to be used predominantly for residential accommodation and which were not commercial residential premises. 4. The fourth supply - taxable supply because the accommodation was supplied by an entity (MHL) which relevantly controlled the Sebel Complex. 1. The first supply - input taxed pursuant to s 40-35 as a supply by way of lease of residential premises to be used predominantly for residential accommodation and which were not commercial residential premises. 2. The second supply - taxable supply, on the basis that clause 47.6.6 of the contract had the effect that the parties did not agree that the sale was a supply of a going concern. 3. The third supply - input taxed pursuant to s 40-35 as a supply by way of lease of residential premises to be used predominantly for residential accommodation and which were not commercial residential premises. 4. The fourth supply - taxable supply because the accommodation was supplied by an entity (MHL) which relevantly controlled the Sebel Complex. The applicants' primary position was that none of the supplies is input taxed and that the second supply is GST-free. However, the applicants put two alternative propositions: (i) if the third supply is input taxed, then the second supply is also input taxed; (ii) if both the first and third supplies are input taxed, then the fourth supply is also input taxed. The applicants sought declarations reflecting these submissions. Stone J at first instance accepted the Commissioner's submissions and dismissed the application. On appeal by the taxpayer, the Full Court decided as follows: 1. The first supply - input taxed (Finn, Emmett and Edmonds JJ). 2. The second supply - GST-free (Finn and Emmett JJ, Edmonds J in dissent on this issue deciding that the sales of the units were taxable supplies. 3. The third supply - there is no supply by MBI to the tenant. 4. The fourth supply - taxable (Finn and Emmett JJ, Edmonds J in dissent on this issue deciding that the supply of accommodation to the guest was input taxed). 1. The first supply - input taxed (Finn, Emmett and Edmonds JJ). 2. The second supply - GST-free (Finn and Emmett JJ, Edmonds J in dissent on this issue deciding that the sales of the units were taxable supplies. 3. The third supply - there is no supply by MBI to the tenant. 4. The fourth supply - taxable (Finn and Emmett JJ, Edmonds J in dissent on this issue deciding that the supply of accommodation to the guest was input taxed). The Court therefore declared that the second supply was GST-free and otherwise dismissed the appeal. Only Edmonds J considered the applicants' alternative submission that the sales of the apartments were input taxed under s 40-65(2)(b) on the basis that they were 'used for residential accommodation (regardless of the term of occupation) before 2 December 1998'. His Honour rejected that submission on the basis that the policy of the provision was to input tax supplies of residential premises where the use before 2 December 1998 is a use which, if the subject of a current supply, would be input taxed.

ATO view of decision:
In respect of the fourth supply, it is the Tax Office's view that the decision turned upon the conclusion of the Court that, having regard to the particular terms of the agreement, MHL made the supply to the guest as principal rather than as agent. The decision does not lay down any principles of law regarding the application of GST in agency situations and, in particular, does not result in an agent being liable for GST on supplies of its principal. Rather, the Court concluded in the particular circumstances MHL made the supply in its capacity as principal for MML. | The Court rulings in respect of the first and fourth supplies are consistent with the submissions made by the Commissioner, as is the conclusion of Edmonds J rejecting the applicants' alternative submission that the sales of the units were input taxed under s 40-65(2)(b). | The Commissioner's view in respect of the second supply, as submitted to the Court, was that, because on the Commissioner's submission both the first and third supplies were input taxed, clause 47.6.6 of the contract had the effect that the parties did not agree that the supply was a supply of a going concern. | The continuing lease issue | The Commissioner's submissions to the Full Court noted previous decisions of the Full Federal Court which recall that GST is a 'practical business tax' and that transactions are to be characterised according to their social and economic reality. Taking that approach, and noting that s 40-35 requires only a supply 'by way of lease' and not 'by way of grant of lease', the Commissioner submitted that where a freehold estate is purchased subject to a continuing lease, the new owner makes a supply by way of lease to the tenant. | The Court rejected that submission. Emmett J, with whom Finn J agreed, stated 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 for by Division 156.' (at [32]) | His Honour then sets out the operation of aspects of Division 156, emphasising that it contains attribution rules, before reiterating that: 'there is no supply by [MBI - the new owner] to [MML - the continuing tenant]. Rather, there was a supply by South Steyne to which the attribution rules apply.' (at [34]. | Finn J also states that the sale of the apartments subject to their respective leases 'did not constitute a new or further supply' and notes that the benefit and burden of the lease covenants ran with the reversion by virtue of real property legislation 'and not by virtue of a distinct supply agreement or arrangement' (see[2]). | Similarly, Edmonds J states at [76] that 'there was no new supply by MBI to MML but merely a continuation of the first category of supply'. | It might be thought to follow from these remarks that the original grantor of a lease of premises, rather than a new owner of the premises, remains liable for GST on a continuing lease of the premises, which is attributed in accordance with Division 156. In that regard, it is noted that s156-5 refers to the attribution of 'GST payable by you' and does not expressly impose liability for GST. It is also noted that, in accordance with s 156-25, Division 156 generally does not apply to taxpayers who account for GST on a cash basis; however, Division 29 operates in respect of leases with broadly the same effect for taxpayers that account for GST on a cash basis. | On the other hand, it would be extraordinarily anomalous if the GST Act had the effect that the original owner of premises remained liable for GST on the lease when a new owner has assumed the obligations under the lease and is in receipt of the rent. Likewise, it would be anomalous if, in respect of an input taxed supply of residential premises, the continuing supply ceased to be input taxed upon a change of ownership of the reversion. If such anomalous results were to follow, it is to be expected that the Court would have made some observations in that regard. | There is nothing in any of the judgements which directly suggests such anomalous outcomes were contemplated by the Court. On the contrary, Edmonds J, without dissent from Finn J or Emmett J, concludes that the attribution provisions of Division 156 'prevent any unintended imbalance between successive reversionary owners over the term of the lease' (see [76]). | The Full Federal Court in Westley Nominees Pty Ltd v Coles Supermarkets Australia Pty Ltd [2006] FCAFC 115 at [21] concluded that the purchaser of a reversion 'assumed the obligation of [the former owner] 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 9-10(2)(g)'. | Our preliminary view is that, considered together, the decisions in South Steyne and Westley Nominees lead to the conclusion that the provisions should be applied in the manner set out below.

Administrative treatment:
On 22 February 2012 two GST determinations were released that outline the Tax Office's view on certain GST consequences following the sale of residential or commercial premises that are subject to a lease. | For the GST consequences following the sale of residential premises subject to a lease, see GSTD 2012/1 Goods and services tax: What are the GST consequences following the sale of residential premises that are subject to a lease? | For the GST consequences following the sale of commercial premises subject to a lease, see GSTD 2012/2 Goods and services tax: What are the GST consequences following the sale of commercial premises that are subject to a lease? | GSTD 2012/2 confirms that following a sale of commercial premises that are subject to a lease, there is a continuing supply by the purchaser to the lessee. Where the other conditions of section 9-5 are satisfied this supply will be a taxable supply. In these circumstances, the Tax Office will treat a document issued by the current owner of leased premises as a tax invoice if it otherwise qualifies as a tax invoice, including where the lease was granted by a previous owner. | Implications on current Public Rulings & Determinations | Addendums have been published to amend GSTR 2004/4 and GSTR 2008/1 to reflect the Full Federal Court decision of South Steyne. | Further, as a result of the decision in South Steyne, GSTD 2012/1 was published to provide clarity on the GST treatment when residential premises are sold subject to an existing lease. | Also, GSTD 2012/2 was published to provide clarity on the GST treatment when commercial premises are sold subject to an existing lease.

Legislative references: A New Tax System (Goods and Services Tax) Act 1999 (Cth)
Case references: Carminco Gold and Resources Ltd v Findlay & Co Stockbrokers (Underwriters) Pty Ltd [2007] FCAFC 194 (2007) 243 ALR 472 Denman College v Commissioners of Customs and Excise [1998] v & DR 399 [1998] BVC 2259 International Harvester Co of Australia Pty Ltd v Carrigan's Hazeldene Pastoral Co [1958] HCA 16 (1958) 100 CLR 644 Lilyvale Hotel Pty Ltd v Commissioner of Taxation [2009] FCAFC 21 2009 ATC 20-094 175 FCR 491 Marana Holdings Pty Ltd v Commissioner of Taxation [2004] FCAFC 307 (2004) 141 FCR 299 (2004) 2004 ATC 5068 (2004) 57 ATR 521 Owen v Elliott (Inspector of Taxes) [1990] 1 Ch 786 Urdd Gobaith Cymru v Commissioner of Customs and Excise [1997] v & DR 273 Westley Nominees Pty Ltd v Coles Supermarkets Australia Pty Ltd [2005] FCA 839 2005 ATC 4484 60 ATR 52 Westley Nominees Pty Ltd v Coles Supermarkets Australia Pty Ltd [2006] FCAFC 115 (2006) 152 FCR 461 2006 ATC 4363 (2006) 62 ATR 682
Subject references: Residential premises Residential accommodation Commercial residential premises Supply by way of lease