Commissioner of Taxation v DB Rreef Funds Management Ltd
Document type: Decision Impact Statement
Venue: Federal Court of Australia (NSD 783-4 of 2005)
Judgment date: 8 June 2006
Date published: 27 September 2006

Summary of decision:

Overview of facts:
This was an appeal from a decision of the Federal Court (Sackville J) reported at (2005) 218 ALR 144. | The taxpayer was a lessor of commercial premises. In 1998 the predecessor in title of the taxpayer leased commercial premises to a tenant for a term of two years effective from 24 January 1997. This lease contained an option to renew for a number of additional terms, each of two years. An unusual feature of the lease was that the nominal rental fixed under it in 1997 was considerably higher than the market rent at the time. This was because the original lessor undertook at its own expense an extensive fit-out of the premises costing $27m and sought to amortise the cost over the expected period of the lease. | Under the agreement, the lessor was able to invoke a ratchet clause to prevent the rental falling below its original level. | The lessee was obliged to reimburse a proportion of the operating costs of the lessor. | The Commissioner decided that the taxpayer was liable to pay GST in respect of the supply made by way of the lease for each of the renewed terms and assessed the taxpayer accordingly. The taxpayer objected and then subsequently appealed to the Federal Court against the Commissioner's disallowance of its objections. | At issue was whether the taxpayer had a "review opportunity" arising under the lease pursuant to section 13 of the A New Tax System (Goods and Services Tax Transition) Act 1999 (the Transition Act'). The Commissioner submitted that the taxpayer had an opportunity to conduct a "general review... of the consideration" pursuant to s13(5)(b) in 2001 and 2003, when a renewal of the lease occurred by exercise of the option in the lease. | Issues decided by the court or tribunal | Was there a review opportunity? | The Full Court upheld Sackville J's finding that the lease did not provide the taxpayer with an opportunity to conduct a "general review, renegotiation or alteration of the consideration" for the supply within the terms of section 13(5)(b) of the Transition Act because: (a) the concept of a "general review" in s 13(5)(b) required a complete or almost universal consideration of the same subject; (b) there was no opportunity for a review of that part of the consideration which related to that part of the premises comprising the fit-out works; and (c) account had to be taken of the substantial value of those fit-out works. | (a) the concept of a "general review" in s 13(5)(b) required a complete or almost universal consideration of the same subject; (b) there was no opportunity for a review of that part of the consideration which related to that part of the premises comprising the fit-out works; and (c) account had to be taken of the substantial value of those fit-out works. | The Full Court also held that as the lease did not provide for any review, renegotiation or alteration of the lessee's obligation to contribute to the operating costs and the operating costs was of such a quantitative component (17 per cent) of the consideration of the supply, the lease did not provide an opportunity for a "general review" of the consideration. | Finally, the Full Court affirmed Sackville J's finding that the ratchet clause alone would not have precluded there from being an opportunity to conduct a general review of the consideration.

Issues decided:
Was there a review opportunity?: The Full Court upheld Sackville J's finding that the lease did not provide the taxpayer with an opportunity to conduct a "general review, renegotiation or alteration of the consideration" for the supply within the terms of section 13(5)(b) of the Transition Act because: (a) the concept of a "general review" in s 13(5)(b) required a complete or almost universal consideration of the same subject; (b) there was no opportunity for a review of that part of the consideration which related to that part of the premises comprising the fit-out works; and (c) account had to be taken of the substantial value of those fit-out works. (a) the concept of a "general review" in s 13(5)(b) required a complete or almost universal consideration of the same subject; (b) there was no opportunity for a review of that part of the consideration which related to that part of the premises comprising the fit-out works; and (c) account had to be taken of the substantial value of those fit-out works. The Full Court also held that as the lease did not provide for any review, renegotiation or alteration of the lessee's obligation to contribute to the operating costs and the operating costs was of such a quantitative component (17 per cent) of the consideration of the supply, the lease did not provide an opportunity for a "general review" of the consideration. Finally, the Full Court affirmed Sackville J's finding that the ratchet clause alone would not have precluded there from being an opportunity to conduct a general review of the consideration.

ATO view of decision:
Supplies made under certain contracts signed before GST was introduced were GST-free until the earlier of 1 July 2005 and when a "review opportunity" arose under such contracts. The rationale for this concession was that businesses would otherwise have had to bear the burden of the GST with no opportunity to "pass on" the GST to their customers, since they signed the contracts before they could reasonably be expected to have anticipated the impact of GST in negotiating prices under those contracts. | This measure is enacted in section 13 of the A New Tax System (GST Transition) Act 1999. | The Commissioner wanted to give business clear guidance about section 13, and in particular about when a review opportunity occurred under their particular contracts. That way, business could be confident that the ATO would regard them as complying with their GST obligations. To this end, the Commissioner dealt in depth with section 13 in Public Ruling GSTR 2000/16. | One question the ruling addressed was whether a review opportunity arose under section 13 if only some of the consideration for a supply were reviewable on a particular occasion. The ruling (at paragraph 152) took the view that it would be sufficient if most of the consideration were capable of review. The Commissioner considered that this view struck a reasonable balance between the interests of the supplier and of the recipient in light of the object of section 13, was commercially realistic, was supportable as a matter of interpretation and was consistent with the limited overseas case law on a similar provision. | The balance was reasonable because it would be detrimental to recipients to wholly deny them input tax credits if most of price of a supply had been reviewed to a GST-inclusive level. Conversely, it would be detrimental to suppliers to impose GST on the whole of a supply if only a small part of the price could be reviewed to reflect the impact of GST. | But the ATO accepts that this interpretation has been found to be wrong in DB Rreef and in another recent Full Federal Court decision, Westley Nominees Pty Ltd v Coles Supermarkets Australia Pty Ltd [2006] FCAFC 115 . The Court has held in effect that a review opportunity arises only if the whole or nearly all of the consideration for a supply is capable of review. An opportunity to review about 83% of the consideration for a supply was not a "review opportunity" within the meaning of section 13. | The ATO also accepts the Court's decision in DB Rreef in relation to the fit-out works. However, we perceive that the particular features of the lease agreement were relatively unusual in this respect. | The ATO agrees with the Court's finding in relation to the ratchet clause which accords with the Commissioner's submissions in the case and with GSTR 2000/16. | The Commissioner is not pursuing any further appeal against these decisions.

Administrative treatment:
Implications on current Public Rulings & Determinations | In light of the Full Court's decision, the ATO has amended the relevant passage in GSTR 2000/16 Goods and Services Tax: transitional arrangements - GST free supplies under existing agreements. Taxpayers who relied on the ruling as in force before this amendment to determine their GST position have the protection of section 105-60 of Schedule 1 to the Taxation Administration Act 1953. | The Tax Office will consider taxpayers' circumstances in relation to the Full Court's decision on a case-by-case basis.

Legislative references: A New Tax System (Goods and Services Tax Transition) Act 1999 13 13(5)(b)
Case references: Westley Nominees Pty Ltd v Coles Supermarkets Australia Pty Ltd [2006] FCAFC 115 2006 ATC 4363 62 ATR 682
Subject references: GST Whether supply was GST-free under the GST transitional provisions Whether lease agreement provided a review opportunity Whether opportunity to conduct market rent review constituted opportunity to conduct general review of consideration for the supply