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GLOXINIA INVESTMENTS LIMITED AS TRUSTEE FOR GLOXINIA UNIT TRUST v FC of T

Judges:
Emmett J

Court:
Federal Court, Sydney

MEDIA NEUTRAL CITATION: [2009] FCA 641

Judgment date: 12 June 2009

Emmett J

1. This proceeding concerns the question of whether or not an assignment of a leasehold of residential premises in an apartment building is an input taxed supply within the meaning of the A New Tax System (Goods and Services Tax) Act 1999 (Cth) ( the GST Act ). Specifically, it involves the construction of provisions of Subdivision 40-C of Division 40 of Part 3-1 of Chapter 3 of the GST Act.

The relevant statutory provisions

2. Under s 7-1 of the GST Act, GST is payable on taxable supplies. Under s 9-10, a supply is any form of supply whatsoever and includes a grant, assignment or surrender of real property. Under s 195-1, real property includes any interest in or right over land.

3. However, under s 9-5, a supply is not a taxable supply to the extent that it is input taxed . Under s 9-30(2) a supply is input taxed if it is input taxed under Division 40.

4.

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Subdivision 40-C of Division 40, which consists of ss 40-65 to 40-75, deals with residential premises . Under s 40-65(1) a sale of real property is input taxed, but only to the extent that the property is residential premises to be used predominantly for residential accommodation, regardless of the term of occupation. However, under s 40-65(2) the sale is not input taxed to the extent that the residential premises are new residential premises . Similarly, under s 40-70(1), a supply is input taxed if the supply is of real property, but only to the extent that the property is residential premises to be used predominantly for residential accommodation, regardless of the term of occupation and the supply is by way of long term lease. Again, under s 40-65(2) the supply is not input taxed to the extent that the residential premises are new residential premises .

5. Section 40-75(1) provides that residential premises are new residential premises if they:

  • (a) have not previously been sold as residential premises and have not previously been the subject of a long term lease ; or
  • (b) have been created through substantial renovations of a building; or
  • (c) have been built, or contain a building that has been built, to replace demolished premises on the same land.

However, under s 40-75(2), the premises are not new residential premises if, for the period of at least five years since the premises first became residential premises or were last substantially renovated or were last built, the premises have only been used for making supplies that are input taxed because of s 40-35(1)(a). Section 40-35(1)(a) relevantly provides that a supply of premises that is by way of lease, hire or licence is input taxed if the supply is of residential premises.

6. Under s 195-1, residential premises are land or a building that is occupied as a residence or for residential accommodation or is intended to be occupied, and is capable of being occupied, as a residence or for residential accommodation. Section 195-1 also provides, relevantly, that a long term lease is a supply by way of lease, hire or licence for at least 50 years.

The relevant residential premises

7. The applicant, Gloxinia Investments Limited ( Gloxinia ), is a company incorporated under the law of the British Virgin Isles and is the trustee of the Gloxinia Unit Trust. Gloxinia carries on a business of property investment. It is presently engaged in the development of a site situated at Double Bay, New South Wales ( the Site ). As at October 2007, the improvements on the Site consisted of a hotel, a public car park, community facilities and the Cosmopolitan Centre Retail Area.

8. The Site is owned by Woollahra Municipal Council ( the Council ). A lease of the site was granted by the Council to Double Bay Shopping Centre Pty Ltd on 20 January 1969 for a term expiring on 4 May 2063 ( the Existing Lease ). By successive transfers, the Existing Lease was transferred to PT Limited, Permanent Trustee Company Ltd and, by transfer of 11 May 1994, to Gloxinia.

9. On 22 October 2007, Gloxinia entered into an agreement for lease with the Council ( the Agreement for Lease ). The Agreement for Lease provides for the consideration payable by Gloxinia to the Council. Part of the consideration has been paid and the Council issued a tax invoice to Gloxinia in respect of the monetary consideration. The tax invoice included GST.

10. By Clause 2.1 of the Agreement for Lease, the Council agreed that, subject to Gloxinia complying with its obligations under the Agreement for Lease in relation to the Works, as defined, and registering the Plan of Subdivision, as defined, the Council would grant and Gloxinia would accept the Retail Lease, as defined, and the Residential Lease, as defined. The Residential Lease is a lease of the Residential Lot, as defined, in the form of lease annexed to the Agreement for Lease. Residential Lot is defined as proposed stratum lot 3 in a plan of subdivision in the form of the plan annexed to the Agreement for Lease. The term of each of those leases is to be 99 years.

11. Under Clause 12.1 of the Agreement for Lease, Gloxinia may, at its own cost, subdivide or consolidate the Site by one or more plans of subdivision and may develop the Site in stages. Clause 12.2 provides for completion of, relevantly, a strata leasehold plan, strata lot

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leases and strata common property lease in accordance with the form of the drafts of such documents contained in the annexures to the Agreement for Lease. Under Clause 12.6, Gloxinia must complete the draft documents and any other plans or instruments relating to the stratum subdivision of the Site and the development of residential, commercial and car park structures in accordance with the Agreement for Lease.

12. Provision is made in the Agreement for Lease for the Council and Gloxinia to take all steps necessary to effect the registration of the proposed plan of subdivision. Gloxinia is required to undertake the development in a staged manner, although Gloxinia may undertake the works contemporaneously. The Works consist of the Retail Works, the Car Park Works and the Residential Works. The final stage of the Works consists of the Residential Works, which are expected to be completed by about November 2009. On completion of the Retail Works and the Car Park Works, Gloxinia must surrender the Existing Lease and the Council will then grant to Gloxinia the Retail Lease and the Residential Lease.

13. In accordance with Clause 4.1 of the Residential Lease, Gloxinia has demolished part of the improvements on the Site and is now constructing the Residential Works, consisting of a complex of 28 residential units above the Retail Works and the Car Park Works in the stratum that will be the subject of the Residential Works.

14. Upon completion of the Residential Works, Gloxinia will subdivide its leasehold interest under the Residential Lease into individual strata lots. Under Clauses 4.2, 4.3 and 4.5 of the Residential Lease, when a strata leasehold plan is registered in respect of the Residential Lot, namely Lot 3, Gloxinia will surrender the Residential Lease and the Council will grant leases to Gloxinia over each of the 28 individual residential strata lots in that strata leasehold plan. Those leases are described as Strata Lot Leases in the Agreement for Lease. The owners corporation will be granted a lease of the common property in that strata leasehold plan.

15. Clause 4.4 of the Residential Lease provides that the Strata Lot Leases will commence upon registration of the Strata Leasehold Plan and will have a term equal to the unexpired term of the Residential Lease. Thus, there is every reason to expect that the term of each of the Strata Lot Leases will exceed 90 years.

16. Gloxinia intends that, after completion of the Residential Works and the grant of the Strata Lot Leases by the Council, it will sell to third party purchasers each of the residential premises that is the subject of a lot in the proposed strata leasehold plan. Gloxinia intends that the sale of each lot will be pursuant to a contract for sale that will be substantially identical to a contract for the sale of land dated 14 August 2008 between Gloxinia as vendor and Vicki Vidor as purchaser in respect of Apartment 5F in the proposed residential development ( the Sale Contract ). On completion of each such contract for sale, Gloxinia will assign to the purchaser the Strata Lot Lease granted to it by the Council in respect of the unit that is to be the subject of the contract for sale.

Assignment is an input taxed supply

17. The respondent, the Commissioner of Taxation ( the Commissioner ), contends that each assignment of a Strata Lot Lease will be a taxable supply for the purposes of the GST Act. Gloxinia, on the other hand, contends that each such supply will be input taxed in accordance with subdivision 40-C of the GST Act and, accordingly, will not be a taxable supply.

18. It is common ground that, at the time of the grant of the proposed Strata Lot Leases by the Council to Gloxinia, the unit or apartment that is the subject of that lease will be residential premises within the meaning of subdivision 40-C. Further, it is not suggested that a contract for sale such as the Sale Contract is a supply. Thus, the question is whether it is correct to say that residential premises consisting of a completed unit or apartment in the proposed residential development, at the time of the assignment of a Strata Lot Lease in respect of that unit or apartment pursuant to a contract for sale, in the form of the Sale Contract, will not have previously been the subject of a long term lease. Gloxinia's simple contention is that a Strata Lot Lease is a long term lease within the meaning of the GST Act

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and that, at the time of the assignment of such a Strata Lot Lease, the residential premises that are the subject of that Strata Lot Lease, being a completed unit or apartment in the residential development, will have been the subject of that lease, albeit not for a long period of time.

19. The Commissioner says that, whether or not s 40-75(1) applies to the residential premises should be determined from a practical and business point of view, rather than upon the juristic classification of the legal rights secured, employed or exhausted in the process (see
Westley Nominees Pty Ltd v Coles Supermarkets Australia Pty Ltd 2006 ATC 4363; (2006) 152 FCR 461 at [59]). Accordingly, he says, juristic concepts of land law ought not to define the operation of Subdivision 40-C and the GST Act should not be interpreted by reference to abstract propositions about interests in land.

20. The Commissioner contends that to treat the residential premises to be sold by Gloxinia as having previously been the subject of a long term lease from the Council ignores the substance and economic reality of the transaction. The Commissioner says that analysis of the transaction in a substantive fashion shows that the Council will merely replace the Residential Lease with the 28 Strata Lot Leases. The Commissioner places store on the fact that the Council will not be selling the units or apartments to Gloxinia. Rather, Gloxinia will construct the units or apartments on its own account and will obtain the fruits of that development. The grant of the Strata Lot Leases, upon surrender of the Residential Lease, is simply to facilitate the development by Gloxinia of Lot 3, which is the subject of the Residential Lease.

21. The Commissioner places reliance on the following matters:

  • • Gloxinia is developing the Site in its own right and at its own risk and is responsible under the Agreement for Lease for all aspects of the development.
  • • Gloxinia will obtain the benefit of the Residential Works and not the Council.
  • • Under the Residential Lease, Gloxinia is subject to the same responsibilities and liabilities in relation to the residential premises as if it were the owner of the premises.
  • • There is no separate consideration payable by Gloxinia for the grant of the 28 Strata Lot Leases: rather, the consideration paid by Gloxinia is for the total amalgamation of rights acquired pursuant to the Agreement for Lease.

22. Further, the Commissioner says, the value of the residential premises that are to be constructed by Gloxinia does not in any real sense pass to the Council. The Commissioner says that the GST Act manifests an intention to treat the supply of a long term lease in the same manner as a sale of freehold. The grant of the Strata Lot Leases is simply the mechanism by which the Council divests itself of its interest in the Site, on which Gloxinia is constructing the residential premises. He says that the surrender of the Residential Lease simultaneously with the grant of the Strata Lot Leases, which is to occur on registration of a strata leasehold plan, is no more than a conversion of Gloxinia's leasehold interest under the Residential Lease into leasehold in respect of the lots in the Strata Leasehold Plan in order to enable Gloxinia more easily to dispose of leasehold interests in the individual lots to unrelated parties.

23. The Commissioner contends that the construction contended for by Gloxinia does not preserve the essential characteristics of GST as a value added tax. He says that a construction that preserves the character of GST as a value added tax ought to be preferred over a construction that seeks to avoid the object and purpose of GST. The Commissioner's approach may be appropriate where there is some ambiguity in the language of a provision of the GST Act. However, there is no ambiguity in the language of s 40-75(1)(a). It may be that the consequence contended for by Gloxinia was not foreseen by the drafter of s 40-75(1)(a). Such an inference may possibly be drawn from the subsequent provisions of s 40-75(1). Be that as it may, however, that is not a basis for reading the words of s 40-75(1)(a) in a way that is different from the way in which they would clearly be understood as a matter of ordinary English. At the time of an assignment the relevant residential premises will have been the subject of a long term lease, namely, the

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relevant Strata Lot Lease granted by the Council to Gloxinia in respect of the relevant unit or apartment. It is not to the point, as the Commissioner contends, to say that the construction contended for by Gloxinia is divorced from the economical reality of the transaction between it and the Council. Either the transaction falls within the provisions or it does not.

24. Alternatively, the Commissioner places reliance upon the notion that the subject matter of the assignments that will take place pursuant to a contract in the form of the Sale Contract for sale is a leasehold interest. He says that that leasehold interest will not have previously been the subject of a long term lease. Therefore, the relevant unit or apartment will be new residential premises. However, that contention involves an impermissible confusion between the physical residential premises and the juristic rights conferred in relation to the residential premises. In a sense, it is refutation of the proposition referred to above upon which the Commissioner places reliance.

25. It may be that, for the purposes of s 40-70(1) there is a supply of real property in the sense of a supply of a leasehold interest in the relevant unit or apartment. However, s 40-70(1)(a) contemplates a supply to the extent that the property, namely the real property, is residential premises. The residential premises that are referred to must be the physical unit or apartment and not the juristic rights to the use or occupation of that unit or apartment. It is clear that the residential premises referred to in s 40-75 are the physical premises. It is equally clear that those physical premises, the unit or apartment in the completed development, is the subject of the long term lease consisting of the Strata Lot Lease.

26. I do not consider that either of the Commissioner's contentions has any substance. The proposed assignments of leases of units or apartments in the proposed residential development will be input taxed and, accordingly, will not be taxable supplies. Gloxinia is entitled to a declaration to that effect.

27. The parties have agreed that there be no order as to the costs of the proceeding and accordingly, I will make no order as to costs.


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