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SOUTH STEYNE HOTEL PTY LTD & ORS v FC of T

Judges: Finn J

Emmett J
Edmonds J

Court:
Full Federal Court, Sydney

MEDIA NEUTRAL CITATION: [2009] FCAFC 155

Judgment date: 20 November 2009

Emmett J

Introduction

6. This appeal concerns the effect of provisions of the A New Tax System (Goods and Services Tax) Act 1999 (Cth) ( the GST Act ) in connection with the Sebel Manly Beach Hotel ( the Sebel Hotel ). The appellants commenced a proceeding in the Court in which they claimed declarations as to the characterisation under the GST Act of certain supplies made in relation to apartments in the Sebel Hotel. A judge of the Court declined to make the declarations claimed by the appellants and dismissed the proceeding. By notice of appeal dated 6 February 2009, the appellants appealed from the order of the primary judge. The respondent, the Commissioner of Taxation ( the Commissioner ), has agreed to bear the appellants ' costs of the proceeding and the appeal in any event, under the Commissioner ' s Test Case Funding Program.

7. The factual circumstances that give rise to the questions in issue, about which there is no dispute, can be stated briefly as follows:

  • • On 8 December 2000, the first appellant ( " South Steyne " ), purchased the Sebel Hotel;
  • • On 10 August 2006, each of the 83 individual apartments in the Sebel Hotel, including apartments 111, 304 and 604, together with the management lot , consisting of the reception area, offices and car parking spaces, became separate lots of a strata plan ( the Hotel Strata Plan );
  • • On 29 September 2006, South Steyne:
    • (i) transferred the management lot to Mirvac Hotels Pty Ltd ( Hotels ); and

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      (ii) granted a separate lease to Mirvac Management Pty Ltd ( Management ) in respect of each of the 83 apartment lots in the Hotel Strata Plan; under each lease, Management 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;
  • • From 29 September 2006 at latest, Hotels had exclusive control of the operation of the serviced apartment business pursuant to an agreement with Management dated 11 January 2006 ( the Management Agreement ), which conferred upon Hotels the benefit of Management ' s rights under the leases;
  • • Between 29 September 2006 and 31 October 2007, South Steyne sold apartments 111, 304 and 604 to the second appellant, MBI Properties Pty Limited ( Properties ); each apartment was sold subject to the applicable lease that had been granted to Management and each contract for sale permitted Properties to participate in a scheme that mirrored the scheme provided for under the leases; Properties elected to participate in that scheme;
  • • On the night of 17-18 October 2007, Ms Emily Young, an employee of the third appellant, Morgan & Banks Investments Pty Ltd ( Investments ), stayed in apartment 403 and made use of various services available to guests of the Sebel Hotel.

The relevant provisions of the GST Act

8. Under s 7-1(2) of the GST Act, goods and services tax ( GST ) is payable on taxable supplies . Under s 9-5, a person makes a taxable supply if, relevantly, the person makes a supply for consideration and the supply is made in the course or furtherance of an enterprise that the person carries on. However, the supply is not a taxable supply to the extent that it is GST-free or input taxed .

9. Section 9-30(1) provides that a supply is GST-free if it is GST-free under Division 38 and s 9-30(2) provides that a supply is input taxed if it is input taxed under Division 40. Section 9-30(3) provides that, to the extent that a supply would be both GST and input taxed, the supply is GST-free and not input taxed, unless the provision under which it is input taxed requires the supplier to have chosen for its supplies of that kind to be input taxed. If such a provision requires the supplier to have so chosen, then the supply is input taxed and not GST-free.

10. Subdivision 38-J of Division 38 deals with supplies of going concerns . Section 38-325(1), which is in Subdivision 38-J, relevantly provides that the supply of a going concern is GST-free if the supplier and the recipient have agreed in writing that the supply is of a going concern. A supply of a going concern is a supply under an arrangement under which:

  • • the supplier supplies to the recipient all of the things that are necessary for the continued operation of an enterprise, and
  • • the supplier carries on, or will carry on, the enterprise until the day of the supply.

11. Subdivision 40-B of Division 40 deals with residential rent . Section 40-35(1), which is in Subdivision 40-B, provides that a supply of premises that is by way of lease is input taxed if, relevantly, the supply is of residential premises other than:

  • • a supply of commercial residential premises , or
  • • a supply of accommodation in commercial residential premises provided to an individual by the entity that owns or controls the commercial residential premises.

However, under s 40-35(2), the supply is input taxed only to the extent that the premises are to be used predominantly for residential accommodation, regardless of the term of occupation.

12. Subdivision 40-C of Division 40 deals with residential premises . Section 40-65, which is in Subdivision 40-C, provides that a sale of real property is input taxed, but only to the extent that the property is a residential premises to be used predominantly for residential accommodation, regardless of the term of occupation. However, the sale is not input taxed to the extent that the residential premises are:

  • • commercial residential premises; or

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    • new residential premises other than those used for residential accommodation before 2 December 1998.

13. Under s 40-70, which is also in Subdivision 40-C, 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, and
  • • the supply is by way of long term lease.

However, the supply is not input taxed to the extent that the residential premises are:

  • • commercial residential premises, or
  • • new residential premises other than those used for residential accommodation before 2 December 1998.

The issues in the appeal

14. The appellants claimed declarations as follows:

  • • A declaration that the granting of the leases of apartments 111, 304 and 604 by South Steyne to Management was not input taxed under any provision of the GST Act.
  • • A declaration that the continuation by Properties of the leases in favour of Management, following the sale of the apartments to Properties by South Steyne, was not input taxed under any provision of the GST Act.
  • • A declaration that the provision of accommodation to Ms Young as a guest in the Sebel Hotel was not input taxed under any provision of the GST Act.
  • • Alternatively to the previous declaration, if the granting of the lease of an apartment by South Steyne to Management was input taxed and the continuation of the lease by Properties to Management was input taxed, a declaration that the provision of accommodation to Ms Young as a guest in the Sebel Hotel was input taxed under Division 40 of the GST Act.
  • • A declaration that the sale by South Steyne to Properties of apartments 111, 304 and 604 in the Sebel Hotel was GST free under s 38-325 of the GST Act.
  • • Alternatively to the previous declaration, if the continuation of the leases by Properties to Management in respect of apartments in the Sebel Hotel was input taxed, a declaration that the sale by South Steyne to Properties was input taxed under Division 40 of the GST Act.

15. The proceeding was conducted at first instance and has been conducted on appeal on the basis that there are in issue four different categories of supply under the GST Act as follows:

  • • The granting by South Steyne to Management of leases in respect of apartments, 111, 304 and 604 in the Sebel Hotel ( the Grant Category ).
  • • The continuation by Properties of the leases to Management in respect of apartments 111, 304 and 604 ( the Continuation Category ).
  • • The provision of accommodation to Ms Young in apartment 403 on 17-18 October 2007 ( the Accommodation Category ).
  • • The sale of apartments 111, 304 and 604 by South Steyne to Properties, subject to the leases previously granted to Management ( the Sale Category ).

The Sale Category was referred to as the second category in the course of argument of the appeal and was also referred to in that way by the primary judge.

Grant of leases by South Steyne to management

16. If an apartment in the Sebel Hotel is not residential premises as defined in the Dictionary in s 195-1 of the GST Act, the supply is taxable. If the apartment is residential premises but is commercial residential premises as defined in the Dictionary in s 195-1 of the GST Act, the supply is also taxable. If the apartment is residential premises but is not commercial residential premises, then the supply is input taxed. Thus, the categorisation of the Grant Category depends upon the definitions of residential premises and commercial residential premises as defined in the Dictionary in s 195-1 of the GST Act.

17. The primary judge concluded that, for the purposes of the GST Act, the apartments in the Sebel Hotel are residential premises to be used predominantly for residential

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accommodation and are not commercial residential premises. As a consequence, her Honour held that their supply by way of lease attracted the operation of s 40-35 such that the supply was input taxed.

18. Relevantly, residential premises means land or a building that is:

  • • occupied as a residence,
  • • occupied for residential accommodation,
  • • intended to be occupied and is capable of being occupied as a residence, or
  • • intended to be occupied and is capable of being occupied for residential accommodation.

In each case, the term of the occupation or intended occupation is to be disregarded.

19. The definition of residential premises was amended following the decision of the Full Court in
Marana Holdings Pty Ltd v Commissioner of Taxation 2004 ATC 5068 ; (2004) 141 FCR 299 ( Marana Holdings Case) . When originally enacted, the term residential premises was defined as meaning:

" Land or a building occupied or intended to be occupied as a residence … "

The definition was amended, with effect from 1 July 2000, to provide that residential premises meant:

" Land or a building that:

  • (a) is occupied as a residence; or
  • (b) is intended to be occupied and is capable of being occupied, as a residence.
  • … "

20. Following the Marana Holdings Case , the definition was amended again, to provide, relevantly, that residential premises means:

" Land or a building that:

  • (a) is occupied as a residence or for residential accommodation ; or
  • (b) is intended to be occupied, and is capable of being occupied, as a residence or for residential accommodation ;

    ( regardless of the term of the occupation or intended occupation ) … "

    [ Emphasis added ]

Thus, two new elements were added to the definition following Marana ' s Case . The first element was the reference to " residential accommodation " in two places. The second was the direction to disregard the term of any occupation or intended occupation.

21. The amendment is curious but, even following the amendment, the definition requires, relevantly for present purposes, that the land or building be occupied for residential accommodation or be intended to be occupied for residential accommodation. The term of occupation is to be disregarded. However, the requirement as to the purpose of the occupation must still be satisfied. Thus, there must still be occupation as a residence or an intention to occupy as a residence . Similarly, there must be occupation for residential accommodation or an intention to occupy for residential accommodation .

22. Whether or not the apartments are occupied as a residence, they are occupied for residential accommodation, particularly when one is to disregard the term of the occupation or intended occupation. It is therefore necessary to consider whether the apartments are commercial residential premises.

23. The term commercial residential premises is defined, relevantly, as including:

  • " (a) a hotel, motel, inn, hostel or boarding house; or
  • …
  • (f) anything similar to residential premises described in paragraphs (a) to (e). "

The definition thus assumes that a hotel, motel, inn, hostel or boarding house may be residential premises. Clearly enough, a single apartment is not a hotel, motel, inn, hostel or boarding house. The question is whether an apartment in the Sebel Hotel is similar to a hotel, motel, inn, hostel or boarding house.

24. There is nothing in the GST Act or the policy underlining the GST Act that suggests that the characterisation of an individual supply can be approached by treating it as if it were the aggregate of that supply and other supplies. It is not possible, as the appellants contend, to treat the supply of an individual apartment as aggregated with the supply of all of the other apartments. Even if the individual leases of the 83 apartments were granted pursuant to a single agreement, the apartments by themselves do not amount to or constitute a hotel; nor do they

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amount to or constitute a motel, inn, hostel or boarding house.

25. It may be that each apartment is part of commercial residential premises consisting of the Sebel Hotel. That, however, of itself, does not render an individual apartment similar to a hotel.

26. A hotel, motel, inn, hostel or boarding house consists of more than the rooms or apartments that are occupied by guests. It must also of necessity include common areas such as reception areas, dining areas, car parks and the like, such as were the subject of the management lot. The supply that consisted only of the rooms or apartments or accommodation units in a hotel complex is not, without those other areas, the supply of commercial residential premises. The management lot is an essential part of the Sebel Hotel.

27. An individual apartment is not similar to a hotel or motel. It does not resemble or have a likeness to a hotel or motel.

28. Paragraph (f) of the definition of commercial residential premises, in conjunction with paragraph (a), may cover a serviced apartment complex or other establishment that provides accommodation on a multi occupancy basis to guests. However, the individual apartments supplied by South Steyne to Management are very different from a hotel or motel. The term hotel or motel would not be used, as a mater of ordinary English, where a single apartment, room or other space is supplied.

29. The fact that the use and occupation by guests of an apartment in the Sebel Hotel may be similar to the use and occupation by guests of a room in a hotel or motel does not make an individual apartment similar to a hotel or motel. It might be appropriate to describe an individual apartment as being similar to a part of a hotel, namely a hotel room. It is not an ordinary use of English to describe a single or individual apartment as being similar to a hotel or motel.

30. The primary judge made no error in the conclusion that she reached. It follows that the supply of each apartment was input taxed.

Continuation of the leases

31. This question concerning the Continuation Category involves the construction of s 40-35(1) of the GST Act. If the continuation by Properties of leases granted to Management by South Steyne is not a supply of premises by way of lease , the supply is taxable. If it is a supply by way of lease and the apartment is not residential premises, the supply is taxable. If the supply is by way of lease and the apartment is residential premises and the apartment is commercial residential premises, the supply is taxable. If the supply is by way of lease and the apartment is residential premises and the apartment is not commercial residential premises, the supply is input taxed.

32. There is a real question as to whether the Continuation Category involves any supply at all. Properties acquired from South Steyne the legal estate in respect of apartments in the Sebel Hotel, being the reversion after the leases in favour of Management. It is common ground that there was a supply on the grant of the leases. The better view is 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.

33. Division 156 deals with supplies and acquisitions made on a progressive or periodic basis. Under Division 156, supplies and acquisitions made for a period or on a progressive basis are treated as separate supplies or acquisitions for some purposes, in particular the attribution rules . Under s 156-5, the GST payable on a taxable supply that is made for a period or on a progressive basis and for consideration that is to be provided on a progressive or periodic basis, is attributable , in accordance with s 29-5, as if each progressive or periodic component of the supply were a separate supply. Section 156-22 provides that a supply or acquisition by way of lease is to be treated as a supply or acquisition that is made on a progressive or periodic basis for the period of the lease. Section 29-5 provides that the GST payable on a taxable supply is attributable to the tax period in which any of the considerations received for the supply, or if, before any of the consideration is received, an invoice is issued relating to the supply, the tax period in which the invoice is issued.

34. Thus, there is no supply by Properties to Management. Rather, there was a supply by

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South Steyne to which the attribution rules apply. In any event, the primary judge made no error in declining to make the declaration claimed in the proceeding in respect of the Continuation Category.

Accommodation of Ms Young

35. If the Grant Category of supply is taxable, it would follow that the provision of accommodation to Ms Young is taxable. However, the conclusion reached above is that the Grant Category is input taxed. In those circumstances, if the provision of accommodation to Ms Young is a supply of accommodation in commercial residential premises, provided to an individual by the entity that owns or controls the commercial residential premises, the supply would be taxable. If it is not such a supply, it would be input taxed. That question turns on s 40-35(1), which relevantly provides that a supply of premises that is by way of hire or licence is input taxed if the supply is of residential premises (other than a supply of accommodation in commercial residential premises) provided to an individual by the entity that owns or controls the commercial residential premises .

36. The Commissioner contends that the supply was a supply of accommodation in commercial residential premises provided to Ms Young by Hotels as principal in its own name, rather than as agent for Management. The Commissioner says that Hotels exercised such practical control of the Sebel Hotel that it was the entity that relevantly controlled the commercial residential premises that the Sebel Hotel constitutes. That contention depends upon the effect of the Management Agreement.

37. The Management Agreement recites that Management is the operator of a proposed management investment scheme to be known as " the Sebel Manly Beach " , that Management intends to become the lessee of apartments in the Sebel Hotel and that Management wishes to engage Hotels to operate the business of operating as serviced apartments all lots in the Hotel Strata Plan. The pivotal provision of the Management Agreement is clause 3.1, whereby Management appointed Hotels as its exclusive agent to manage and operate the serviced apartment business and Hotels accepted that appointment and agreed to manage and operate the serviced apartment business. Clause 3.6 provides for the payment of a fee consisting of a proportion of all of the income of Management from the occupation of the scheme apartments.

38. By clause 4.1 of the Management Agreement, Hotels agreed to carry out all duties and responsibilities that Management has under the apartment leases and Management agreed to allow Hotels to have the benefit of any right of Management under those leases to allow Hotels to carry out those duties and responsibilities. By clause 4.2, Hotels agreed to use its expertise to operate the serviced apartment business and was given exclusive control and discretion in the operation, direction, management and supervision of the serviced apartment business. That control and discretion was specifically to include:

  • • hiring and discharge of all employees,
  • • entering into contracts in its own name, or as agent of Management,
  • • setting room tariffs and charges.

39. Under clause 4.3, Hotels is obliged to use reasonable endeavours to collect monies due from apartment guests, including instituting legal proceedings to collect any amounts due. Clause 5.1 required Management to open a bank account into which all cash comprising apartment revenue is to be deposited. Hotels acknowledged that all funds from time to time in that account are held on trust for members of the management scheme. However, Hotels was to be entitled to deposit other moneys into that account if it considered that doing so was consistent with operating the serviced apartment business in conjunction with other businesses and activities operated by Hotels in connection with the Sebel Hotel.

40. At the time of Ms Young ' s stay in the Sebel Hotel, Hotels was the owner of the management lot, which consisted of the reception area, offices and car parking spaces of the Sebel Hotel. The management lot is clearly an integral part of the operation of the serviced apartment business being carried on in the Sebel Hotel. In addition, Hotels exercised control over the conduct of the restaurant that forms part of the Sebel Hotel and the provision of room service and the service of alcohol in the

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restaurant, bar and mini bar facility within the apartments. Hotels exercised that control under an agreement of 11 May 2006 by which Hotels was entitled to provide input on menus for room service and breakfast in the restaurant.

41. The tax invoice given to Ms Young for her accommodation was in the name of Hotels. That is consistent with the provision of clause 4.2 of the Management Agreement giving Hotels exclusive control and discretionary operation of the serviced apartment business, including entering into contracts in its own name.

42. Management, of course, was the lessee of apartment 403 on the night of 17-18 October 2007. Nevertheless, the name on the tax invoice supplied by Hotels to Ms Young, when taken together with the provisions of the Management Agreement and the agreement of 11 May 2006, leads to the conclusion that the accommodation provided to Ms Young was provided by Hotels as principal and not as agent of Management. That is the conclusion reached by the primary judge. There was no error in her Honour ' s conclusion.

Sale of apartments to properties

43. The only question in relation to the Sale Category is whether the supplier, South Steyne, and the recipient, Properties, have agreed in writing that the supply is of a going concern. That depends upon the effect of clause 47.6.6 of the form of Contract for Sale between South Steyne and Properties in relation to apartments in the Sebel Hotel. The forms of Contract for Sale entered into in relation to each apartment were relevantly the same.

44. The Contract for Sale contained a provision on page 1 that was relevantly in the following terms:

" This sale is not a taxable supply because … the sale is … GST-free because the sale is the supply of a going concern under section 38-325. "

Clause 47.6.3 of the Contract for Sale provided as follows:

" 47.6.3 The parties agree that the sale of the Property comprises a supply of a going concern for the purposes of s 38-325 of the GST Act. "

Those two provisions meet the requirement of s 38-325(1)(c) for an agreement in writing that the supply constituted by the sale is a supply of a going concern. It is common ground that, under the Contracts for Sale of apartments by South Steyne to Properties, South Steyne was to supply to Properties all of the things that are necessary for the continued operation of the enterprise of a serviced apartment business and that South Steyne was to carry on that enterprise until completion of the contract.

45. However, clause 47.6.6 of the Contract for Sale provided as follows:

" If page 1 of the Contract says that the supply is GST-free because the sale is the supply of the [ sic ] 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; … "

46. Division 75 of the GST Act allows a taxpayer to use a margin scheme to bring within the GST system taxable supplies of freehold interests in land, of stratum units and of long term leases. Under s 75-5(1), the margin scheme applies in working out the amount of GST on a taxable supply of real property that a person makes by selling a freehold interest in land, by selling a stratum unit or by granting or selling a long term lease, but only if the person and the recipient of the supply have agreed in writing that the margin scheme is to apply. Clause 47.6.6 appears to be the result of an attempt by its author to enliven s 75-5(1).

47. The wording of s 47.6.6 creates a tension with the provision on page 1 and clause 47.6.3 of the Contract for Sale. That is to say, those two provisions have the effect that any supply under the Contract for Sale is GST-free. Clause 47.6.6, however, appears to be based on the

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assumption that, for some reason, the supply is not GST-free but is a taxable supply and that s 75-5(1) is intended to be invoked. The margin scheme, by definition, applies only where there is a taxable supply.

48. It is difficult to understand what the parties intended by saying that, if page 1 says that the supply is GST-free, the margin scheme is to apply, when the margin scheme does not apply to a GST-free supply. The Commissioner says, therefore, that the effect of clause 47.6.6 is to over-ride the purported agreement in writing pursuant to s 38-325 to be found on page 1 and in clause 46.6.3 of the Contract for Sale.

49. It appears somewhat unlikely that the intention of the parties was to over-ride the express provisions of page 1 and clause 47.6.3. The author of clause 47.6.6 may have worked under a misapprehension, that, even if the parties agreed in writing that a supply is of a going concern, the supply may nevertheless be a taxable supply in the circumstances where subdivision 40-C applies. The language of clause 47.6.6 is clearly reminiscent of the language of s 40-65. Thus, the author appears to have assumed that, if s 40-65 applies and the sale is not input taxed, it will be a taxable supply, notwithstanding the agreement pursuant to s 38-325 that the supply is of a going concern such that the supply is GST-free. The parties cannot, of course, by agreement make a supply a taxable supply, which is the literal purport of clause 47.6.6.

50. I do not consider that the garbled language of Clause 47.6.6 overrides the clear statements contained on page 1 and in clause 47.6.3 of the Contract for Sale. It follows that the supply consisting of the sale to Properties was GST-free under s 38-325. The primary judge concluded that the Sale Category was not GST-free. I consider that her Honour erred in that respect.

Conclusion

51. It follows from the conclusions set out above that the appeal should be upheld in part. The order of the primary judge dismissing the proceeding should be set aside. In lieu of that order there should be a declaration that the sale by South Steyne to Properties of apartments in the Sebel Hotel was GST-free under s 38-325 of the GST Act. The proceeding should be otherwise dismissed. There should be no order as to the costs of the appeal.


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