Commissioner of Taxation v MBI Properties Pty Ltd
[2014] HCATrans 241
Replacement transcript
[2014] HCATrans 241
IN THE HIGH COURT OF AUSTRALIA
Office of the Registry
Sydney No S90 of 2014
B e t w e e n -
COMMISSIONER OF TAXATION
Appellant
and
MBI PROPERTIES PTY LTD
Respondent
FRENCH CJ
HAYNE J
KIEFEL J
GAGELER J
KEANE J
TRANSCRIPT OF PROCEEDINGS
AT CANBERRA ON TUESDAY, 4 NOVEMBER 2014, AT 10.16 AM
(Continued from 11/9/14)
Copyright in the High Court of Australia
FRENCH CJ: Yes, Mr Hmelnitsky.
MR HMELNITSKY: Your Honours, there is a measure of common ground between the parties as to how the principal issues arising on the Commissioner’s notice of appeal ought to be resolved. At paragraph 16 of the Commissioner’s written submissions he says that:
What comprises a “supply” for GST purposes is entirely a matter of the application of the GST Act, properly construed, to the legal and factual circumstances of the taxpayer.
Your Honours, we agree that that is the task. We also agree, essentially, as to the nature of a lease as being both an executory contract and an executed demise. We also agree in the Commissioner’s identification of the obligations to which the respondent became subject upon acquiring the reversion in the three units. In particular, we are in agreement that it became bound to honour the covenants in the existing leases, specifically and most particularly, the obligation to afford quiet enjoyment to the sitting tenant, who was Mirvac.
What is in dispute, your Honours, is whether in all of those events MBI, the purchaser, did anything that could constitute a supply within the meaning of the Act. “Supply” your Honours see defined in section 9‑10 of the Act, commencing at page 2 of the authorities. In subsection (1) of the definition your Honours see perhaps a distinctive aspect of the definition which is that subsection (1) uses the expression “supply” in the definition of “supply”. That, we say, suggests that the expression “supply” in the Act is intended to have its ordinary meaning, and the sense in which “supply” is used in that ordinary sense your Honours see from the way it is used, for example, in subsection (2) but also elsewhere in the Act, as being the furnishing or the provision of something. It may be anything, of course, and it may be in any form, but we say that that ordinary sense of the word “supply” carries with it some element of furnishing or providing from one person, being you, the taxpayer, to whom the Act is speaking, to whom the Act calls the recipient.
For the reasons I was submitting on the last occasion, and as we have submitted in writing, we say that must be so. There must be that element of furnishing or providing because supply is the occasion in the Act for a dealing – for a price to be set so that the burden of the indirect tax can be passed on to what the Act calls the “recipient” of that supply.
When MBI acquired the three apartments from South Steyne, it became subject to the burdens of all of the landlords’ covenants that touched and concerned the land by reason of real property legislation. In this case, particularly by section 118 of the Conveyancing Act 1919, and it seems to us also by reason of section 40(3) of the Real Property Act 1900. For that reason, your Honours, it became subject to an ongoing executory obligation towards Mirvac to provide quiet enjoyment. In those events, your Honours, the Commissioner fixes on, essentially, two things as candidates for what may be the supply that was intended by MBI in conducting the enterprise and in carrying on the enterprise having acquired the units from South Steyne.
The first contender for the intended supply is the supply that the Commissioner’s case particularly relies on and that he particularly emphasises and that is that in the performance of the executory obligation from time to time, from month to month, in being the landlord under the leases in respect of which it was bound to honour the covenants – MBI thereby supplied quiet possession to Mirvac and, in the words of the Commissioner’s submissions, allowed use of the premises and continued to provide quiet enjoyment of the premises that were the subject of the lease.
But, your Honours, to speak in these circumstances of a landlord providing or allowing or supplying use or quiet enjoyment of premises is, we say, to really employ a form of shorthand because neither use of the premises nor the tenant’s quiet enjoyment of the premises is a thing that passes from the landlord, whether it is the original grantor or the purchaser of the reversion from time to time during the course of the lease.
Quiet enjoyment, which is the thing that the tenant enjoys, really describes a state of affairs which is incidental to the initial grant of the lease and is enjoyed from time to time, not because anyone provides anything or furnishes anything or, indeed, does anything from month to month or from period to period but because neither the landlord, nor anyone claiming under landlord, does anything at all to derogate from the grant or to deprive Mirvac of their possession of the premises.
FRENCH CJ: This links into your contention point, does it not?
MR HMELNITSKY: It does, ultimately. Yes, it does, your Honour. But for the moment the point that I am seeking to develop is that the Commissioner’s case, insofar as he says that the performance of the executory obligation was an intended supply, supposes that the performance of that obligation actually involved doing something that could fall within the statutory definition of “supply” at all.
Perhaps the only point I am making here is that the performance of the contract and the honouring of an executory obligation may or may not involve making a supply and in the case of a landlord who has relevantly promised quiet possession and use of the premises, honouring that obligation does not involve the doing of anything at all, much less ‑ ‑ ‑
HAYNE J: Why stop the inquiry at the observation that there is an abstention from action? Why not observe the consequence that follows from the abstention from action?
MR HMELNITSKY: Because we say, your Honour, that a supply within the meaning of the Act needs to be something that has moved from the taxpayer to the recipient and cannot be met simply where it can be said that the putative recipient has enjoyed something, enjoyed a state of affairs. So, for example, one might say of a potential recipient of a supply that they derive a benefit, a need of theirs is met by a state of affairs by the state of the law, by the erection of a building or the fact that a building exists. But, even though it might be said in those circumstances that a person has a need that has been met, it does not follow that a person has supplied it within the meaning of the Act.
HAYNE J: Why then is it irrelevant to ‑ or is it irrelevant to put those observations into the legal framework of rights and obligations?
MR HMELNITSKY: There is no doubt, your Honour, that those considerations do play a role, including, in particular, the creation of rights and obligations. My point is only, your Honour, that the discharge of those obligations or the enjoyment of rights do not themselves necessarily involve supplies as distinct from the supply of the right or the entering into the obligation in the first place.
GAGELER J: What is missing?
MR HMELNITSKY: Something done by the supplier, your Honour.
GAGELER J: Something active?
MR HMELNITSKY: Something – anything done by the supplier. There is no doubt, of course, that if you enter into an executory contract you make a supply, you submit yourself to obligations to do things, and the entering into the obligation is unquestionably the granting of a supply or the making of a supply. We do not dispute that. But our point is that that is the supply on which – if money is given for entering into the obligation – that supply will be sufficient to make the consideration paid consideration for a taxable supply. The consideration paid will be brought into the GST net.
Whether or not the discharge of the obligations also is a supply is what is in issue and we say it may be a supply, it may not be a supply. Here, where all the landlord does – well, where the landlord does relevantly nothing having acquired the reversion, we say there is nothing upon which to fix the statutory concept of supply.
KEANE J: But is that not an artificial way of looking at it – to say that a landlord is doing nothing? If Mirvac does nothing then the landlord moves in.
MR HMELNITSKY: Well, Mirvac may do nothing.
KEANE J: The state of affairs is performance by each side - on one side the payment of rent, on the other side the continuing performance of an obligation to give quiet possession. If one stops, the other stops. That is when you have nothing.
MR HMELNITSKY: Well, we say that is not necessarily so, your Honour, and that the rent continues to be paid and payable whether or not the tenant uses the premises. So whether the tenant continues in occupation, continues in use of the premises, continues to enjoy quiet possession, is not contingent upon – I am sorry, I have put that around the wrong way, your Honour. The rent that is paid is still payable whether or not the tenant performs the tenant’s side of the bargain. But your Honour puts to me that what is continuing is the state of affairs ‑ ‑ ‑
KEANE J: But if the tenant stops paying rent the landlord can move in and exclude the tenant.
MR HMELNITSKY: Yes, we do accept that, your Honour; yes, that is so. But it does not follow that while ever the tenant is paying rent and the landlord is tolerating that situation that the landlord can be said to be providing anything to the tenant and that is our point, your Honour. Your Honour suggests that one might test it by the state of affairs and there is no doubt that the state of affairs that your Honour describes is as it would be ‑ your Honour respectfully correctly describes that state of affairs. But the Act does not impose tax by reference to a state of affairs. It imposes tax only by reference to particular forms of dealing and that is, we say, where the Commissioner’s analysis fails because one does not see any dealing or the provision of anything by the landlord from day‑to‑day while the tenant is in occupation and paying rent.
HAYNE J: But the state of affairs comes about because of the performance of correlative obligations.
MR HMELNITSKY: We say the state of affairs comes about because of the initial grant and then the subsequent honouring of the obligations which involves doing nothing more. So what is correlative, in our submission, is the grant and the initial entering into the executory promise by the grantor of the lease and then, on the other side, the promise to pay and the payment by the tenant from time to time. So we say that however that may be that there are correlative obligations in existence and however it may be that the state of affairs can be said to involve those correlative obligations, it does not follow that what the landlord does in sitting quietly, not derogating from the grant, not interfering with the title and not depriving the tenant of possession, that can be said to be a supply.
We do accept that there is a sense, perhaps a vernacular sense, in which one might say that the landlord is providing quiet enjoyment, but we say that is not the supply of anything within the meaning of the Act. That, your Honours, is because we say that essentially the obligation that the Commissioner relies on, the obligation to provide quiet enjoyment is essentially a negative one and when I say that I mean that it is performed essentially by doing nothing, from day‑to‑day the landlord does nothing.
Your Honours, the error that is attributed to the Full Court in South Steyne in relation to the identification of this supply is said by the Commissioner to be essentially the same error as was identified by this Court both in Reliance Carpet and in Qantas – that is, that their Honours in South Steyne, where this issue was first considered, were prepared only to recognise as a supply that which was the essence and sole purpose of the transaction, being the initial grant of the lease.
But, your Honours, in our submission that really in no way describes the reasoning of the Court in South Steyne. May I invite your Honours to go to, first, Justice Finn’s reasons, which appear behind tab 5 of the authorities in 180 FCR 409? At page 411 of the report, page 90 of the authorities, in paragraph 2, your Honours see what Justice Finn said of the question of whether or not MBI, as purchaser, made any further supply. In particular your Honours see that his Honour points out:
The covenants of the initial leases remained but the benefit of the respective tenants’ covenants and the burden of the landlord’s covenant –
as his Honour says –
“ran” with the reversion by virtue of real property legislation . . . and not by virtue of a distinct supply agreement or arrangement –
His Honour gives a reference to that. Your Honours, we say that it is quite clear that his Honour approached the identification of whether or not there was a supply in the correct way. His Honour is clearly conscious of the fact that the lease continues and quite clearly conscious of the fact that, upon acquiring the reversion, MBI becomes subject to obligations and can be expected to comply with them.
His Honour did not reject the proposition that that involved a supply because he had in mind that the supply that had previously been made was of a particular character and to identify this supply would not have been to fix on the essence and sole purpose of the transaction, as had been done both in Reliance and in Qantas. His Honour, we say, did really the very opposite of that. He considered whether, in the events which happened, there could be discerned anything that could meet the definition of “supply” – as his Honour says, “a distinct supply” – in those circumstances. For the reasons that his Honour gave, he saw that he could not.
Justice Emmett’s reasons, we say, are to the same effect. Your Honours see those, relevantly, at paragraph 32 of the reasons on page 417 of the report, or page 96 of the authorities. We say his Honour’s observations there really were to the same effect. His Honour is not, we say, falling into the error that is sought to be attributed to him by the Commissioner here – that is, the error of closing his eyes to the existence of a supply in favour of what he sees to be the supply that reflects the essence and sole purpose of the transaction. Rather, he does, we say, precisely what Justice Finn did in paragraph 2, which is to inquire as to whether there is anything that is done by MBI that might meet the definition, and he concludes that there was not.
It was only Justice Edmonds, at paragraph 76 of the reasons in South Steyne, which your Honours see at page 102 of these authorities - your Honours, it is only in Justice Edmonds’ reasons and only, I think, in paragraph 76 of the reasons where there is a reference to the notion of “the supply”, that is the grant of the lease continuing and his Honour refers to the “continuation of the first category of supply” in that first sentence in paragraph 76. His Honour continues, around halfway through that paragraph:
Its lease, originally granted by South Steyne, continued uninterrupted by the change in the owner of the reversionary interest.
It is perhaps a little unclear what it was that his Honour had in mind in referring to the continuation of the supply, or the continuing supply, but whatever it was, your Honours, it was that passage in the reasons of Justice Edmonds and the reference to a continuing supply, or the continuation of the supply by South Steyne that the Commissioner, not MBI, but that the Commissioner seized on in order to raise these assessments.
The Commissioner, at the time he raised these assessments, did so on the footing that South Steyne was correctly decided and he did so on the footing, expressly, that MBI, having acquired the reversion in the three units, made no supply, just as the Full Court in South Steyne had found. The error that is attributed to the Full Court in this case of, as it were, falling into the same error as was exposed in Reliance and Qantas, needs to be assessed against the submissions that were put to the Full Court here.
Relevantly the submission that was put to the Full Court was that, on the strength of what was said in paragraph 76 of the Full Court’s reasons in South Steyne and the reference to a continuing supply, there must necessarily be a supply continuing because of the character of the dealing between the parties and that was sufficient for there to be an increasing adjustment under section 135‑5.
One sees that perhaps best - I will just give your Honours the references to where your Honours see the argument that was put by the Commissioner. The primary judge, whose reasons start at page 251 of the appeal book, set out the Commissioner’s argument most expressly, your Honours, I think on page 266 of the appeal book, starting at about line 29 of the appeal book in what appears as paragraph (e) on that page of the reasons.
The Commissioner’s argument, based on the correctness of South Steyne and his construction of the Act, was that there was no requirement that the supplies that are referred to in section 135‑5 needed to be made by MBI and, of course, it was common ground that MBI made no supplies and intended to make no supplies.
In (f) on that page your Honours see how the Commissioner put his case, which was particularly by reference to what was said in paragraph 76 of South Steyne latching onto the concept of a continuing supply, and we would say latching onto the notion that the lease because it continues must have a particular character for GST purposes. His submission your Honours see there at the end of (f) on page 266 of the appeal book, which is that so long as it is continuing there must be a supply for GST purposes. That essentially was the – that was the argument that the primary judge accepted. One sees that in paragraph 27 of his Honour’s reasons and also particularly at paragraph 31 on page 268 of the appeal book.
When the matter came to the Full Court, bearing in mind what is said to be the error that is attributed to the Full Court in this case, when the matter came to the Full Court it was again common ground that MBI neither made – well, it was common ground that MBI did not make any supply on purchasing the reversion. It was common ground that South Steyne was correctly decided, and that meant, your Honours, that what the court was fundamentally dealing with was the Commissioner’s submission, not the taxpayer’s submission, that the question of whether or not there was a supply could be resolved by reference to the character of what had been supplied by South Steyne, namely, a lease.
The state of affairs that had been created by South Steyne continued. It had a particular character, namely, it was a lease, and while ever that continued, that supply, then it must follow that MBI intended the outcome and therefore ought to be subject to an increasing adjustment. But the first step of the argument critically is to take the reference to a continuing supply and the character that that implies and work it into section 135‑5. That, your Honours, is the proposition that was rejected in paragraph 24 of Justice Edmonds’ reasons which appears at page 290 of the appeal book. The proposition that is flawed is the failure to distinguish between what is the subject of the supply, being the lease, the transaction that occurred, and the supply itself, which is a statutory concept.
Your Honours, we say that what his Honour said in paragraph 24 in rejecting the submission that was put by the Commissioner as to the character of the supply was correct. It is fundamentally important to distinguish between the subject of the supply and the supply itself. The Act is concerned with the making of a supply. It is concerned with the transaction or the dealing. It is not concerned with a state of affairs that is created by a supply and it is not particularly concerned – I should say it is particularly not concerned with a supply made by someone other than the taxpayer.
So, your Honours, we say that the error that is attributed to the Full Court in this case, which is said to be essentially the same error as identified in Reliance Carpet and Qantas, is not made out. That was not what Justice Edmonds found in paragraph 24 of his Honour’s reasons and there is nothing in the other judgments that suggests anything different.
Your Honours, the second candidate for a supply or an intended supply by MBI upon acquisition of the reversion is what might be called the acquisition supply or the supply that is made by assuming the obligations of the landlord upon acquiring the reversion. I think in our written submissions we have identified where it is in the Commissioner’s submissions where he points to that particular supply.
There are, we say, essentially two things that can be said about that putative supply. The first, your Honours, is this. We accept, your Honours, that by reason of the acquisition of the reversion the relationship between MBI on the one hand and Mirvac on the other hand changed. There is no doubt that that occurred and it occurred by reason of section 118 of the Conveyancing Act.
But, your Honours, “supply” used in its ordinary way and used in the sense in which it is used throughout the GST Act, in our submission is just not apt to describe instances in which all that happens is legal relations change. Again, your Honours, we say that there must be a supply in the sense of some element of dealing between the parties - some transaction between the taxpayer on the one hand and the recipient on the other - that can be said to be a supply from one to the other.
Here, MBI, of course, did become subject to the obligations towards Mirvac, the sitting tenant, and following its acquisition of the reversion it was bound by the obligations under the existing leases. That state of affairs no doubt existed but we say that in none of that is there a supply of anything by MBI to Mirvac within the meaning of the Act. There is no dealing between them. There is no ‑ ‑ ‑
FRENCH CJ: It had agreed upon acquisition of the reversion to – well, as it had no alternative to comply with the obligations of landlord.
MR HMELNITSKY: Yes, that is so.
FRENCH CJ: In relation to Mirvac.
MR HMELNITSKY: Yes.
FRENCH CJ: A legal relationship sprang into existence between it and Mirvac to which it agreed – albeit it was not in the context of a contract concluded between it and Mirvac.
MR HMELNITSKY: Yes, that is so, your Honour. But, what we particularly focus on is the fact that all that has happened happens by force of law in the same way that relationships between individuals change all the time.
FRENCH CJ: Well, it did not come as lightning out of a blue sky.
MR HMELNITSKY: No, no, quite so.
FRENCH CJ: It entered into a transaction with those incidents.
MR HMELNITSKY: Yes. But, your Honour, that is certainly true but the Act here is not identifying a supply as something which causes a benefit to someone or which results in a benefit to someone. The relationship is rather different, we say. It must involve some element of provision or furnishing or dealing and we say that is not present. The sense in which there is a supply – or the provision of something that your Honour raises with me – is, of course, equally met by South Steyne in that same transaction. South Steyne equally enters into the same transaction to assign the reversion away.
It equally has its relations with Mirvac altered by reason of the Conveyancing Act and the Real Property Act. It might, on the analysis that your Honour puts to me, equally be said of South Steyne that it makes a supply in those circumstances. We say that neither party makes a supply by reason of that circumstance. As I have put, we say that the meaning of “supply” involves some element of dealing or furnishing or providing of something.
FRENCH CJ: The supply we are concerned with here is supply made through the enterprise. I know you have another point about that.
MR HMELNITSKY: I was just about to come to that, your Honour, yes.
FRENCH CJ: That rather puts the position of MBI in a different position from that of South Steyne, does it not?
MR HMELNITSKY: Yes. I only raise the position of South Steyne, your Honour, really to test the proposition that your Honour puts to me as to whether or not it can fairly be said that within the meaning of the Act there was a supply. I am really just ‑ ‑ ‑
FRENCH CJ: I understand that.
HAYNE J: The submissions you have just been making, emphasising provision, furnishing, dealing, seem, do they not, to confine supply relevantly to a consequence brought about by making of a contract?
MR HMELNITSKY: Not only that, your Honour ‑ ‑ ‑
HAYNE J: Because here other legal doctrines lead to the connection in law between the two parties concerned, do they not?
MR HMELNITSKY: They do.
HAYNE J: The legal relationship, thus established, is, so far as your client is concerned, is it not, assumed voluntarily?
MR HMELNITSKY: Yes, it certainly is that.
HAYNE J: Or assumed willingly.
MR HMELNITSKY: Yes.
HAYNE J: Why then would one chop up the legal universe into consequences that follow from one particular form of voluntary assumption of legal obligation contract and carve out of it voluntary assumption of legal obligations which occurs through the operation of the Conveyancing Act and the Real Property Act?
MR HMELNITSKY: May I answer that in two ways, your Honour? The first is that at the very outset I think your Honour put to me that on our analysis it is only the entering into a contractual obligation that would be the making of a supply. That is certainly not the way we put our case.
HAYNE J: It would be too narrow, would it not?
MR HMELNITSKY: That would be, your Honour, yes.
HAYNE J: Yes.
MR HMELNITSKY: In particular, your Honour, we say and we recognise that a supply may take any form. It need not be contractual; it need not be contracted for at all. It need not be pursuant to any prior agreement. It may be legal or illegal. The form does not matter, your Honour. That is the first thing I would say in response to what your Honour puts to me.
Secondly, your Honour, I think that the balance of what your Honour put to me, we would say, focuses on the benefit to the recipient, something enjoyed by the recipient, as a criterion for the existence of a supply, as opposed to what we say the Act focuses on, which is the doing of something, the transacting of something.
I think, your Honour, my response to at least the second part of what your Honour puts to me is that, on our analysis, invariably when people do things, in fact whenever people do things, that is a supply. It does not matter what the source of the obligation was, whether it was in contract, statute, a moral obligation. It may be illegal, of course. We say none of that matters, for the very reason that the criterion of liability is taxable supply and supply means the doing of something; it means the dealing in something. Where a recipient enjoys a state of affairs which results not from something provided by a supplier but because of a change in the law or some other circumstance, we say that is not a supply.
FRENCH CJ: But it does extend to an entry into an obligation, for example, to refrain from an act or to tolerate a situation.
MR HMELNITSKY: Yes, it clearly does. It does so by reason of the extended definition in subsection 19(2)(d), but that circumstance we say would be within subsection (1) in any event because when you enter into an obligation to do anything – or indeed to do nothing – one is transacting with a recipient. One is providing something, one is furnishing something.
But, of course, the doing of it may or may not involve making a supply at all. I might enter into an obligation to not sell my wares south of the Murray. That is an obligation I have entered into. It is unquestionably a supply. If I receive money for it it is taxable. But if, in the absence of any entry into an obligation, I just happen not to sell wares south of the Murray, within the meaning of the Act I am not making a supply to anyone, but it does not matter because wherever money is received for entry into the obligation it will be taxable. So it does not matter whether performance involves a supply or not.
The second point I was going to make in relation to what I think I have called the acquisition supply was only this, your Honours. Your Honours need not turn it up again but we say to the extent that there was error in the reasons of South Steyne or in the reasons of the Full Court in this case by reason of their Honours’ failure to see the entry into the obligations or the assumption of the liabilities, as a supplier we make essentially the same submission we made in relation to the error for which the Commissioner contended in relation to the other supply that he identifies, that is, their Honours did not reject that proposition either expressly or impliedly by recourse to the kind of thinking that was exposed in the Full Court’s reasons in Reliance Carpet or in Qantas Airways.
If your Honours are of the view that there was a supply made by MBI upon acquisition of the reversion by reason of the fact that the relation between the parties changed and by force of section 118 of the Conveyancing Act such as it could be said that MBI entered into an obligation to be bound by the covenants or otherwise made a supply in that sense, then, as we pointed out and as your Honour the Chief Justice has raised with me just now, we say in paragraphs 18 and 19 of our written submissions that there is a further difficulty in how a supply of that kind can apply in the context of section 135‑5.
This is a point, your Honours, that so far as we can tell the Commissioner has said nothing about either in writing or at least yet orally, but the point, your Honours, is a short one. Can I invite the Court to go to section 135 of the Act which appears at page 24 of the authorities. Your Honours see first in section 135‑1, which is headed:
What this Division is about
The recipient of a supply of a going concern has an increasing adjustment to take into account the proportion (if any) of supplies that will be made in running the concern and that will not be taxable supplies or GST‑free supplies ‑
and there is reference there to the possibility of later adjustment if that intended proportion of supplies changes over time. The language of the operative provision in section 135‑5 your Honours see particularly in subsection (1)(b), that liability for an increasing adjustment depends upon your intention 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.
There are two things to be said, your Honours, about that particular choice of language there. The first, your Honours, is that Division 135 only comes to be considered where there has been a GST‑free supply of a going concern in the first place, and there can only be a GST‑free supply of a going concern in respect of which there may be a later adjustment where there is a going concern, where the enterprise has been started, it has been commenced, is being conducted by the vendor of the enterprise, or a vendor of all of the things that make up the enterprise, up to the point of sale of the going concern. That carries with it, we say, the notion that the enterprise that is referred to in the adjustment provision here in section 135‑5 is the one already up and running, already being commenced and will be commenced from time to time by the purchaser.
Secondly, your Honours, the language here in respect of the conduct of the enterprise is somewhat different to the language that is used elsewhere in the Act in relation to enterprises conducted by taxpayers. One sees it perhaps most starkly in section 9‑5 of the Act. Your Honours will see in 9‑5, which tells you when you make a taxable supply, that one of the conditions for a taxable supply is that:
(b)the supply is made in the course or furtherance of an enterprise that you *carry on ‑
and “carry on” your Honours see bears an asterisk, and somewhat curiously the expression “carry on” is not defined but the expression “carrying on” is defined. I think your Honours do not have the definition of “carrying on” in the Court bundle for which I apologise but, your Honours, carrying on an enterprise is defined in such a way as to include the commencement of an enterprise, so I will just give your Honours a reference to that. I am sorry, it is section 195‑1 in the dictionary to the Act:
“carrying on” an enterprise includes doing anything in the course of the commencement or termination of the enterprise.
That reference to “carrying on” is not picked up in section 135‑5 and nor is that language of being in the course of, or the furtherance of, an enterprise that is central to the core provisions of the Act picked up in section 135‑5. Instead here the intention must relate to the supplies that are to be made through the enterprise – that being an enterprise that is already up and running and is provided to you – supplied to you.
FRENCH CJ: But that is, in this case, an activity or series of activities on a regular or continuous basis in the form of a lease.
MR HMELNITSKY: Yes, that is so, your Honour. That is the enterprise. That was the enterprise that was being conducted by South Steyne and South Steyne sold to MBI everything necessary for the conduct of that enterprise, being the reversion.
FRENCH CJ: So you say that that picks up what is said to be supply here in the sense that you cannot have a supply through the enterprise.
MR HMELNITSKY: Yes, your Honour. We say that if there is a supply involved in putting yourself in a position to conduct that enterprise at all, namely, by assuming the obligations of the landlord under the lease, then that cannot be said to be a supply that is made through the enterprise from time to time by the new landlord. It is true, on this view ‑ ‑ ‑
HAYNE J: Sorry, can you put that again? I slipped.
MR HMELNITSKY: I am so sorry.
HAYNE J: Put the proposition again.
MR HMELNITSKY: Yes, I am so sorry, your Honour. The requirement in section 135‑5 is that you intend to make a supply through the enterprise that you have acquired. The enterprise that you have acquired is a leasing enterprise which, as the Chief Justice points out to me, is one within the general definition of enterprise being carrying on of a leasing enterprise from time to time. Our point is this, your Honour, that the supply you make upon acquiring the reversion – subjecting yourself to the obligations towards the tenant – is not a supply made through the enterprise that you will conduct once you have assumed those obligations.
The enterprise that you will conduct, that you intend to conduct when you acquire the reversion, is the enterprise of being the landlord, getting in the rent from time to time. We say that it cannot be said that a supply of this particular character, being the entering into obligations to be bound by that lease in the first place, is a supply through that enterprise. That is the point, your Honour.
Your Honour, we say it is unsurprising that the language of that provision should appear that way because it is very frequently the case that in transactions involving the sale of enterprises there will be agreements which include a range of supplies going both ways. There will be covenants in relation to confidential information. There will be promises to make adjustments and all manner of things. It is just in the ordinary course of things that people make supplies in acquiring enterprises and, by the language of section 135‑5, supplies of that particular character are not within the provision. They are not the intended supplies upon which liability for an increasing adjustment rests.
GAGELER J: So that is an answer to the Commissioner’s second argument?
MR HMELNITSKY: Only the second argument, your Honour. Yes, that is so. Then lastly, your Honours, in relation to the issues that arise on the Commissioner’s notice of appeal, a question arises as to whether or not either of the two supplies for which the Commissioner contends can be said to be a supply of premises that is by way of lease, and that is because the Commissioner’s case depends ultimately upon the intended supply being an input tax supply. The only way that can be, your Honours – and this is common ground I think – is that the intended supply, either upon acquisition or upon performance of the covenants or toleration of the lease from time to time is an input tax supply within the meaning of section 40‑35 which your Honours see at page 23 of the authorities.
“Residential premises”, your Honours, is defined in section 195‑1 at page 30 of the authorities. When one reads that definition, that definition being the land or building, relevantly, back into the operative provision in section 40‑35, we say that what is required in order for a supply to be an input tax supply within the ambit of this particular provision is that there must be a supply of some rights, some ability for the recipient of the supply to use premises. Your Honours see that the definition of “residential premises” means the physical building, the physical land, but we say that read in context in section 40‑35, that can only sensibly work if the Act is there speaking of the supply of rights to use premises in some form or another.
Here, however, your Honours, Mirvac already had exclusive possession of the premises. It already had the right to use the premises. Mirvac neither before or after the acquisition – I am sorry, I withdraw that. MBI neither before nor after the acquisition of the reversion had any ability to detract from Mirvac’s right to use the premises and could not have stopped Mirvac from using the premises.
The Commissioner, we submit, puts his case perhaps a little too high on this question. He submits that what MBI did following acquisition of the reversion was to allow use of the premises, to provide use of the premises, and so on. But, your Honours, that does not accurately reflect the relations as they existed following acquisition of the reversion because Mirvac, as I say, already had all of those things that the Commissioner says were supplied. They already had all of the rights in respect of the residential premises by reason of the original lease.
Lastly, in relation to this question, your Honours, the Commissioner has submitted that there is something to be gained in his case from what was said in Westley Nominees in the Full Court on this issue. That, your Honours, is not so. Westley Nominees 152 FCR 461, behind tab 3 of the authorities, your Honours, potentially involved a very similar question but, your Honours, at paragraph 23 of the court’s reasons on page 60 of the authorities, your Honours see that on this particular question, namely whether or not the acquisition of the reversion involved a supply by way of lease, your Honours see that the court declined to determine that question and in the final sentence in that paragraph your Honours see what their Honours said:
the indications discussed [above] tend to point away from that construction.
So we say that the Commissioner’s reliance on Westley Nominees on this particular question is misplaced. Your Honours, that really brings me to notice of contention point. The notice of contention which is at page 307 of the appeal book is essentially this, that if, contrary to our primary submission, the respondent did make or did intend to make supplies through the leasing enterprise that it acquired from South Steyne, then there is, even in that event no increasing adjustment because none of its intended supplies was for a price within the meaning of the GST Act.
In terms of the formula in section 135‑5(2), which is at page 24 of the authorities, your Honours see that the adjustment is calculated by reference to the price of the supplies that you intend to make through the enterprise. “Price”, your Honours see, where it is used in the definition of “proportion of non‑creditable use” has an asterisk and that, your Honours, picks up the definition of “price” which takes one back to section 9‑75 of the Act.
I will come to 9‑75 in a moment, your Honours, but may I just say at the outset that what it seems to us really divides the parties on this notice of contention is really a question of construction of section 9‑75, namely this, your Honours. Can an amount of consideration that is provided in connection with two supplies be for both of those supplies within the meaning of the Act and specifically can the one amount of consideration be the price within the meaning of section 9‑75 of more than one supply.
The issue arises because it is common ground - if the Court gets to the notice of contention - that the rent is in connection with two supplies. It is in connection with the grant of the lease, for the reasons that we have endeavoured to set out in our written submissions, and it is also in connection with the later use of the premises from month to month by the tenant.
The issue of construction is really laid bare, in a sense, by paragraph 10 of the Commissioner’s reply submissions, where he says that, within the meaning of section 9‑75, the one amount of consideration – say a monthly rental payment – can, within the meaning of the GST Act, be for more than one supply and specifically that it can be the price of more than one supply.
That is the construction that we dispute, your Honours. In our case we put it this way: we say that an amount of consideration may clearly be paid in connection with a series of supplies within the meaning of the Act. That was the case in Qantas and it was the case in Reliance and it is the case in most circumstances in which people enter into contracts.
But we say that once the core provisions of the Act treat that amount of consideration as being for one of them, such that one can then identify a taxable supply, then that supply – that first supply, the entering into the contract, the selling of the airline ticket – is a taxable supply, and the consideration that was received is the price of that supply. It does not matter that it was also received in connection with other supplies that may or may not have happened. Those are the supplies. Once the consideration has been brought into the GST net, they are of no consequence for the GST Act, and the Act has no occasion to assign a price to those supplies and we say it does not do so.
In the language of the Act, we submit that the rent that is paid to a landlord from time to time is in connection with the grant and on this view it is in connection with the use from time to time of the premises, but it is treated by the Act as only being consideration for one of them – that is, the first one to occur, save some special provision of the Act that provides otherwise. There is none here.
GAGELER J: How does section 9‑15(3)(a) fit with that argument?
MR HMELNITSKY: The effect of section 9‑15(3), your Honours, is consistent with what I have put in relation to how the Act works. We would say what the Commissioner says in relation to that provision, which is that it is really there out of an abundance of caution. I think that was my learned friend’s response to your Honour. But it brings about the same result as that which is brought about by the core provisions in the way I am going to attempt to show in any event. It does not work any different outcome. It just makes clear that when one has an option agreement that the additional consideration that is paid when a later supply is made is brought into the GST net.
We do not suggest that it really alters the operation of the core provisions in any way and we do not suggest that it has any particular application here. The Commissioner’s construction of these core provisions that leads him to the submission that the one amount of consideration may be the price of more than one supply we say suffers from a series of difficulties. I will come to them in due course. But, your Honours, fundamentally it seems to us to misstate the effect of the attribution provisions.
I say that for this reason, your Honours. On the Commissioner’s case, the one amount of consideration may be received in connection with a series of supplies. It may be received in connection with an airline ticket and it may also, at the same time, be in connection with the flight and that is undoubtedly so. But, the Commissioner says that where that occurs – that one amount of consideration – the thousand dollars you pay for your ticket – is, for the purposes of the GST Act, the price of the ticket and it is also, within the meaning of the GST Act, the price of the flight.
The Commissioner says, we think, that that consideration is brought to tax only once because of the attribution provisions. On his view – on his construction – the Act assigns a price to supplies more than once but it avoids a problem of construction and a practical problem of double taxation in Division 29 which contains rules about attribution.
The fundamental difficulty with that conception of the Act, your Honours, is this. Suppose, on the facts of Qantas, that an airline sells a ticket and a passenger takes a flight. So, unlike Qantas where none of the flights were taken, the ticket is sold and the passenger takes the flight and they do so in the same tax period – they do so on one particular day. Then, on the Commissioner’s construction, two supplies have been made – unquestionably there are two supplies at the very least, probably many more, and at least those two supplies, within the meaning of the Act, each have a price and the price is the same because the same amount of consideration is received in connection with them.
The Commissioner says that the consideration is only attributed to one tax period and he does so by recourse to the attribution rules. But the attribution rules, your Honour, which appear in Division 29, starting at page 15 of the authorities, do not do anything of the kind. What the attribution rules do is to tell you when the GST payable by you on a taxable supply is attributable – which tax period the amount of GST that you have to pay goes into. Those opening words in section 29‑5(1):
The GST payable by you on a taxable supply –
pick up the language of the provisions of the Act that impose the obligation in the first place – section 7‑1 – and, more particularly, section 9‑40 which appears on page 8 of the authorities. Section 9‑40 says that:
You must pay the GST payable on any taxable supply that you make.
The difficulty with the Commissioner’s construction is that it does not, in our respectful submission, grapple with how GST comes to be payable only once where multiple supplies are made. The answer is not to be found in Division 29. The answer, we say, both as to why there is only one taxable supply and as to why consideration may only be treated once as the price for that taxable supply is that that is simply the effect of what the Act calls the core provisions – the relationship between section 9‑5, section 9‑40 and section 9‑75. Your Honours see on page 2 of the book of authorities, your Honours see in 9‑5(a) the critical statutory language that:
You make a taxable supply if:
(a) you make the supply for consideration ‑
and the reference to consideration, your Honours see is defined. It is defined in section 9‑15 expansively, and also inclusively, to include:
(a) any payment . . . in connection with a supply –
Where the requirement in section 9‑5 is met, so where consideration in connection with the supply is treated by the Act as being consideration for a supply in section 9‑5, then you have made a taxable supply and the amount of tax that you pay on the taxable supply is worked out in this way. First, your Honours see in section 9‑40 that having made the taxable supply, you must pay the GST payable on it, and Subdivision 9‑C, which your Honours see towards the bottom of page 8 of the authorities, is entitled:
How much GST is payable on taxable supplies?
9‑70 tells you that it is:
10% of the value of the taxable supply ‑
and value is defined in section 9‑75 as a function of the price. But your Honours see that price is defined in section 9‑75 in a way that mirrors the statutory concept of a taxable supply. Your Honours see that it uses the word “for”, just as section 9‑5 uses the word “for”, and together, your Honours, those provisions operate to tell you when GST is payable, that is, when you make a taxable supply, and they tell you how much, and in each case they do so by reason of the relationship which the Act sees between the consideration on the one hand and the supply on the other.
So we say, your Honours, that the consideration for the supply that is referred to in the definition of “price” in section 9‑75, is the consideration for which the supply was made. That is, coming back to the critical language in section 9‑5:
you make the supply for consideration ‑
and the amount of tax you have to pay by reason of that occurring is calculated by reference to the consideration for that supply.
Now, your Honours, just as not all consideration in connection with a supply is consideration for a supply, not all consideration in connection with the supply is the price of a supply and that, we say, flows from what the Court held in Reliance Carpet. Your Honours will find Reliance Carpet reported in (2008) 236 CLR at 342 and also behind tab 4 of the authorities.
That was a case, your Honours, in which there had been a contract for the sale of land that had been entered into, the contract went off and the deposit was forfeited to the vendor. The issue in the proceedings was whether or not the forfeited deposit could be seen to be the consideration for a supply.
Your Honours, there are perhaps three things that we particularly emphasise about the Court’s reasons in Reliance Carpet. The first, your Honours, is this. In paragraphs 4 and 5 of the Court’s reasons at page 346 of the report and page 76 of the authorities, your Honours see the emphasis given, particularly in paragraph 5, to what the Court called:
The composite expression “a taxable supply”.
Their Honours pointed out that that is of critical importance for the creation of liability to GST. That is to say, your Honours, that the mere making of a supply is never sufficient for the Act to bite; there must be a taxable supply within the meaning of section 9‑5.
Secondly, your Honours, the case concerned particularly the difference in language that one sees as between section 9‑5 on the one hand and section 9‑15 on the other. Section 9‑15, as your Honour Justice Keane I think pointed out to me on the last occasion, read together with section 9‑5, presents on one view a difficulty of construction, but what the Court in Reliance Carpet was very careful to do was to distinguish between the two concepts. On the one hand, it was important and necessary to show that the deposit was consideration in connection with a supply and that requirement was met because the supply was easily identified as the entry into the contract in the first place and it was not difficult to conclude that the forfeited deposit was in connection with it.
But, your Honours, the question posed by section 9‑5 is a different one. It is whether or not the Act treats the consideration as being for a supply. That involves a different question, and that is made clear, your Honours, by what is said in paragraph 33 in particular in the reasons of the Court in Reliance Carpet. First, as the Court pointed out, it is necessary to show that the consideration is:
“in connection with” a supply –
and as their Honours pointed out at the very top of the next page, that was readily seen in that case. But, your Honours, in the last sentence in that paragraph 33 your Honours see that:
as to the requirement for “consideration”, that is not the end of the matter.
It is not the end of the matter, we say, because the second critical step is that the consideration must be treated by the Act as being consideration for the supply. That particular question was affected in Reliance Carpet by the existence of a wait and see provision in Division 99, and so the time at which that was taken to occur, that is, the time at which section 9‑5 was taken to treat the consideration as being for a supply, was affected by that wait and see provision. Your Honours see that once that wait and see provision had done its work then the Act was able to treat the consideration as being for the initial supply.
Now, just pausing there, your Honours, those observations about how the GST Act works were sufficient to dispose of the appeal in Reliance Carpet and they were also sufficient to dispose of the appeal in Qantas. In neither of those cases had there been a second supply in connection with which the consideration had been received. They were both cases in which the consideration that was sought to be brought into the tax net was in connection with two supplies, but only one had been made.
But, your Honours, in paragraphs 41 and 42 of Reliance Carpet the Court dealt with what would occur if two supplies had been made. Again, their Honours’ observations about how the Act works in this circumstance were affected by the fact that, in the case of deposits, Division 99 alters the usual outcome in terms of timing, but we draw attention to those paragraphs because they deal with in a sense the issue that arises on the notice of contention, which is how does the Act work where consideration is received in connection with two supplies that are actually made? The Court’s conclusion in paragraph 42 in particular is that it is “not treated as consideration for a supply” except by the Act. That is as we would characterise paragraph 42 of the Court’s reasons. In other words, the Act only treats consideration as being for a supply once. It does not treat consideration as being for all of the supplies in connection with which it is given.
Qantas Airways, your Honours, is essentially, in our submission, to the same effect. Again, your Honours, that was a case in which consideration, being the payment of the fare, was received in connection with more than one supply but, like Reliance Carpet, the second supply, the flight had not occurred, and so it was sufficient to dispose of the appeal in Qantas by reference to those same observations that had been made in Reliance Carpet, namely, the Commissioner need only show that consideration was received in connection with the supply and that the Act treats that consideration as being for the supply. That was easily demonstrated in Qantas.
But the question arises, your Honours ‑ and I said something about this at the outset when I began to deal with the notice of contention – the question arises as to how the Act would work in a case like Qantas if two supplies were made and the answer, we say, is that section 9‑5 and section 9‑75 together ensure that the consideration in connection with many supplies is only made consideration for one of them ‑ we say it is the first one that occurs – and within the meaning of the Act, only one of those supplies has a price. The Act just does not have occasion to fix prices for supplies that are not taxable. They are otherwise of no consequence in the scheme of the Act.
The Commissioner seems to seek some support from what was said, in particular, in paragraph 19 of the Court’s reasons in Qantas Airways. It is behind tab 6 of the authorities, your Honours. At page 124 of the authorities, on page 293 of the report, which incidentally is 247 CLR 286, your Honours see in paragraph 19 a reference by their Honours to what was said in Reliance Carpet at paragraph 5, and then the Court continued:
That is not to deny that the one consideration may be received for more than one supply, although, as noted above, the GST will be payable once and will be attributable to the first tax period in which any of the consideration is received or invoiced.
That observation is undoubtedly true in the context of Qantas because there was not only one supply, and the GST that was payable by reason of selling the ticket was undoubtedly attributable to that particular tax period. But it does not follow from that, your Honours, that consideration received in connection with multiple supplies will be treated by the Act as being consideration for multiple supplies within the meaning of section 9‑5 and, your Honours, it does not follow from what was said in paragraph 19 of Qantas that a problem of double taxation is avoided in that circumstance by way of the attribution rules, because Qantas was not concerned with a situation where two supplies were made and it was necessary to resolve a conflict between the two of them. We say that that was the circumstance that was considered by the Court in Reliance Carpet at the very end of the Court’s reasons in paragraphs 41 and 42, and we say that nothing said in Qantas really alters that outcome.
So coming back to the provisions of the Act, your Honours, we say it works in this way: that where consideration is received in connection with several supplies, in order for a GST liability to arise there are relevantly two criteria, two things, that must be shown. The first is that the consideration must be in connection with one of them, and that is essentially a factual inquiry. A contractual connection will ordinarily be sufficient, and that is in order to satisfy the requirement in section 9‑15 that the consideration be in connection with the supply. But, secondly, your Honours, and critically, that consideration must be treated by the Act as consideration for a supply, picking up the words of section 9‑5, and it is in that way that the Act brings consideration into the GST net – tax can be paid on it – but the Act only does that once.
The language in section 9‑5 which differs from the language in section 9‑15 accommodates the possibility that the Act might hold up the connection between the consideration on the one hand and the supply on the other such as it did in Reliance Carpet, but it also accommodates the possibility, your Honours, that the Act might already have treated that consideration as having been for a taxable supply.
So in the Qantas example, the language in section 9‑5, consideration for a supply, accommodates the possibility that where a fare is paid and a flight is taken that the Act, although it will see the consideration as being in connection with both of those supplies will treat it as consideration for a taxable supply only once. So coming back to our notice of contention and how we say all of that applies here, it is, as I have submitted, common ground that rent when it is paid is in connection with two things.
It is in connection with the grant of a lease and it is on this view also in connection with the use of premises. Where rent, like any consideration, is received in connection with more than one supply, the Act will only see one taxable supply and as soon as that has occurred it will have no occasion to treat that consideration as being for any other supply ‑ ‑ ‑
KEANE J: So does your argument depend on the notion that the promise to pay rent made originally or initially on the creation of the lease is the same as payment of rent from time to time?
MR HMELNITSKY: No, your Honour. It is that where the rent is in connection with more than one supply – we do not deny that it is in connection with use on this view, it is on this view. The only question is how the Act treats consideration that is in connection with more than one supply, and the point that we make is that the Act treats consideration as being for a supply once only, and wherever a supply is made and consideration is received in connection with it there will be a taxable supply and the price of that taxable supply will be the amount of consideration for it.
The Commissioner’s case here in relation to the increasing adjustment is that the rent that came in from time to time after the acquisition of the reversion was the price of the use of the premises within the meaning of the GST Act and at the same time was the price of the grant. The submission we make is that that is not how the GST Act works. It applies once and once only to bring consideration in, tax is paid on it, and that is the end of the hunt for the relationship between consideration and supplies. That is how we put the notice of contention, your Honours. The last matter I think I need to deal with, your Honours, is the ‑ ‑ ‑
KEANE J: Mr Hmelnitsky, can I just ask you, why would not one analyse the lease relevantly as there is a promise to grant an estate and quiet possession for the term of the lease in return for a promise to pay rent for the term of the lease? Then, there is also the supply of the use of premises from time to time in return for payment of rent from time to time.
MR HMELNITSKY: Is your Honour putting to me that there may be separate supplies and the consideration is in connection with the separate supplies?
KEANE J: Yes.
MR HMELNITSKY: That, your Honour, really is the point that we make. Assume that the Court is of the view that there is a supply that is made from time to time after you purchase the reversion. The difficulty of construction is that there are two supplies but the one amount of consideration is, on any view, in connection with two of them. The difficulty is how does the GST Act resolve that tension? Does it ascribe a price to each of those supplies and then iron out the difficulty through the attribution rules and we say it does not. We say it is simpler than that. The Act only fixes a price once, it does so in section 9‑75 by reference to the consideration that has been treated by the Act as being for a supply. It is in that way that consideration, although paid in connection with multiple supplies, is only brought to tax once but it follows that only one supply has a price within the meaning of section 9‑75.
So we say that the price of supplies made by MBI, having acquired the reversion, was nil. Contractually, of course, there is a connection between the two and for the law of contract undoubtedly it could be said that the one is for the other, but as the Court pointed out in Qantas at paragraph 14, the expression “the supply for consideration” does not import contractual principles and, we say, nor does the expression “consideration for the supply” in 9‑75. They work together. They do not bear a relation to contractual principles, or principles of commerce, except insofar as the one must be in connection with the other, but as to how the Act treats the consideration which is, after all, the subject of the tax, we say that it does it once and once only.
GAGELER J: You took us down this route because you said Division 29 does not itself contain any provision that would prevent double counting on the Commissioner’s construction.
MR HMELNITSKY: Yes, your Honour, yes.
GAGELER J: If consideration for two supplies is received only once, is that not enough to prevent double counting?
MR HMELNITSKY: No, your Honour, because if on the one day I buy a ticket and take a flight, then in that one tax period Qantas has made two supplies to me and Qantas has received a thousand dollars in connection with two of them – both of them – all of them – because there may be many. The Commissioner’s argument is that the attribution rules tell you that you only pay tax once. But all the attribution rules do is tell you which period your GST is attributed to. If both of those things occur in the one period, it will be potentially, on the Commissioner’s construction, attributed twice.
On the Commissioner’s view, both the ticket and the flight have the same price, price within the meaning of the Act. We say this is all resolved simply by the construction of the core provisions which – I am repeating myself now, but they do it once and once only, and price does not hang there giving a price to supplies that are not otherwise within the scope of those core provisions, which is how the Commissioner would see it.
The Commissioner would accept that in the case of the Qantas flight, the ticket that is sold and the flight that is taken on the one day, tax is only payable once. We are in agreement about that. The only question is how, how do these core provisions work to bring that about? Your Honours have my submission as to how that is so.
The very last point, your Honours, that I need to deal with is the suggestion that should the respondent succeed there will be anomalous outcomes here. We have said something about this already in the written submissions, but can I deal specifically with what was said by our learned friends to be the anomalous outcome here, that is to say, in the case of an input tax supply? It is common ground, of course, that the grant of the lease by South Steyne to Mirvac was input taxed. That had the consequence, your Honours, that there was no GST chargeable on the rent, and Mirvac could not claim an input tax credit.
When MBI acquired the reversion in those units, nothing changed in that regard. The rent was the same, no GST was payable on it, on any view, and Mirvac still cannot claim an input tax credit. Whether or not there is an increasing adjustment, whether or not MBI can be said to be making a supply, makes no difference whatsoever to the collection of GST on the rent because, as we have emphasised in writing and as I stress now, an input tax supply is not taxable. GST is not payable on the rent and no one can claim a credit.
The anomaly for which the Commissioner contends is this, that because South Steyne, when it set the rent on the lease to Mirvac, did so at a price that would allow it to recoup the cost of that lease having been input taxed, then MBI, who acquired the reversion, is making some form of a windfall profit or windfall gain at the expense of, we assume, Mirvac. We say there is just no basis to reach that conclusion. All that has happened is that MBI has acquired a reversion with a lease in place at a particular level. One would assume, reasonably, that the parties would act in their interests in setting a price for that income stream, and one would presume that MBI, acquiring the reversion with leases in place that do not involve any GST, would pay a price that reflected the value to South Steyne, having put the leases in place and having disposed of them.
There really is no anomaly, there is no capricious outcome here in relation to input tax supplies. The other possibility for which the Commissioner contends is that MBI, if it were to succeed on the appeal, or rather – I will put that a different way, your Honours, if I may – should MBI succeed on the appeal, anomalies would arise in the case of taxable supplies of premises, because on the Commissioner’s view, section 156 or Division 156 of the Act may not work to deal with the GST consequences of taxable leases.
In our submission, that really has nothing whatever to do with this case. If there is any difficulty of construction in relation to Division 156, then that really needs to be resolved in a case in which it has some bearing on the outcome. It has no bearing on the outcome here. In any event, your Honours, on any view of Division 156 of the Act, GST would be payable on a lease both before and after the sale of the reversion. A tenant would be entitled to input tax credits both before and after the sale of the reversion. The only question would be, who is it who has the liability to the Commissioner? Is it the original landlord who granted the lease, or is it the purchaser of the reversion? Again, a circumstance that one might reasonably think is sorted out commercially between the parties. So we say that the argument for which MBI contends gives rise to no anomalies and no capricious circumstances. If the Court pleases, those are our submissions.
FRENCH CJ: Thank you, Mr Hmelnitsky. Yes Mr Slater.
MR SLATER: Thank you, your Honours. Your Honours, I had proposed, subject to anything your Honours might say, to respond by taking the points of my friend’s three‑page outline in turn. As to paragraphs 1(a) and (b), there is no issue between the parties. As to paragraphs 1(c) and the related argument at paragraph 7(d), we would say that the propositions advanced in those paragraphs are not supported by authority and are contrary to authority in this Court.
If I could make that good briefly? The first citation is from Reliance 236 CLR 346 at paragraph 5. That is on page 76 of the bundle of materials. Our friends put that in support of the proposition that there will be only one taxable supply. If your Honours look at what the Court said in that case, their Honours said that:
upon examination it may appear –
not will be, but may appear –
that there is no more than one “taxable supply”.
We would say that that paragraph does not support the contention advanced. The observations of the Court at paragraph 12 in Reliance on page 347 of 236 CLR again do not support the proposition for which they are advanced and, in any event, turn on the special provisions in section 99‑5, as your Honours will see from the last sentence of that paragraph. The observations at paragraphs 41 to 42 on page 356 of the report in Reliance at 236 CLR are also addressed to Division 99. The limitation in Division 99 is summarised at paragraph 42 and the conclusion in paragraph 42 of those observations has, in our submission, no operation outside that division.
Turning to Qantas, the observations at paragraph 33 of the report in 247 CLR, reproduced at page 130 of the bundle of materials, do not address the case of more than one supply in connection with a single consideration. The dispute in Qantas concerned only the case where the promise was supplied and performance was not called for. The present case concerns the case where consideration was in connection with two supplies. Having said that, I will come back in a moment to my friend’s argument about Qantas as he gave it orally this morning.
At paragraph 14 on page 292 of Qantas, reproduced at page 123 of the bundle, the contractual analysis which is advanced by our friends in paragraph 7(d), that is, that consideration must be, or can only be, for one supply, was rejected by the Court in that case. It was said there that “a connection or relationship” was enough.
Can I come back in a moment to deal with the observations at paragraphs 19 and 5 of the judgment in Qantas? The core issue between the parties is that identified in paragraphs 2 and 3 of our friend’s submissions. In our submission, the definition of “supply” is broader than, as my friend puts it, dealing, some dealing between a supplier and a recipient. Section 9‑10(1) extends the definition to “any form of supply whatsoever”, and in subsection (3) extends it to the case whether or not the supply is voluntary. There is, in our submission, no basis for confining the meaning of “supply” to its so‑called ordinary meaning in the face of language which explicitly adopts the widest possible meaning, “any form of supply whatsoever”.
In our submission, what is furnished or provided here is the use of the premises in question, with the benefit of quiet enjoyment, and that is so notwithstanding that the new landlord is bound to afford the use. That is the point of subsection (2) of section 9‑15. In our submission, if one is looking for a thing, and we would submit to the Court that that is perhaps putting too narrow a constraint on the definition in section 9‑10, but if one is looking for a thing, the thing is the use of premises which is supplied. Our friends would have it that the only supply is the making of the contract and that its performance is not a supply. We would contest that.
Your Honours, this point has been addressed at length. May I just briefly remind your Honours of the point which the Chief Justice made in argument to my friend, and that is that section 9‑5, paragraph (b) requires that a taxable supply be made:
in the course or furtherance of an enterprise –
and section 9‑20 defines an enterprise to be ‑
an activity, or series of activities, done ‑
inter alia –
(c) on a regular or continuous basis, in the form of a lease –
It is clear from that that the Act contemplates that what is done by a landlord, although the landlord is obliged to do it by the terms of the lease, is nonetheless a supply and continues to be a supply during the continuation of the lease. The very going concern which was supplied here was the supply of the enterprise, as so defined, of affording to the tenant the use of the premises.
Turning to paragraph 4 of our friend’s submissions, what is in issue here is not any supply on acquisition by MBI of the premises. What is in issue is the supply of the use of the premises after acquisition. Our friend’s argument based on the words “will be made” in section 135‑5(1) and on the intention that supplies “will be made” in paragraph (b) of subsection (1) of section 135‑1 all turn on the proposition that the purchase of the land is not a supply through the enterprise, but that is where the argument, in our submission, breaks down. It is not the acquisition of the land that is the supply in contest. It is the supply of use of the premises after acquisition which is the intended supply which is not either taxable or GST‑free.
The arguments advanced in paragraph 5 of our friend’s submissions are, in our respectful submission, misdirected. The question is not whether there is a supply simply upon acquisition, but whether there is a supply intended to be made after acquisition. This is somewhat repetitive of what I have already said, but the going concern enterprise was the leasing enterprise referred to in section 9‑20(1)(c). The use of the premises was supplied through that leasing enterprise and section 135‑5(1)(b) refers to intent, not to certainty.
The reference to section 40‑35 in paragraph 6 of our friend’s outline is addressed by us in writing and orally in‑chief. What is done, in our submission, under the terms of the lease and wholly in discharge of rights and obligations expressed in the lease is done by way of lease within section 40‑35. Our friend’s oral argument was based on the premise that the only supply was the grant or creation of the rights as tenant. We say the supply in issue is the supply of use of the premises.
GAGELER J: Is that different from quiet possession?
MR SLATER: No, your Honour, it is just a different way of putting it. It is supply of use with the benefit of quiet possession and the benefit of all the landlord’s covenants expressed in the lease.
GAGELER J: So it was put against you, or at least in Mr Hmelnitsky’s argument he characterised your argument about supply as having two alternatives. Are you saying that the second alternative is not put?
MR SLATER: I confess that I am not quite sure what the second alternative in my friend’s account of my argument was.
GAGELER J: He labelled it, I think, the acquisition supply, that is, that there was a supply which occurred by assuming the obligations of the landlord. At least, that is as I understood his characterisation of your argument.
MR SLATER: We would say that that is also a potential supply, but the supply that we rely on principally is the provision of the use of the premises and the benefit of the landlord’s covenants, including quiet enjoyment.
Your Honours, if I could turn then to paragraph 7 of our friend’s outline, and this is the argument concerning price in section 135‑5(2). In essence, the problem with the argument that our friends advance here – there are two problems, but the first problem, the fundamental one perhaps, is the one which was identified in the exchange between Justice Keane and my friend where the question was asked whether it could be said that the grant of the lease was given in exchange for the promise of rent and the use of the premises was given in exchange for the payment of rent.
Although it may not be fair to my friend to say that he adopted that proposition, it was the issue which was tested. What actually happens here, or what was intended to happen, using the language of section 135‑5, is that it was intended that MBI would receive the rent and intended that MBI would supply the use of the premises. That really is the end of the discussion about price; that is, the price for the rent which was to be paid is the price for the supply which was to be made. The rest of the debate about whether there is one supply or two supplies is beside the point.
The second problem is that the argument that my friend put, that there can be two taxable supplies on the making and the performance of a contract and that each of them gives rise to a liability tax which is cumulative, is the argument which was tested, and as I recall but perhaps imperfectly, tested by Justice Hayne’s questions to me in Qantas; that is, Qantas was concerned with cash paid to Qantas by passengers who had contracted for carriage by air, but having paid the price did not turn up to take the carriage.
We argued in that case that that was consideration for a supply of contractual rights. The issue which was tested in the course of argument was whether, if the passenger did turn up and took the flight, it could be said that there was supply both of the contractual rights and of the carriage and that the one payment was the price of each of them. We submitted in that case, as we submit in this case, that the price is only brought to tax once. That is the scheme of the Act.
In the judgment, although, as my friend says, it was not necessary for the Court in deciding that case to deal with the case where the passenger did turn up and take the flight, nonetheless the point was adverted to in the passage which my friend took your Honours to on page 294 of 247 CLR, at the end of paragraph 19, it is on page 125 of the book of materials – at the end of that paragraph the Court said:
That is not to deny that the one consideration may be received for more than one supply, although, as noted above, the GST will be payable once and will be attributable to the first tax period in which any of the consideration is received or invoiced.
The footnote to that paragraph, footnote 23, refers the reader back to paragraph 5 of the judgment, which is an account of the argument which was advanced by the Commissioner but, in our submission, reading paragraph 19, one reads that as acceptance of that argument. The argument which was advanced and, in our submission, accepted, was that:
the effect of the GST Act is that with respect to any particular transaction the GST is payable only once, at the end of the attributable period. In particular, GST is not payable more than once by reason that the consideration is received in connection with an executory contract which involves more than one supply. Thus, GST on the consideration received is not payable in each of the tax periods in which a series of events occur in performance of an executory contract; the GST is payable once, in the tax period of the first payment or invoice.
In our submission, those observations are a complete answer to the proposition which my friend puts about section 135‑5.
GAGELER J: Is it the operation of section 29‑5 that produces the result referred to in the argument?
MR SLATER: In our submission, that is the scheme of the Act, yes, and that is the way it works. It is attributed to one tax period and it does not matter how many different supplies a consideration might be in connection
with, only once is the supply brought into the calculation of a net amount upon which tax is payable. Any other answer would make a complete nonsense of the Act. It would involve parsing every transaction minutely to discern how many different supplies could be associated with the one payment to the taxpayer.
GAGELER J: You both give the same answer. You just have different ways of getting to it and yours is through section 29‑5 as I take it?
MR SLATER: Yes. We would say that is the correct answer and we would say, for the reasons I gave a little earlier, that neither our answer nor our friend’s answer assists my friend in his argument based on section 135‑5(2).
May I digress briefly from my friend’s outline to one further matter that he mentioned and that was the matter of the errors, or the error in the reasons of the Full Court? We accept that the case we are putting here is not the case which was put to the Court below, either at first instance or on appeal. At first instance, it was not open to the Commissioner to put that case. On appeal, it was in practical terms, although not in strict legal terms, not open to the Commissioner to put that case. It would have been necessary to persuade the Court below that its own decision in South Steyne was plainly wrong and a different course was taken. But in this Court we say that the decision in South Steyne is wrong and that it should be reversed and that the Court below, in the present case, was wrong to follow it.
Finally, your Honours, as to the matter of implications, what my friend said at the end of his oral submissions is correct in that in the case of an input tax supply the anomaly to which we referred in our written submissions and in‑chief does not arise. As a matter of incidental byword, it was argued both by South Steyne and by MBI in the case reported in South Steyne that the supply by MBI to Mirvac, the supply which is in contest in these proceedings, was a taxable supply. Your Honours will see that at page 422 of 150 CLR at paragraph 71.
Your Honours, the fundamental basis of the reasoning of the Full Court in South Steyne and in the present case that there is no supply by the purchaser of a reversion made to the tenant sitting at the time of purchase has the necessary consequence that in the case of an ordinary commercial lease – not in the case of an input tax lease such as the present – that the irrational consequences we put in our argument in‑chief must follow and for that reason, in our submission, the conclusion of the Full Court in this case and in South Steyne is one which is disruptive to the scheme of the Act to its ordinary operation and extraordinarily implausible and for the reasons we have given, apart from that, should be rejected. If your Honours please.
FRENCH CJ: Thank you, Mr Slater. The Court will reserve its decision. The Court adjourns until 2.15 this afternoon.
AT 12.11 PM THE MATTER WAS ADJOURNED
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