Commissioner of Taxation v MBI Properties Pty Ltd
[2014] HCATrans 200
[2014] HCATrans 200
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 THURSDAY, 11 SEPTEMBER 2014, AT 10.00 AM
Copyright in the High Court of Australia
MR A.H. SLATER, QC: May it please the Court, I appear with my friend, MR B.C. KASEP, for the appellant. (instructed by Australian Government Solicitor)
MR J.O. HMELNITSKY, SC: If the Court pleases, your Honours, I appear with my learned friend, MR D.P. HUME, for the respondent. (instructed by Balazs Lazanas & Welch LLP)
FRENCH CJ: Yes, Mr Slater.
MR SLATER: Thank you, your Honours. Your Honours, on 30 October 2007, Mirvac Management Ltd, a company to which I will with your Honours’ consent refer to as “Mirvac”, was the tenant under a lease for a term of 10 years of three premises comprised in strata lots in a building at Manly, a seaside suburb of Sydney, which was used as an apartment hotel. On 31 October, the respondent, MBI Properties Pty Ltd, to which I shall refer as “MBI”, purchased the three lots subject to the lease and with the intent that the lease would continue and that it would receive the rent in the future.
The principal issue in this appeal is whether for GST purposes, the relationship between MBI and Mirvac after the purchase was that MBI supplied the premises to Mirvac. The course of our submissions, in brief, your Honours, will be in four stages. I will take your Honours to the statutory context, then to the facts in brief and the application of the statute to the facts, then to the respondent’s contention, and finally to the errors that we submit are to be found in the reasons of the Full Court.
If I could begin by taking your Honours to the statutory context, your Honours should have a bundle of materials which has been prepared by the parties, and if I could take your Honours to page 24 of that bundle, where your Honours will find the section under which the assessment in contest was made; that is section 135-5, which provides that:
You have an increasing adjustment if:
(a) you –
and I pause there to say that “you” is used throughout the Act to refer to the taxpayer –
are the recipient of a supply of a going concern, or a supply that is GST-free under section 38-480; and
(b)you intend 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.
The significant contest in the appeal concerns the words “supply” and “input taxed supply”, that is to say a supply which is neither taxable nor GST free. Your Honours will find the definition of “supply” on page 2 of the bundle in section 9‑10 and I draw your Honours’ attention in particular to the opening words in subsection (1):
A supply is any form of supply whatsoever.
It is our submission that those words are extremely broad. They are as broad as they could sensibly be. Then in subsection (2):
Without limiting –
and I emphasise those words –
Without limiting subsection (1), supply includes any of these –
and I do not need to take your Honours to these in any detail but simply to note that paragraph (a) covers goods, paragraph (b) services, paragraph (c) advice or information, paragraph (d) a grant of “real property” and those are the words which attracted the attention of the Full Court:
(e)a creation, grant, transfer, assignment or surrender of any right;
(f) a financial supply –
which does not arise here –
(g) an entry into, or release from, an obligation –
and materially for the present matter –
(ii) to tolerate an act or situation;
(h)any combination of any 2 or more of the matters referred to in paragraphs (a) to (g).
I draw your Honours’ attention also to subsection (3) which is on page 3 of the materials:
It does not matter whether it is lawful to do, to refrain from doing or to tolerate the act or situation constituting the supply.
Your Honour, “input taxed supply” is defined in section 9‑30(2) which your Honours will find on page 7 of the bundle to include:
A supply is input taxed if:
(a) it is input taxed under Division 40 –
and your Honours will find Division 40 at page 22 of the bundle and materially, for present purposes, on page 23 section 40‑35 “Residential rent”:
A supply of premises that is by way of lease, hire or licence (including a renewal or extension of a lease, hire or licence) is input taxed if:
(a) the supply is of residential premises –
Your Honours, those are the provisions which underlie the assessment made, but before I go to the facts I should draw your Honours’ attention also to another aspect of the legislation which is relevant to our friend’s notice of contention, and that is the provisions which deal with liability to pay GST and its quantification.
Could I turn your Honours’ attention to page 8 of the materials, section 9‑40. Your Honours will see that it provides that “You” – and again I remind you that “you” is the taxpayer – “must pay the GST payable on any taxable supply that you make.” How much you must pay is provided for in a series of provisions starting on page 17 of the bundle, with section 33‑3:
If:
(a)the net amount for a tax period applying to you is greater than zero; and
(b)the tax period is a quarterly tax period;
you must pay the net amount to the Commissioner as follows -
I do not need to take your Honours to the mechanics of that, nor to the case of people who are on monthly tax periods. The net amount that is referred to there is defined in section 17-5, which your Honours will find on page 14 of the bundle. In subsection (1):
The net amount for a tax period applying to you is worked out using the following formula:
GST – Input tax credits
where:
GST is the sum of all of the GST for which you are liable on the taxable supplies attributable to the tax period.
I do not need to bother your Honours with the material dealing with input tax credits, but the words “attributable to the tax period” are explained in section 29‑5 which your Honours will find on page 15. If I take your Honours to that, starting in the middle of the page:
(1)The GST payable by you –
again, payable by you –
on a taxable supply is attributable to:
(a)the tax period in which any of the consideration is received for the supply –
I do not need to bother your Honours with paragraph (b) which deals with invoices in advance of payment. I do, however, draw your Honours’ attention to subsection (2):
However, if you account on a cash basis, then:
In paragraph (b):
if, in a tax period, part of the consideration is received – GST on the supply is attributable to that tax period, but only to the extent that the consideration is received in that tax period;
Now, the consideration that is referred in section 29‑5, is defined in section 9‑15 which your Honours will find on paragraph 3 of the bundle. I apologise that this seems to be a gallop around the Act but it is necessary to put these provisions into perspective. Section 9‑15 defines consideration. In subsection (1):
Consideration includes:
(a)any payment, or act or forbearance, in connection with a supply of anything; and
(b)any payment, or act or forbearance, in response to or for the inducement of a supply of anything.
Now, I draw your Honours attention also to subsection (2):
It does not matter whether the payment, act or forbearance was voluntary, or whether it was by the recipient of the supply.
Then, consideration as there defined feeds into the definition of “price” which is in section 9‑75, and your Honours will find that on pages 8 and 9 of the bundle. In section 9‑75 which specifically defines “value” at the foot of page 8:
The value of a *taxable supply, is as follows –
It is price x 10 over 11 - the point of the 10 over 11 is that the base rate of GST is 10 per cent –where:
price is the sum of:
(a) so far as the consideration for the supply is consideration expressed as an amount of money – the amount –
I do not need to bother your Honours with paragraph (b) which deals with property. Section 9‑70 on the preceding page:
The amount of GST on a taxable supply is 10% of the value –
So it is the one‑eleventh in that 10 over 11 fraction. Your Honours, these provisions were considered by this Court in the matter of Commissioner of Taxation v Qantas Airways Limited (2012) 247 CLR 286. It is in tab 6 of the bundle of materials your Honours have, and if I could take your Honours to page 294 of the report, which is on page 125 of the bundle. At the end of paragraph 19, after dealing with the expression – with the composite expression of “taxable supply” the plurality, the majority, Justices Gummow, Hayne, Kiefel and Bell said at about line 15:
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.
I draw your Honours’ attention to that because it makes the point that GST is payable only once in respect of any amount of consideration. Footnote 23 to that passage takes your Honours back to page 121 of the bundle, paragraph 5 of the judgment on page 290 of the report:
The appellant (the Commissioner) stresses 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 taxation 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.
The effect of those provisions, your Honours, can be summarised this way; the amount of GST is fixed by the amount of the consideration. It is, in effect, one‑eleventh of the consideration. It is payable by reference to what the Act calls “your” receipt; that is, the receipt by the taxpayer of the consideration. The consideration is potentially referable, and therefore the GST is potentially referable, to several supplies, some or all of which may be taxable supplies, but it is only payable once in respect of each dollar of consideration.
Your Honours, if I could then come to the facts of this case, very briefly. The essential facts, I have already stated; Mirvac was the tenant of the premises, MBI bought subject to the tenancy, and MBI intended that the tenancy should continue. Other material facts are these: first, the premises were residential premises. That had been established in earlier litigation between the same parties in the matter of South Steyne Hotel Pty Ltd v Commissioner of Taxation (2009) 180 FCR 409. It is in tab 5 of the bundle your Honours have; I will not take your Honours to it now, but that point is not in contention.
Second, South Steyne conducted the GST enterprise of letting the premises to Mirvac, but it was not subject to GST on the rent because the premises were residential premises. That also was established in South Steyne. To put it in context, your Honours, the definition of “enterprise” is on page 4 of the bundle of materials in section 9‑20. Can I just take your Honours briefly to that? Your Honours will see that subsection (1) defines an enterprise:
An enterprise is an activity, or series of activities, done –
and materially, for present purposes, in paragraph (c) –
on a regular or continuous basis, in the form of a lease –
The enterprise here in issue was the enterprise of leasing the apartments to Mirvac. MBI acquired that enterprise as a going concern from South Steyne. So much was decided in the proceedings in South Steyne v Commissioner, and it is not in contest. In consequence, the supply of that enterprise was GST‑free under section 38‑325. That provision, your Honours will find on page 20 of the bundle:
The supply of a going concern is GST‑free if:
(a)the supply is for consideration; and
(b)the recipient is registered . . . ; and
(c)the supplier and the recipient have agreed in writing that the supply is of a going concern.
What is meant by “supply of a going concern” is to find on the top of the next page, page 21 of the bundle –
A supply of a going concern is a supply under an arrangement under which:
(a)the supplier supplies to the recipient all of the things that are necessary for the continued operation of an enterprise; and
(b)the supplier carries on, or will carry on, the enterprise until the day of the supply –
Your Honours, MBI bought subject to and intended to continue with the lease to Mirvac. So much again is not in contest. It elected to participate in the management rights scheme referred to in the contract of purchase, indeed, MBI purchased in order to test the GST consequences of that transaction. It sold subject to the lease and to the management rights scheme. Your Honours will find the contract at page 116 of the appeal book and the relevant clause at page 140, line 40 of the appeal book and I will take your Honours briefly to that. It is clause 47.6:
If the Purchaser has elected to participate in the Management Rights Scheme –
then 47.6.1 –
the Property is sold subject to the Apartment Lease and the Vendor’s membership of the Management Rights Scheme and the Purchaser intends that the Property will be used as part of the hotel by the Operator pursuant to the Management Rights Scheme –
I will not take your Honours to it but for convenience the definition of “management rights scheme” is on page 152 of the appeal book. Now, the lease is at page 160 of the appeal book as attached to the contract and the terms of the lease begin at page 163 of the appeal book. At clause 8.1 on page 168 at line 48 it is provided that the owner which at the time of the entry into of the lease was South Steyne who sells the land must secure from the purchaser an undertaking in the form of Schedule 3 to the lease.
Your Honours will find Schedule 3 at page 184 of the appeal book and the parts of it which are relevant are at the foot of page 184 and the top of page 185. The new apartment owner by signing this form acknowledges that it owns the apartment specified in clause A, acknowledges that it “has been leased to you” that is to Mirvac, for “use in the scheme”. At the top of page 185:
acknowledge that my/our ownership of the Apartment is subject to the lease –
and 4:
have received a copy of the lease and agree to comply with all of the obligations of the landlord in the lease.
Your Honours, what is manifest from that is that MBI intended at the time of acquisition to give that undertaking and to hold subject to and comply with the landlord’s obligations under the lease. Those obligations are to be found in the terms of the lease which begin at page 163. If I draw your Honours’ attention to some of them without reading them, first in clause 1.1 ‑ ‑ ‑
FRENCH CJ: Sorry, the parties to this acknowledgement are?
MR SLATER: It is addressed at the top at line 10 at page 184, your Honour:
Acknowledgement of Lease by a New Apartment Owner –
it is addressed to Mirvac Management ‑ ‑ ‑
FRENCH CJ: It is simply executed by MBI?
MR SLATER: ‑ ‑ ‑ and to be signed by the purchaser.
KIEFEL J: It was signed by MBI, is that correct?
MR SLATER: I do not think there is any direct evidence of that, your Honour. I think that point has been made by our friends but it was certainly intended to be. It was a term of this and section 135‑5 turns on intention rather than the fact. Now, I was directing your Honours’ attention to the terms, starting at page 163. In clause 1.1, at line 27 on page 163:
The Owner –
which was at the time South Steyne and was to be MBI –
leases the Apartment to –
Mirvac –
for the Term in consideration for –
Mirvac –
paying the Rent to the Owner.
Clause 1.2, at line 29, allows Mirvac, so long as the rent was paid, to occupy and use the apartment and exercise exclusively the other rights conferred on Mirvac by the lease, and that is without interruption or interference by the owner. At page 165, at line 37, it undertakes to make contributions to cover furniture, fittings and equipment. At page 168, at line 45, in clause 8.1(a), it undertakes to do nothing “affecting the conduct of the serviced apartment business”.
In the same clause in paragraph (c) it undertakes to pay rates and taxes and so forth. In clause 8.2, it undertakes to give possession of the furniture, fittings and equipment. In return, the operator – that is, Mirvac – undertook to pay the rent. Your Honours will find that at clause 4.1 and 4.2, at lines 23 to 43 on page 164, read together with schedule 1 on page 180 of the appeal book. I will not take your Honours to the details of that.
On failure by Mirvac to pay the rent, MBI could, if the failure to pay amounted to a fundamental breach, terminate the lease by re‑entry or, alternatively, exercise the right of termination, which is found at clause 2.2 of the lease, page 163, at line 39, by giving the withdrawal notice, which is defined at page 179, line 19, of the lease. But until termination of the lease, MBI was bound to allow Mirvac possession and use of the premises.
May I remind your Honours of what was said by your Honours last year in Willmott Growers Group Inc v Willmott Forests Ltd [2013] HCA 51, presently reported at 304 ALR 80. I do not propose to read to your Honours from this, but may I draw your Honours’ attention to some of the passages. In the judgment of the plurality, your Honours the Chief Justice and Justices Hayne and Kiefel, at paragraph [39], adopted what had been said by Justice Deane in Progressive Mailing House Pty Ltd v Tabali Pty Ltd [1985] 157 CLR 17 at [51] that a lease is both an executory contract and an executed demise.
At paragraph [49] of your Honours’ judgment, your Honours observed that the rights and liabilities with respect to quiet enjoyment and exclusive possession are continuing rights and liabilities. That was why termination of the contract by the liquidator also terminated the estate. Your Honour Justice Gageler dealt with a matter at paragraphs [60] and [65] of the judgment. At paragraph [60]:
the growers’ leases remain contracts between WFL and the growers under which WFL has ongoing obligations to give the growers exclusive possession -.
and those observations were repeated at paragraph [65] of your Honour’s judgment. The significance of taking your Honours, or reminding your Honours of what was said there is that the purchaser of the reversion in property, subject to an ongoing lease, is required to and does perform executory ongoing obligations and, by doing so, in our submission, within the very wide language of section 9‑10 of the GST Act, it thereby supplies exclusive possession.
Also there is the circumstance that by statute, MBI as purchaser took subject to the landlord’s covenants, and the Full Court drew attention to that, and it is Conveyancing Act 1919 (NSW) ,section 118 and the Real Property Act 1900 (NSW), section 40(3). I do not think I need take your Honours to those provisions.
FRENCH CJ: You characterise that as that MBI submitting to the covenants.
MR SLATER: Yes. Submitting to and being bound to and thereby intending to observe and perform them and that we say is a supply. In particular, providing exclusive possession and quiet enjoyment of the premises is, in our submission, a supply by way of lease.
GAGELER J: Does it follow that every executory contract will have at least two supplies: one, the creation of obligations on entering into the contract and two, the supply that occurs at the time of performance?
MR SLATER: Yes, your Honour, but GST will only be payable once because there is only one consideration that is paid. So although the taxable event is a supply, the quantum of tax is fixed by reference to consideration and by reference to the time of receipt of consideration.
GAGELER J: Here, the performance could be characterised as…..different supplies. Could it be the supply of premises or is it the supply of rights to occupy the premises? Is it the ‑ ‑ ‑
MR SLATER: It can be described in a variety of ways, your Honour.
GAGELER J: Yes.
MR SLATER: Each of those ways could be characterised as a supply. In the Qantas Case the entry into the contract was a supply of the contractual rights. If the contract of carriage was performed, that is if the passenger turned up and got on the aeroplane, then it was performed by provision of carriage but GST was payable on the consideration for that contract, both because it was a supply of the rights and, if exercised, it was a supply of the carriage and it was payable once on the GST on the consideration, at the time the consideration was received. So the same underlying structure applies across all events.
GAGELER J: There is a particular provision in 9‑15(3)(a)(i), that appears to speak to some executory contracts but not others. Is that just there out of an abundance of caution? Does it impact in any way on the general operation of the scheme?
MR SLATER: What it does is to say that if you pay – if I can take a simple example – $1,000 for an option to acquire Blackacre at a price of $2,000, the $1,000 is consideration at the time of the grant of the auction. On the execution of the auction and purchase of Blackacre, the consideration is $2,000 but GST is payable only on the extra $1,000. That is the function of that provision.
FRENCH CJ: Sorry, just before you go on, Mr Slater, when you were running through the statutory framework – I may have missed this but how does the existence of an increasing adjustment for the purposes of 135‑1 link to liability?
MR SLATER: The function of Division 135 is this; if you acquire an enterprise GST‑free and then intend to use it for making input tax supplies – if you acquire it as a going concern GST‑free and then intend to use it to make input tax supplies, then you are subject to an increasing adjustment because you are not going to use it to make taxable supplies. That is the underlying rationale of the provision.
FRENCH CJ: But where does the word “increasing adjustment” appear in some liability‑creating provision, or from which one can infer the creation of a liability?
MR SLATER: Sorry, your Honours, I did gallop through this at rather a brisk pace. “Increasing adjustment” is dealt with – I should know this by heart but all these funny numbers, I am afraid, I am at risk of getting them mixed up.
FRENCH CJ: Some things it is better not to keep in the heart, I think.
MR SLATER: Yes. It is in Division 19, I think, your Honour, which is not in the bundle of materials we have given you.
HAYNE J: Do we need to be concerned about it?
MR SLATER: I do not think so, your Honour. It is the mechanism by which additional tax is payable.
HAYNE J: I think it is your submissions, is it not, that mention it, or am I mistaken in that?
MR SLATER: We say that mention it – it is my submissions that draw attention to the operative provision, section 135‑5, which is the subject of dispute, but the way in which that translates into tax has not been the subject of any dispute; that is, there is no dispute about the arithmetic. Adjustment events are provided for in Division 19.
FRENCH CJ: Section 19‑50, I think, makes reference to increasing adjustments for supplies, yes.
MR SLATER: Yes. That adjusts the amount which goes into the net amount. If your Honours are assisted, I will hand up a short note which ties those provisions together, either after the luncheon adjournment or if I could send it to your Honour’s associate in the next 48 hours. Would that be a convenient course?
FRENCH CJ: Yes, thank you.
MR SLATER: I was going to take your Honours to the application of the statute to the present facts. We submit that while the lease was on foot and the rent was paid, MBI was bound to perform the landlord’s obligations – I have taken your Honours to those – but in particular, it was bound to perform the obligation to allow Mirvac, so long as the rent was paid, to occupy and use the apartment and exercise exclusively the other rights conferred on Mirvac by the lease; that is clause 1.2 that I took your Honours to earlier.
That was something which MBI by the contract agreed to do and intended to do for the purpose of section 135‑5. In our submission, giving Mirvac the use of the premises was a supply within the broad definition in section 9‑10(1). It is not relevant, in our submission, whether the provision of continued use and occupation was within any of the particular extensions in subsection (2) because as I drew your Honours’ attention to earlier subsection (2) begins with the words:
Without limiting subsection (1) –
There appears to have been a view, at least implicitly taken in the Full Court, that because the grant of the lease was expressly within one of the paragraphs of subsection (2) that was the only supply in contention. In our submission, that is not so. What MBI agrees to do amounts to a supply of premises. It is premises of which possession and use is ceded under the lease and it follows that the supply is by way of lease. It is a supply under the terms of the lease and, in consequence, it is a supply which is input taxed within section 40‑35. I took your Honours to that earlier. It is on page 23 of the bundle of materials.
In addition to that supply, there was this other supply. The intended execution of the covenant at pages 184 and 185 of the appeal book is itself, in our submission, an input taxed supply. The acknowledgement of the obligations – I said covenant, it is really a promise rather than a covenant within – the acknowledgement of those obligations is a supply of rights within section 9‑10(1) and section 9‑10(2)(g) in that it is the entry into of an obligation to tolerate Mirvac’s position and it is a supply by way of lease, the obligations under the lease being assumed, of residential premises and so, again, falls within section 40‑35.
The view I have just put to your Honours is the view which was adopted by the Full Court in the matter of Westley Nominees Pty Ltd & Anor v Coles Supermarkets Australia Pty Ltd & Anor (2006) 152 FCR 461. It is in the materials which were handed up to your Honours under tab 3 and the relevant passage is on page 60 of those materials in paragraph 22.
HAYNE J: Page of the report?
MR SLATER: Page 468, your Honour. I will not read that to your Honours. I just draw your Honours’ attention to it. Your Honours, the consequence, in our submission, of section 40‑35 being attracted is that the criteria in section 135‑5 which I remind your Honours is on page 24 of the materials are met. That is MBI was the recipient of a supply of a going concern.
So much was previously held in the South Steyne Case and was not in issue, and MBI intended that supplies would be made through the enterprise, that is the enterprise of leasing and I took your Honours to the definition of “enterprise” in section 9-20. It intended that those supplies would be within section 40‑35 so that they would be input taxed and not either taxable or GST‑free. So, the requirements of both (a) and (b) of subsection (1) which provides that you have an increase in adjustment are met.
The assessment, in consequence, was correctly made. Your Honours will find the assessment at page 8 of the appeal book. It is quite opaque; it simply says you have a liability to tax. But the basis for it your Honours will find in the Commissioner’s appeal statement at page 35, line 31, of the appeal book. I just give your Honours that reference without reading it to your Honours.
Your Honours, may I then turn to our friend’s notice of contention. That is at page 307 of the appeal book, at line 30. The contention is that there is no increasing adjustment because there was no price for the supplies MBI intended to make. Your Honours, the increasing adjustment is provided for by subsection (2) of section 135‑5. Your Honours will find that at page 24 of the bundle of materials. In the middle of the page:
The amount of the increasing adjustment is as follows:
It is one‑tenth of the supply price – so it is, in effect, GST on the supply price – multiplied by the proportion of non‑creditable use. The proportion of non-creditable use is then defined, at about point 6 of the page. It is:
the proportion of all the supplies made through the *enterprise that you intend will be supplies that are neither *taxable supplies nor *GST-free supplies, expressed as a percentage worked out on the basis of the *prices of those supplies.
The expression “prices”, as your Honours will see by the asterisk, is a defined expression. The definition is on page 28 of the materials in section 195‑1 and that takes your Honours back to section 9‑75, which is on page 9 of the materials, and I took your Honours to that earlier. Materially, price is, so far as the consideration is expressed in money, it is the amount of money. Consideration – I did take your Honours to this earlier and I would just remind your Honours of it – it is a defined term. It is at page 3 of the bundle in section 9-15. It includes:
any payment . . . in connection with a supply of anything; and
any payment . . . in response to or for the inducement of a supply of anything.
Applying those provisions to the present case, the rent to be paid to MBI by Mirvac is a payment in connection with the supply of premises. We say it is in connection with the supply of premises for the reasons I have advanced to your Honours that the provision of use of the premises is a supply of the premises. It is therefore consideration within section 9‑15 for that supply.
Your Honours pointed out in Commissioner of Taxation v Qantas 247 CLR 286, it is in paragraph 14 of the judgment – the judgment is reproduced under tab 6 of the materials. For your Honours’ assistance, paragraph 14 is on page 292 of the report, page 123 of the bundle. The point which your Honours made in that case was that consideration, as defined in section 9‑15, is not confined to contractual consideration – that is, what is consideration for the purposes of the law of the contracts.
The consideration in the present case is money, and so the price is also money. The supply of the premises is a supply that MBI intended to make at the time that it contracted to purchase. I took your Honours to the terms of the contract by which it undertook to abide by the management rights scheme and to the undertaking it was to give to Mirvac at page 185. That is the only supply that MBI intended to make in connection with the rent; that is, the only supplies that MBI intended to make in connection with the rent were the supplies of the premises, whether it is put in terms of rights to the premises or in terms of supplying the use of the premises, or in any other way it might be described – the only supply was of the use of the premises.
That supply, because the premises were residential premises, was input‑taxed and so neither taxable nor GST‑free. The rent was all of the price of the supplies to be made – that is, it was 100 per cent – so that the increasing adjustment, the proportion of non‑creditable use, is 100 per cent of the price – I am sorry, I have tangled myself up there, I apologise. The proportion of non‑creditable use in the formula in section 135‑5 is 100 per cent. The amount of the increasing adjustment is therefore the whole of one‑tenth of the supply price of the premises, and that is the amount which was assessed.
So that it follows, in our submission, that the assessment was not excessive, and these proceedings being ultimately proceedings under Part IVC of the Taxation Administration Act, the respondent as applicant in the initial proceedings fails, in our submission, to demonstrate that the assessment was excessive.
Our friends say in their submissions that the rent is consideration for the prior grant. The implicit premise in that argument is that rent is an indivisible thing issued out of the land. That was so in the 15th century when Littleton was writing, and perhaps still so in the 16th century when Lord Coke wrote his treatise based on Littleton, in the notes at [47a] and [142a] of Coke upon Littleton, but it has not been so since at least the middle of the last century.
The change in the conception of rent as an indivisible thing issued out of the land to the price paid for the right to use the land is traced by Justice Brownie in a judgment in Commissioner of Stamp Duties v Commonwealth Funds Management (1995) 38 NSWLR 181. The President, Justice Kirby, agreed at page 176. I do not need to take your Honours to that; it is a reasonably well-established proposition now.
The ordinary meaning of “rent” now is that it is the price for the use of the land. It is the contractual payment made under the land. Your Honours will have been familiar with all of that learning in considering the Willmott Case. But in any event, in our submission, a payment can be consideration for more than one supply. It can be a payment in connection with both promise and performance, and your Honour Justice Gageler asked me about this earlier.
I drew your Honour’s attention to what had happened in Qantas. In that case, the payment was held to be in connection with both the promise of carriage, and the carriage itself, and I have taken your Honours to paragraphs 19 and 5 of the judgment in Qantas. The argument for our friends proceeds, in our submission, on a false premise or a false dichotomy. The rent or the promise is not received in connection exclusively with one or other of the grant and the performance of the lease; it is received in connection with both. But the GST payable on it is payable only once on the amount of the consideration.
In essence, our friends’ submission – and this is perhaps more a matter for reply, but I will deal with it briefly now – rests at all stages on, in our submission, a wrong premise that one must adopt a contractual analysis of consideration and that that is what is mandated by the Act. In our submission, that is contrary both to section 9‑15 and to what was said by this Court in Qantas. Other aspects of our friends’ submissions on their contention are dealt with briefly in our written reply, and I will not take time to read those to your Honours. Can I turn then to what we say are the errors in the reasons of the Full Court?
FRENCH CJ: At paragraph 47 of the respondent’s submissions, they take the case “in which rent is payable fully at the commencement of the lease”, and that then supports a coherence argument. Is there any difference in that situation on your submission?
MR SLATER: No, your Honour, there would still be a supply of the premises. There would just be no – if supply were a taxable supply, there would be no GST payable because the purchaser of the reversion would receive no consideration. But the purchaser of the reversion would still be making a supply of the premises by reason of submitting to the lease and undertaking to perform the obligations of the landlord.
Your Honours, I was going to go to the errors in the reasons of the Full Court. What we say is the fundamental error in those reasons will be apparent from our submissions up to now. The Full Court wrongly held that there was no supply and so no input tax supply intended to be made by MBI as purchaser of the leasing enterprise.
That error was an adoption of what had been said by the earlier Full Court in the matter of South Steyne Hotel Pty Ltd v Commissioner of Taxation. I have given your Honours the reference to that, but I will give it to you again. It is (2009) 180 FCR 409 and it is under tab 5 of the materials. There is a convenient summary of the reasons of the members in the appeal book at page 286 in paragraph 14. I will not read that your Honours now because I will take your Honours in a moment to what was said by the Full Court directly.
The reasoning in South Steyne was not challenged in the court below. Before Justice Griffiths it was not open to challenge. Before the Full Court it was open to the challenge but the challenge was not made, and I accept that. It would have been necessary to persuade the court presided over by Justice Edmonds, who sat in South Steyne, that the earlier decision was manifestly wrong. That was perhaps a bridge too far. But we do challenge the reasoning in South Steyne in this Court and the challenge to the reasoning in South Steyne was the basis upon which we made the application for special leave.
South Steyne was proceedings for declaratory relief both at first instance and on appeal between, among others, the same parties. The other parties were South Steyne itself and Morgan and Banks Investments Pty Ltd, the employer of an occupant of an apartment. There were three categories of putative supply in issue. Those are summarised conveniently on page 285 of the appeal book, beginning at paragraph 8 at about line 47.
(1)First category of supply: was the supply by way of lease from South Steyne to MML –
The second category of supply was:
the supply by sale of the apartments by South Steyne to investors –
and materially to MBI and a third category of supply was the continuing supply of the premises, as we would have it, by MBI to Mirvac in consequence of MBI’s purchase of the reversion.
Now, the way in which the Full Court in South Steyne dealt with that is summarized briefly in paragraphs 9 to 13. I do not need to take your Honours through what happened in the first and second categories. Your Honours will see it there. In the third category, the primary judge in South Steyne concluded that the supply made by MBI to Mirvac, after MBI acquired the premises was an input taxed supply within section 40‑35.
The Full Court on appeal in the South Steyne matter decided that there was no supply at all by MBI to Mirvac, and it is useful at this point to go to the judgements in South Steyne direct, rather than to the extract on page 287 of the appeal book. So if I could take your Honours to that. It is under tab 5 in the bundle of materials and I ask your Honours to bear in mind that the passages I am about to read were in the context of the debate over what, in the court below in the present matter, was called the third category of supply, that is the continued provision of the premises by MBI to Mirvac and not in connection with what was there called the second category of supply, that is the sale by South Steyne to MBI. Justice Finn, at page 411 of the report in 180 FCR, dealt with the matter at paragraph 2 of his Honour’s judgment where he said:
First, the sales of three apartments to MBI Properties subject to the respective leases did not constitute a new or further supply. The covenants of the initial leases remained but the benefit of the respective tenants’ covenants and the burden of the landlord’s covenant “ran” with the reversion by virtue of real property legislation . . . and not by virtue of a distinct supply agreement or arrangement.
Justice Emmett dealt with it at paragraphs 31 to 34. Perhaps before I go to that I should draw your Honours’ attention to what was said by Justice Edmonds at page 423 of the report – page 102 of the bundle – in paragraph 75, where his Honour noted that:
Before the primary judge and on the hearing of the appeal there was, as the primary judge observed at [72] of her Honour’s reasons, “. . . no dispute between the parties that the purchase of the reversionary interest in the apartments by MBI effected a ‘supply’ by MBI in favour of MML. The parties disagree[d], however, as to the nature of the supply –
The notion that there was no supply was not one which was advanced or argued for by either of the parties, nor, for that matter, argued materially against by either of the parties in the proceedings in South Steyne. It was a notion which was conceived on the Bench and, like all such notions, it was by far the most persuasive argument that could be put to the Bench, and the attempts of counsel to respond to it proved to be unpersuasive.
Justice Emmett dealt with this at page 416 of the report, page 95 of the bundle. I do not need to take your Honours to paragraph 31 because all his Honour does there is to refer to section 40‑35. I would take your Honours to the top of the next page, page 417 of the report, page 96 of the bundle, in paragraph 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 Div 156.
I can pause and say two things about that. The first is that his Honour seems to have been conceding of the supply by MBI to Mirvac as being the creation of a tenancy rather than the observance of the tenancy. That is the reasoning which appears to underlie that passage in his Honour’s judgment.
HAYNE J: Well, it seems to be perhaps the adoption of the notion of singular characterisation which is driving it, that you need to apply to what is a series of events having a number of legal consequences and legal characteristics, a singular all‑embracing characterisation which may be masking the complexity of both the events and the legal character of events that are embraced.
MR SLATER: It is the notion which underlay the reasoning of the Full Court both in Reliance Carpet and in Qantas that there was one fundamental or essential sole supply, and that notion, as we pointed out in our written submissions, was rejected on appeal by this Court in both matters. There are cases in which the idea of the fundamental character of supply is relevant. Those cases are categorisation cases where the question is, for example, whether supply falls within Division 38. That was the issue in Travelex, but this is not such a case. This is a case of identifying what the supply is, and the point we make, and I am not sure if I am ‑ ‑ ‑
HAYNE J: Well, it is a question of whether a series of events having a number of legal characteristics include within them one or more suppliers.
MR SLATER: Yes, it is our submission that they can and do. It is our submission that that was the view which this Court took in Qantas but the series of events there, the making of the booking, the payment of the price of the ticket and the attendance or the non‑attendance of the passenger to take use of the seat in the plane was a series of events which embraced more than one supply for the consideration in question.
HAYNE J: Purchasing the reversion of Blackacre which is subject to lease has the legal consequence that the purchaser is bound by the obligations that run with the land but the assumption of those obligations and their performance may or may not be matters of relevance to the kind of issue which is presented by this Act. Simply observing that it is the law which explains why the obligation attaches may be correct so far as it goes, perhaps one needs to go further.
MR SLATER: We would submit that one does need to go further and it is not merely the circumstances which give rise to the obligation but the performance of the obligation which falls for consideration.
FRENCH CJ: The intention of which 135‑5(1)(b) speaks would be satisfied on your submission by the mere acquisition of the reversion with the legal consequences that necessarily attach to it, absent any covenants in the contract of sale, absent the acknowledgement of ‑ ‑ ‑
MR SLATER: Yes, that manifests the intention. It then has to be an intention to make a supply and it is the supply which is in contest.
FRENCH CJ: Yes, I appreciate that. The supply is then the performance of the covenants which the purchaser is obliged to perform by operation of law.
MR SLATER: Yes. That is the proposition we are putting, your Honours. So that, in our submission, where Justice Emmett has gone astray is that he has not paid attention to what your Honour the Chief Justice put to me, that is, to the ongoing position after the acquisition of the land but only to the event of acquisition as the only supply which requires any consideration at all. His Honour’s reasoning appears to be that merely by acquiring it you do not create any new rights. We cavil with that proposition as well but we say that it is not all that needs to be considered, and I am not sure whether I am mischaracterising what your Honour Justice Hayne put to me earlier but I had the impression that that was the point that your Honour was raising for debate.
HAYNE J: It is perhaps an alternative point, I think, that it is either a singular characterisation of what may, in truth, wear two faces or more than one face, or it may be a timing issue, the point at which the characterisation is being attached in that it is a snapshot view of the series of events without regard to perhaps other events which may or may not bear upon the issue presented by the Act.
MR SLATER: I am not sure that I am directly responding to what your Honour says in this, but it is paying attention only to the event of acquisition and not to what is intended to be done after acquisition.
HAYNE J: Yes.
MR SLATER: Your Honours, the other thing that I should draw your Honours attention to in Justice Emmett’s judgment is that at paragraph 33 he deals with Division 156. I will come back to say something about Division 156 in a moment, but one thing to note – and this is something that might have been drawn to his Honour’s attention had the matter been fully argued, that is, had the parties been prepared for an argument on this point – and that is the point which was made by Justice Davies in the present matter, and that is that Division 156 simply has no application to the present case because there was not to be a taxable supply and Division 156 only applies to taxable supplies. I will come back in a moment to Division 156, but before I depart from Justice Emmett, his Honour concluded at paragraph 34:
Thus, there is no supply by Properties to Management. Rather, there was a supply by South Steyne to which the attribution rules apply.
That second sentence we say is wrong and I will explain why that is so in just a moment. In the end, his Honour, resting both on a misapprehension of Division 156 and on, in our submission, a misidentification of the supply in issue, came to what his Honour called “the better view” of the matter and that was, in the end, his Honour’s conclusion. I threatened to take your Honours to Division 156. Your Honours will find portions of that in the materials. Perhaps I should start with section 9‑20, at page 4 of the materials. I have taken your Honours to this before, but just by way of introduction:
An enterprise is an activity, or series of activities, done:
. . .
(c) on a regular or continuous basis, in the form of a lease –
So clearly the Act contemplates that leasing is an enterprise which involves continuing supplies. Section 9‑5, which is on the second page of the materials:
You make a taxable supply if:
(a) you make the supply for consideration; and
(b) the supply is made in the course or furtherance of an enterprise –
The enterprise in this case being the enterprise conducted on a regular or continuous basis in the form of the lease. I have taken your Honours to the wide definition of “supply” in section 9‑10. It is necessary to take your Honours back to section 29-5 on page 15 to see what the role of Division 156 is.
So what section 29‑5 does is to attribute “The GST payable by you” – and I draw attention to those words “payable by you” – on a taxable supply to a tax period that is attributable to the tax period in which any of the consideration is received. The consequence of that, absent some other provision in the case of a lease, would be that in the month or the quarter in which the first payment of rent was made the rent as a whole, being the consideration for the use of the premises over the whole term, in that first period GST will be payable on the whole of the rent if there were not some other provision.
That is, that is so if one is a taxpayer accounting on an accruals basis. If the taxpayer is accounting on a cash basis, the position is different. I drew your Honours’ attention earlier to subsection (2). However, if you account on a cash basis, then paragraph (b):
if, in a tax period, part of the consideration is received –
you pay GST only on the part that is received in that period. Now, the effect of section 156‑5, which is on page 25 of the materials, is to ameliorate the problem which would otherwise conceptually arise for an accruals payer where payment of rent for the first period of the tenancy was received in a month and what it does in section 156‑5(1) is to say that:
The GST payable by you on a taxable supply that is made:
(a)for a period or on a progressive basis –
Here, under a lease, and –
(b)for consideration that is to be provided on a progressive or periodic basis;
is attributable, in accordance with section 29‑5, as if –
and “as if” is a form of deeming provision –
each progressive or periodic component of the supply were a separate supply.
So what Division 156 does is to say where there is a taxable supply on which you, the taxpayer, are liable to pay tax and it is over a period, then you break the supply up into a series of periodic supplies and you pay GST on the consideration attributable to each of those periodic supplies. It does not apply to GST‑free supplies because there is no GST payable on GST free supplies. It does not apply to input taxed supplies because there is no GST payable on input taxed supplies.
Our friends seek to make something of the fact that there are no input taxed credits for input taxed supplies. That is a feature of the design of the legislation but it is not an imposition of tax on input taxed supplies. It is a denial of credits which is conceptually a quite different thing. The amount of tax which is at stake is the tax on the acquisitions in connection with the supply, not tax on the consideration for the supplies made. It is fundamentally different.
Now, two things that I should draw your Honours’ attention to: one I have already drawn your Honours attention to and that is that section 156‑5 does not apply to GST‑free or input taxed supplies. The other is that it does not apply if the taxpayer accounts on a cash basis. Your Honours will find that in section 156‑25 which, I apologise, is not in the bundle of materials that has been handed up. Section 156‑25 provides that this division does not apply to a taxpayer on a cash basis. Now, the operation of section 156‑5(1)(a) is filled out by section 156‑22, which your Honours will find at foot of page 26 of the bundle:
For the purposes of this Division, a supply or acquisition by way of lease, hire or similar arrangement is to be treated as a supply or acquisition that is made on a progressive or periodic basis –
So that directly attaches the operation of Division 156 to a lease which is a taxable supply. The effect of Division 156 is to spread the GST attribution as if each rent payment was a separate amount of consideration for a separate supply but it only operates where the GST falls on you. So it does not operate where the GST has fallen on somebody else.
Our friends seek to say that because South Steyne made a taxable supply or an input tax supply or a supply of any sort, Division 156 can be invoked by MBI. That is not the way the provision works. The provision only works where the taxpayer liable to pay tax is one who is claiming its benefit.
Your Honours, if I could go back then to the third judgment in South Steyne and that is the judgment of Justice Edmonds. That is at page 423 of the reasons - I am sorry, it is on page 102 of the materials and if I could just very briefly draw your Honours’ attention to his Honour’s summary of the issues on the previous page.
He summarises the first – what his Honour calls the first category of supply, that is the creation of the lease by South Steyne; the second category of supply, the sale of the apartments by South Steyne to the investors; and then goes on on page 423 at paragraph 75 to the third category which is the one which is here in contest, that is, the supply, as we would have it, by MBI to Mirvac of the apartments after MBI’s purchase of the reversion. I draw your Honours’ attention to the note in paragraph 75 of the course of events. In paragraph 76 his Honour said:
I have come to the view that when MBI purchased the reversionary interest in the three apartments there was no new supply by MBI to MML but merely a continuation of the first category of supply –
That is a curious phrase and it is not immediately obvious what it means. It appears to involve the idea that the leasehold estate created by the grant of a lease continued and that that was somehow a continuation of the supply involved in the grant of the lease.
KIEFEL J: This is different from the approach of Justice Emmett.
MR SLATER: Not entirely, I think, your Honour. I drew your Honours’ attention to what seems ‑ ‑ ‑
KIEFEL J: I thought Justice Emmett acknowledged that there was a supply when MBI purchased the reversion. Am I wrong about that?
MR SLATER: If your Honours look at page 417 in paragraph 32, his Honour seems to be saying something very similar to what Justice Edmonds says in the penultimate sentence of paragraph 32. As I said earlier – and I think Justice Hayne elucidated it better than I could – there is a conceptual uncertainty in there that his Honour seems to be dealing with the idea of the creation of the leasehold estate as being the supply or the creation of the relationship of landlord and tenant as being the supply.
That is not entirely the supply we rely upon. We rely upon the continued supply of exclusive use and occupation and quiet enjoyment of the premises as being the supply, and I think that is different from what his Honour Justice Emmett and Justice Edmonds are dealing with. Then his Honour goes on to say towards the end of paragraph 76 that:
The attribution provisions of Div 156 . . . prevent any unintended imbalance –
He did not rely on Division 156 as applying to MBI, and I have taken your Honours to why we say Division 156 does not assist. In the proceedings before the Full Court in this matter, counsel for the Commissioner sought to rely on the words “continuation of the first category of supply” in both those judgments as indicating the intent of MBI that supplies made through the leasing enterprise would not be taxable. That argument was clearly rejected at page 290 of the appeal book, and I will just take your Honours momentarily to that in paragraph 24. The argument which was put for the Commissioner one can see at the very top of page 290:
The proposition . . . is simply this: if there is a continuing lease, there must be a continuing supply.
There is a disjunct between the understanding of that proposition by counsel and the understanding by the court perhaps. At least as we put it now – and perhaps this is not the way that it was put below – while there is a continuing lease, there is a continuing supply of the premises. His Honour read it as being a continuing supply of the estate, I think, and he rejected that emphatically.
With respect, the proposition is flawed. The lease is the subject of the supply. The supply is the grant of the lease. The supply is complete on the lease coming into existence. So his Honour is dealing with the creation of the estate and not with its performance and the observance of the landlord’s obligations. Fairly, to the court below, the argument which I am putting to your Honours now was certainly not put in these terms, in the terms which I put to your Honours, to the court below, and the background that I have given to your Honours earlier.
We say that the answer which Justice Edmonds gave is not an answer to the statutory question. The statutory question is whether MBI intended that some or all of the supplies made through the leasing enterprise, which had been acquired GST‑free, will be supplies that are input taxed. The statute asks are there future supplies - that is the import of the words “will be” -which will be input taxed supplies. It is not concerned with the past act of the grant by South Steyne, nor with the instant act of the acquisition but with the future acts of supply of the premises.
That question was not considered by the Full Court below. Justice Farrell at page 295 simply concurred in the other judgments. Justice Davies at page 297 in paragraph 50 observed that the matter had been decided in South Steyne, and Justice Edmonds at paragraph 14 on pages 286 to 287 of the appeal book adopted the reasons of the court in South Steyne.
In our submission, the Full Court, both in South Steyne and in the present case, wrongly looked to the grant or creation of the estate as the only supply and wrongly disregarded the affording of the use of the premises, to pick language as neutral as may be, in observance of the landlord’s obligations as being a supply.
In our submission, when MBI became the owner of the freehold, it thereafter intended to supply the use of the premises to Mirvac. That it was bound to do so by virtue of Mirvac’s estate as tenant does not exclude that supply from being a supply for the purposes of the Act, or from being an input tax supply. Subsection (3) of section 9‑10 expressly points out that it does not matter whether it is lawful to do otherwise. So, in our submission, both in South Steyne and in the present case, the Full Court asked itself the wrong question. It addressed the grant of the lease, creation of the estate, and not the continuing provision of use. The wrong question ‑ ‑ ‑
HAYNE J: That point, I think, becomes the point that can be expressed this way. To ask was there a supply elides or obscures by whom and when. The relevant statutory question is did MBI make a supply?
MR SLATER: Or specifically, did it intend to make a supply?
HAYNE J: Yes.
MR SLATER: Yes.
HAYNE J: The elision, I think, or obscurity is omission of by whom and when in asking was there a supply?
MR SLATER: I think it is fair to say that had the point been raised before the oral hearing in South Steyne, the two experienced counsel who argued the case would have brought out that elision. But the way in which the matter came up effectively prevented that from happening. It all happened in the space of 10 minutes or so.
Finally, your Honours, can I go to the implications of the Full Court decision. This is, in a sense, a species of reductio ad absurdum argument, but the implications of the Full Court decision are these. The Full Court decision that there is no supply by the purchase, the reversion after the purchase made to the tenant results in some strikingly curious and aberrant outcomes.
Your Honours will know that most commercial leases fix a rent which is designed to recover the GST payable by the tenant. That, indeed, is the design of a value‑added tax that each taxpayer will add the amount of the tax to the price which is charged on. That is why it is called a value‑added tax. That is the design of the GST.
If the Full Court is right, then what happens in such a case is this. The tenant will continue to be bound to pay the rent fixed under the lease, that being a rent which was designed to cover the GST payable by the landlord. The new landlord will receive that, as I might put it, enlarged rent and will receive a recoupment of the GST liability which would have fallen on the vendor of the land assessor. But, on their Honours’ reasoning, the purchaser of the reversion will not be liable to GST so the purchaser will be entitled to keep the GST which was incorporated into the rent and not pay it to the Commissioner and will thereby make an adventitious super profit.
The tenant, on the other hand, because on their Honours’ reasoning the supply made by the purchaser to the ongoing tenant is not a supply, the purchaser will not be entitled to an input tax credit because the input tax credit is limited to the GST payable on the supply. So the purchaser will both pay a larger rent to recoup the GST and be denied the benefit of the input tax credit for that rent. That, again, is contrary to the design of the GST.
GAGELER J: Does Division 156 have anything to say about ‑ ‑ ‑
MR SLATER: No, your Honour, Division 156 does not assist in this case. It does not apply to the purchaser because there is no GST payable by the purchaser of the reversion on a taxable supply. So the condition in section 156‑5 is not satisfied. Just to make that point, I will take
your Honour to the language of the section. It is at page 25 of the materials. The operative part of section 156‑5(1) is the words after paragraphs (a) and (b). It is “attributable, in accordance”.
What is attributable in the first line is the GST payable by you on a taxable supply. If the Full Court is right then section 156‑5 does not apply to the purchaser because there is no GST payable by you the purchaser on a taxable supply. So Division 156 just does not help anybody.
Section 156‑22 which their Honours seem to have treated as having some sort of independent roaming operation begins with the words “For the purposes of this Division” – that is, its scope is, in effect, only for the purpose of filling out the meaning of section 156‑5. It does not have a general application. In our submission, your Honours, that cannot be the intended outcome of the legislation, but it is the inevitable outcome of the basis of the Full Court decision.
FRENCH CJ: The proposition that rent is fixed to recover GST expected to be payable by the landlord, that proposition is put as an assumption implicit in the design of the GST or ‑ ‑ ‑
MR SLATER: Yes, it is implicit in the design and there is no evidence of this obviously, your Honour, but ‑ ‑ ‑
FRENCH CJ: But that is what people would normally be induced to do by the ‑ ‑ ‑
MR SLATER: Yes.
FRENCH CJ: Yes.
MR SLATER: So, your Honours, for those reasons the decision of the Full Court should be rejected, the reasoning should be rejected and, in our submission, the appeal should be allowed and the orders sought at page 305 of the appeal book should be made. If your Honours please.
FRENCH CJ: Thank you, Mr Slater. Mr Hmelnitsky.
MR HMELNITSKY: Thank you, your Honour. Your Honours will hopefully have received our written outline of oral submissions and your Honours will see that what we propose to do at the outset is to say something about the statutory scheme. It may be useful by way of introduction if I can just indicate to your Honours at the very outset what the questions of statutory construction we say are informed by this particular conception of the scheme and to indicate where in the outline of oral submissions your Honours see what our propositions are in relation to them.
The first, your Honours, is as to the construction of the expression “supply” in section 9‑10 which your Honours have been taken to, and your Honours see at the bottom of the first page what it is we say as to the construction of that expression. In short, it is that it has its ordinary meaning and that that ordinary meaning in the scheme of the Act involves some provision or furnishing of some thing, and I will come back to that proposition in due course.
The second significant issue of statutory construction that divides the parties and that turns in large part on an appreciation of the scheme as a whole is the question of construction that is in issue in relation to our notice of contention and specifically that which we identify in paragraph 7 of the outline, in particular 7(d) on the final page, and the issue of construction is as to whether or not consideration that is paid in connection with more than one supply may within the meaning of the Act be the price for each of those supplies. Our contention is that it cannot be and I will come to the reasons why not in due course.
Can I invite the Court back to the statutory scheme and what we say about it? We would seek to characterise, hopefully uncontroversially, the GST Act as being in the nature of a multistage or indirect tax in the sense that it imposes a tax on taxpayers by reference to a particular kind of transaction, that is, taxable supplies which are defined in section 9‑5. But at the same time as imposing the burden legally on the taxpayer, the Act also provides for and assumes that the effective burden of the tax will be passed on through that same transaction to the person who receives the supply.
It is in that sense that the tax is an indirect one but, your Honours, what is important to note about the indirect aspect of it is that the passing of the burden occurs and is provided for by way of a particular form of transaction, and the way the burden of the tax is passed on is through what the Act describes as the price and defines as the price for that particular transaction.
The end result of all of that is that once input tax credits are allowed where they are available to taxpayers in a chain of production the ultimate private final consumer, that is, someone who is not conducting an enterprise who is supplied goods or services, bears a burden of the tax, which is calculated by reference to the value added at each stage.
We would suggest that a significant purpose of the Act, having regard to those features of it, is to do just that. It is to impose tax at each stage and to provide for it to be passed on through the price to those people who receive supplies and, your Honours, draw particular attention to the centrality of the notion of supply in the Act.
Secondly, your Honours, the key, both to working out how much tax is payable by a taxpayer conducting an enterprise and also to understanding the amount of an input tax credit that may be available to a taxpayer who receives a supply is to be found in the definition of “price” which your Honours see in section 9‑75. That appears at page 8 of the bundle, and starting at the bottom of the page your Honours see that first section 9‑70, which tells you that:
The amount of GST on a taxable supply is 10% of the value of the taxable supply.
“Value” is defined in section 9‑75, in terms which your Honours see over the page to be referable to the price, and what we particularly draw attention to in that definition of “price” is the phrase which your Honours see in paragraph (a) of it, which is that the:
price is the sum of:
(a)so far as the consideration for the supply is consideration expressed as an amount of money –
it is that amount. We will come back in due course to the significance of that expression, “consideration for the supply”, but your Honours will see that it mirrors the expression that is used in section 9‑5 in the definition of “taxable supply” to indicate when you make a taxable supply in the first place, and your Honours see back on page 2 of the bundle in section 9‑5 that:
You make a taxable supply if:
(a)you make the supply for consideration –
Your Honours, our ultimate submission when we come to our notice of contention is that those two composite expressions that your Honours see in section 9‑5 and in section 9‑75 serve a common purpose in the Act, which is to tell you both when GST is payable and how much is payable.
KEANE J: If you read 9‑5 exegetically with 9‑15(1) you make a taxable supply if you make the supply for any payment in connection with a supply.
MR HMELNITSKY: Yes. Your Honour, that difference in the language that is used in section 9‑5, on the one hand, and section 9-15 on the other hand, is something that I will come to. But may I answer your Honour’s question very briefly in this way. In Reliance Carpet in this Court, the Court pointed out the difference between the language which appears in section 9‑15 and that which appears in section 9‑5.
The reasoning of the Court in Reliance Carpet, which I will come to, and the conclusion of the Court was that not all consideration that is in connection with multiple supplies will be for the supply within the meaning of section 9‑5. Consideration may be in connection with a number of supplies, but is only for one of them.
The difference between the language does not suggest that there is any different factual inquiry to be undertaken as between supply on the one hand and consideration on the other. We say that it just denotes when it is that your liability to tax arises – that is, when it is treated by the Act in section 9‑5 as being supply for consideration – and then, by reason of sections 9‑70 and 9‑75, is taken to be the value of that taxable supply in working out the amount of tax that is payable. I might come back to that in due course, if I may, your Honour.
The third feature of the Act, your Honours, that we particularly point to as informing the construction of supply is, in a sense, the issue that your Honour Justice Keane raises with me as to how the Act operates in a case where consideration is paid in connection with many supplies. The solution, as explained in Reliance Carpet, is that the consideration is only treated as being consideration for one of them.
So on the facts of any given case, there may be an agreement to enter into obligations, and the Act will see a range of things done in the course of that dealing which satisfy the description of “supply” but, your Honours, the intent of the Act and the effect of the Act is not to fix consequences to all of the supplies that occur in any particular dealing or any situation but to seek out just one taxable supply and treat the consideration for the taxable supply as being the amount upon which GST is payable.
It is not the intent of the Act, your Honours, that it should fix consequences to all of the supplies that are made in discharge of obligations, for example. Where the Act has treated consideration as being consideration for a taxable supply, that is the end of the inquiry so far as the Act is concerned and an amount of GST is payable once in respect of that consideration because there is only one taxable supply.
Lastly, your Honours, the Act provides for a particular species of supply – input tax supply – which, as our learned friends point out is a form of exemption within the Act. Input tax supplies are provided for in Division 40 of the Act and one sees the consequence of making an input tax supply in section 40‑1 which appears at page 22 of the authorities. In
section 40‑1 where your Honours see what this division is about, your Honours see that it – I am sorry, your Honours – would your Honours just give me a moment.
FRENCH CJ: Adjourn the Court.
AT 11.41 AM SHORT ADJOURNMENT
UPON RESUMING AT 12.24 PM:
FRENCH CJ: In the circumstances, the Court will adjourn the hearing of this appeal to a date to be fixed. The parties will be notified.
The Court will now adjourn to 9.30 tomorrow morning in Sydney.
AT 12.24 PM THE MATTER WAS ADJOURNED
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