Commissioner of Taxation v MBI Properties Pty Ltd

[2014] HCATrans 76

[2014] HCATrans 076

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Sydney   No S269 of 2013

B e t w e e n -

COMMISSIONER OF TAXATION

Applicant

and

MBI PROPERTIES PTY LTD

Respondent

Application for special leave to appeal

KIEFEL J
GAGELER J
KEANE J

TRANSCRIPT OF PROCEEDINGS

AT SYDNEY ON FRIDAY, 11 APRIL 2014, AT 9.32 AM

Copyright in the High Court of Australia

MR A.H. SLATER, QC:   If the Court please, I appear with my friend, MR B.C. KASEP, for the applicant.  (instructed by Australian Government Solicitor)

MR J.O. HMELNITSKY, SC:   If the Court pleases, your Honours, I appear with MR S.J. FREE for the respondent.  (instructed by Balazs Lazanas & Welch LLP)

KIEFEL J:   Yes, Mr Slater.

MR SLATER:   Your Honours, the central question in this appeal is whether the Full Court was correct to hold that for GST purposes a purchaser of real property who receives rent from the sitting tenant makes no supply whatsoever to the tenant in return for the rent received.  If the Full Court is right to so hold, the decision produces the curious result that a tenant carrying on business in a rented factory must go on paying to the purchaser of the freehold a rent calculated to recover the GST on the rent, but the purchaser is not liable to pay the GST and the tenant obtains no input tax credit in respect of the GST component of the rent.  That is a result so remarkable and, with respect, so implausible that it suggests that there is an error in the Full Court’s reasoning.  In our submission, the error lies in the Full Court’s reasoning that the only supply made between landlord and tenant is the creation of the leasehold estate.

KIEFEL J:   That is there is one supplier and that is at the point of grant.

MR SLATER:   Yes.

KIEFEL J:   Your argument is that there is a continuing supply?

MR SLATER:   Our argument is that by making the premises available to the tenant and observing the covenants in the lease after the acquisition, the new owner goes on making a supply – not the same supply as was made by the grant of the lease, but a supply which is sufficient to attract GST.

KIEFEL J:   In that respect, then, the notion of continuation of supply for which you contend is somewhat of a departure from Justice Edmonds in the South Steyne Case.  Is that right?

MR SLATER:   Whether it is a departure from what Justice Edmonds said in the South Steyne Case may be open to question.  His Honour seemed to take a different view of what he had said in the Full Court in the present case.

KIEFEL J:   I observe that he did explain what he had intended to convey in the first case.

MR SLATER:   Yes.  “Explain” is a courteous word.

KIEFEL J:   But that throws up the matter that is put against you, I think, and that is whether or not there is some inconsistency in your approach from the earlier decision in South Steyne.  As I understand it, what is put against you is that your case involves something of a denial of the finding there, that there was a supply from MBI to MML, whereas I think your case is that you are actually building upon what you understood the Full Court to be saying in the South Steyne Case.  Is that correct?

MR SLATER:   Not quite, your Honour.

KIEFEL J:   “Please explain”, as they say.

MR SLATER:   Yes.  Can I do it this way, if I may, by taking your Honours to what was said in South Steyne and then going on from there, because in this case the Full Court followed the reasoning in the earlier decision in South Steyne, and may I remind your Honours that the earlier decision was materially between the same parties.  The reasoning is conveniently gathered together on pages 33 and 34 of the application book, so if I could take your Honours to that and begin by identifying the category of supply that was in issue in the present case.  If your Honours look at about line 15, where Justice Edmonds identifies a third category of supply; that is “the leases of apartments” by MBI to Mirvac:

in consequence of [MBI’s] purchase of the reversion from South Steyne –

The reasoning of the Full Court in South Steyne about that is to be found in paragraph 14 at the foot of that page.  If I could take your Honours first to what Justice Edmonds said at about line 25 on page 34 on the subject of whether MBI made a supply to Mirvac after the acquisition of the reversion.  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 –

The first category, just to remind your Honours, was the grant of the lease by South Steyne to MML –

and there is no dispute that that supply was “by way of lease”.  The basis for this view is sourced in the proposition that when MBI purchased its reversionary interest in the three apartments, MML’s lease did not come to an end and a new lease commence.  Its lease, originally granted by South Steyne, continued uninterrupted by the change in the owner of the reversionary interest.  In other words, there is no third category of supply, merely a continuation of the first category –

So it is that essential proposition; there is no third category of supply, which is the foundation of the decision in the present case.  Justice Emmett, a little further up the page, said in South Steyne:

There is a real question as to whether the Continuation Category –

what Justice Edmonds called the third category –

involves any supply at all.  Properties acquired from South Steyne the legal estate in respect of apartments . . . being the reversion after the leases . . . 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 –

Justice Finn, at the foot of the previous page:

[T]he sale of three apartments to MBI Properties subject to their respective leases did not constitute a new or further supply –

by which his Honour meant, as becomes apparent from the next sentence, a supply by MBI to Mirvac –

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 –

The unspoken premise in his Honour’s reasoning is that a supply is the making of an agreement and not a course of conduct.  Now, the primary judge in the present case took up the words of Justice Edmonds at about line 30 on page 34, a continuation of the first category.  Your Honours can see that in the extract from the primary judge’s reasons at the top of page 36, where his Honour said:

I consider that the requirements . . . are satisfied in circumstances where there is a supply that is treated as a continuing supply (namely the supply of the residential premises by lease) which continues to be made through the enterprise constituted by the serviced apartment business after its supply as a going concern.

The Commissioner argued in the Full Court in the present case that the grant was not the only supply and that there was a continuing supply.  Your Honours will see that at the top of page 37, where Justice Edmonds recites the argument of counsel for the Commissioner:

The proposition, if one can boil it down as much as possible, is simply this:  If there is a continuing lease, there must be a continuing supply.

GAGELER J:   But it was a different supplier?

MR SLATER:   Yes.

GAGELER J:   Is there any significance in that?

MR SLATER:   The significance was that the argument failed.

GAGELER J:   It is a different argument.

MR SLATER:   Yes, I grant that it is a different argument from the argument I am putting here.  The argument there, faced with Justice Edmonds presiding and taking a very strong view right from the outset of the argument that South Steyne decided the present case completely against the Commissioner, counsel for the Commissioner pressed on with a proposition that the words “continuation of supply” gave him a foundation, and that all that was needed was that there was a continuation of some supply which was input taxed in order to satisfy section 135‑5.

GAGELER J:   What are the arguments?

MR SLATER:   The proposition I am putting to your Honours, just to be clear, is that the relevant supply is the supply by the purchaser of the reversion and that what the Full Court said in South Steyne is wrong.  The Commissioner could not appeal the decision in South Steyne.

KIEFEL J:   Because the second declaration was not made?

MR SLATER:   Yes.  That decision was in the Commissioner’s favour; the order was in the Commissioner’s favour, and one cannot appeal against the reasoning.  This is the opportunity, in effect, for the Commissioner in this Court, effectively not available to him below, to ‑ ‑ ‑

GAGELER J:   What do you mean by that?

MR SLATER:   I mean by that that it was not open to him at first instance because the judge at first instance was bound by South Steyne.

GAGELER J:   That can be accepted.

MR SLATER:   Yes, and it was, I say, effectively – and I cannot put it any higher than that – not open to him in the Full Court in this case, given the peremptory approach which was adopted at the commencement of the argument which was there is only one category of supply you can prosecute here and it is not the one we found was not there in South Steyne.

KEANE J:   Well, to put it another way, the Full Court in this case would have had to be satisfied that the Full Court in South Steyne was wrong, plainly wrong ‑ ‑ ‑

MR SLATER:   Plainly wrong, yes.

KEANE J:   So that was the legal test and, in practical terms, that was most unlikely to happen.

MR SLATER:   Yes, so the Commissioner’s counsel attempted to find another way home.  But this is not a case where the argument comes as a surprise.

KEANE J:   It is not a case where there is a problem with this Court not having the benefit of the Full Court’s views?  You have the benefit ‑ ‑ ‑

MR SLATER:   This Court certainly has the benefit of that in the sense that the Full Court here adopted, in the way I have just shown your Honours, verbatim what was said by the Full Court in South Steyne.  It is worth remembering that in South Steyne there was no issue between the parties that there was a supply.  Both parties accepted that there was a supply; the contest was over what type of supply.  The notion that there was no supply was what in other contexts has been called a frolic of their own.  It was a notion which was arrived at by the Full Court without having been agitated in argument and it was not argued in the present case.  But the reasons of the Full Court are fully set out in South Steyne and adopted in this case.

Your Honours, we submit that the proposition that was adopted in South Steyne and in this case, namely that there is no supply by the purchaser of the reversion to the sitting tenant, is fundamentally wrong and is contrary to the language of the Act.  To make that good, can I take your Honours to the language of the Act.  Your Honours should have a bundle of materials.  If your Honours would go to page 2 under tab 1(a), the meaning of “supply”, that is defined in section 9‑10:

A supply is any form of supply whatsoever.

Those words could not be broader.  Your Honours have probably heard me say that before.  Then subsection (2) –

Without limiting subsection (1), supply includes –

in paragraph (d) –

a grant . . . of real property –

and in paragraph (g), over the page –

an entry into, or release from, an obligation:

(i)to do anything; or

 . . . 

(iii)to tolerate an act or situation –

and subsection (3) –

It does not matter whether it is lawful to do, to refrain from doing or to tolerate the act or situation constituting the supply.

In our submission, it cannot be the case that because there is no grant by the reversioner to the tenant, there is no supply by the reversioner to the tenant.  Subsection (1) is in the broadest possible language; subsection (2) does not limit it, it extends it; and subsection (3) makes it clear that it does not matter whether the taxpayer is obliged to make the supply.  If I could then turn to section 135‑5, which your Honours will find under tab 1(h) – that is the section which was in issue in the present case:

You have an increasing adjustment –

after a GST‑free supply, and there was here; it had been decided in South Steyne, a GST‑free supply “if”:

you intend that some or all of the supplies made through the enterprise –

which was supply GST‑free –

will be supplies that are neither taxable supplies nor GST‑free supplies.

Now, it is not in contest that MBI acquired a going concern – that had already been decided – and it is not in contest that the only enterprise was the ownership of the reversion.  That was the only basis for there being a going concern.  The liability to GST on an increasing adjustment turned on whether there was to be an input tax supply.  The relevant input tax supply is that in section 40-35, which your Honours will find a little earlier under tab (g).  It is in section 40‑35:

A supply of premises that is by way of lease . . . is input taxed if:

(a)      the supply is of residential premises –

It was decided in South Steyne that the apartments were residential premises, and that was not in contest.  So the statutory issue was whether a landlord who purchases the reversion makes a supply of premises and, if so, whether the supply was by way of lease.  The Full Court, both in South Steyne and in the present case, decided that the purchaser landlord makes no supply at all.

Your Honours, we accept that the purchaser did not make a supply by way of grant of the lease, but we submit that the purchaser does make a supply of the premises by way of ongoing performance of the landlord’s covenants and obligations, including that the tenant may occupy and use exclusively and have quiet enjoyment of the premises.  That is under and by way of the lease and in this case Mirvac enjoyed and MBI held subject to the leasehold estate created by the grant. 

Mirvac enjoyed and MBI supplied, in our submission, the benefit of the lease covenants, both by virtue of the Conveyancing Act, as Justice Finn pointed out, and by express novation between MBI and Mirvac.  MBI expressly undertook to Mirvac to comply with its obligations under the lease and in return Mirvac paid MBI the rent due under the lease.

It is sufficient, for the purposes of section 135‑5 that there be at least one input taxed supply, whether or not there is or has been another supply.  Here there is a supply of premises by performance of the covenant of quiet enjoyment and MBI’s intended performance of its obligation as landlord is, in our submission, a sufficient supply of premises for section 135‑5.  It is input taxed, being a supply of residential premises; it is by way of lease, being through the medium of the lease subject to which MBI purchased and which it undertook to observe, and it is immaterial that MBI did not grant the lease.

Your Honours, the fulcrum of the reasoning of the Full Court in both decisions is that the purchaser of the reversion makes no supply to the tenant.  If that is correct, then a purchaser of leased commercial property is not liable to GST on the rent received.  To make that good, can I take your Honours to section 9‑40, which your Honours will find under tab 1(a) on page 7.  Section 9‑40 provides that “you”, in the joyous second person singular language of the revenue statutes:

must pay the GST payable on any taxable supply that you make.

If the Full Court is right, then the purchaser of the reversion, being the “you” there spoken of, does not make a supply and is not liable to GST.  But correspondingly, the tenant is not entitled to input tax credits.  One gets that by looking at section 11‑5, which your Honours will find under tab 1(b) on page 9:

You make a creditable acquisition if:

(a)you acquire anything solely or partly for a creditable purpose –

and I am dealing here with a case of a commercial tenant who is entitled to an input tax credit generally; and –

(b)the supply of the thing to you is a taxable supply –

You are not entitled to an input tax credit unless the supply to you is a taxable supply and if the Full Court is right then the reversioner makes no supply; the rent is not consideration for a supply and therefore there is no taxable supply.  The consequence of that is that although the rent will have been set, taking into account that the landlord must pay GST to the Commissioner, and taking into account that the tenant will be entitled to an input tax credit, the effect of the Full Court’s decision is that the landlord is entitled to keep the whole of the rent and not pay anything to the Commissioner, and the tenant gets no input tax credit notwithstanding that he is in effect paying the landlord to enable the landlord to pay the GST.

That, in our respectful submission, is a very curious result.  It is one which has caused a great deal of concern and anxiety in the commercial community.  We have set out some of that material in Ms Leslie’s affidavit.  I will not take your Honours to all of it, but can I draw your Honours’ attention to the circular at page 66 of the application book where your Honours will see that the Property Council, which is concerned with the position both of landlords and of tenants, expresses the view that the industry is concerned about the implications of the decision, that the outcome of the MBI – this is about line 25:

The outcome of the MBI Case is unworkable under the current GST system –

and they give their reasons for saying that.  There are other circulars by professional advisers to similar effect at pages 68 through to 87.  In our respectful submission, the decision is wrong and it is of sufficient importance to warrant a grant of special leave.  If your Honours please.

MR HMELNITSKY:   Your Honours, the two errors for which the Commissioner contends are identified in the applicant’s summary of argument.  First, there is what is described as the “cardinal error” in paragraph 18, which is said to be that the Full Court proceeded on the basis of an implied premise that there was in the circumstances of this case only one supply, and that is to say, to be clear about it, that the Full Court is said to have fallen into error by not recognising or acknowledging that the taxpayer also made a supply in the circumstances of this case.  The second error is said to be the failure by the Full Court to follow what had been said in a previous Full Court, namely the decision in Westley Nominees.  That relates essentially to the same matter, and I will come to it.

Your Honours, in our submission, neither of those criticisms of the Full Federal Court’s decision is warranted.  Far from reasoning from some implied premise about whether or not the taxpayer here made a supply, the Full Court proceeded on the basis that the Commissioner expressly invited him to proceed, namely that the decision in the previous Full Court decision in South Steyne was correct, and that it was not to be distinguished and it was not wrong.  What your Honours see in the passage in the Full Court’s reasons which is said to disclose error is a rejection of the alternative argument that was put by the Commissioner which took as its express premise that the decision in South Steyne was correct.  Can I make that good, your Honours, by ‑ ‑ ‑

GAGELER J:   Mr Hmelnitsky, is this an argument that the decision of the Full Court was so plainly correct that we should not look at it, or is it an argument that this is not a suitable vehicle?

MR HMELNITSKY:   There are two points, perhaps, to be made, your Honour.  One is that we say there is no error because the court in those circumstances proceeded as it should have done, which is to treat the previous Full Court as being binding; it was in relation to these same parties in relation to this same transaction.  So we say first that ‑ ‑ ‑

KIEFEL J:   Is not that what created the problem for the Commissioner, that the Full Court was clearly going to do that; it felt obliged to do that and that restricted the Commissioner’s argument.  The question remains, is the decision correct?  That is the question of importance.

MR HMELNITSKY:   Yes, your Honour, but as to that, your Honour, the application is really advanced on the basis that leave should be granted in order to correct what are now said to be inconsistencies in successive decisions of the Full Federal Court.  Those inconsistencies are as between the decision in Westley Nominees in which it was suggested that the purchaser of a reversion does make a supply, and the decision in South Steyne in which the Full Federal Court unanimously held that the purchaser of a reversion does not make a supply by reason of acquiring the reversion.

KIEFEL J:   Was Westley referred to in ‑ ‑ ‑

MR HMELNITSKY:   It was, but not for that proposition, your Honour, because to rely on it for that proposition would have denied the Commissioner’s major premise, which is that the decision in South Steyne was correct.  Can I take your Honour to what the Full Court said about Westley.  First, your Honours see, starting at page 34 of the application book, your Honours see in paragraph 15 – I think your Honours were already taken to this – what the position of the Commissioner was; that was, as Justice Edmonds set out, that South Steyne was correct and that what his Honour had said in South Steyne was a reason for the Commissioner to succeed in these proceedings. 

Secondly, your Honours see the court dealing with that particular proposition, or at least his Honour Justice Edmonds dealing with that proposition starting at paragraph 19 of his Honour’s reasons at page 36.  Your Honours see there set out the position that had been adopted before the primary judge and also in written submissions before the Full Federal Court and also in oral argument before that court, namely that there is a continuing supply by the original grantor, South Steyne.

But then, your Honours, just to come back to your Honour the presiding Judge’s question, your Honours see what proposition was sought to be gained from Westley Nominees at the very bottom of that page.  What was sought to be gained from Westley was not the proposition for which it is now advanced, namely that the purchaser of a reversion makes a continuing – sorry, I withdraw that – the purchaser of a reversion makes a different supply.  Westley was relied on for the very opposite proposition, namely consistent with the Commissioner’s case as otherwise advanced below, that the original grantor was deemed or treated by the GST Act to make a continuing supply. So Westley was referred to, your Honours, but for the very opposite proposition for which it is now relied on.

The inconsistency that the Commissioner now points to as between Westley and the decision in South Steyne, and also the decision below in this case, was an inconsistency that was not only not brought to the court’s attention below, but was really entirely inconsistent with the way the case was conducted below.  This is not a matter, your Honours, about which the court below was unaware; in fact, her Honour Justice Davies, if your Honours would go to page 44 of the application book, you will see in the final paragraph of her Honour’s reasons that she records there the potential for there to be, upon one view, some tension – I am reading from the very last line of the page on page 44:

some tension between Westley and South Steyne as to whether there is a further “supply by way of lease” –

But her Honour says, consistently with the submissions of both parties below, that it was attention that need not be resolved because neither party was contending for any inconsistency.  The parties jointly took the view – the Commissioner certainly took the view – that it was the decision in South Steyne that was to be preferred and that was correct.

KIEFEL J:   Do you say there was no reason that the Commissioner could not have argued that, even in the face of what had been held in South Steyne?

MR HMELNITSKY:   No, there was no reason at all, your Honour.  I am sorry, maybe I need to qualify that somewhat.  It was open to the Commissioner, if he is right in his contention that there was no estoppel in relation to this, but assume that in the Commissioner’s favour, he could have submitted to the Full Federal Court that either the decision in South Steyne was wrong, but not clearly wrong, or he could have submitted that it was clearly wrong and that the second Full Court should decline to follow it.  But he never did that.  There is no foundation for the submission that he was really bound by the way that the attitude of the Full Court revealed itself during the oral hearing not to take the point.  He could have taken the point, if his view was, as he now submits, that that first decision was wrong, but he did not.

KIEFEL J:   Are you saying that special leave should not be granted because of the way it has been argued to this point, whereas there appears to be an important question that has been inconsistently – been approached by the Full Court of the Federal Court, which is an unsatisfactory state of affairs.

MR HMELNITSKY:   It is unsatisfactory, your Honour, or it would be unsatisfactory if the remarkable consequences to which the Commissioner points really could be said to flow from the decision in this case, but they do not.  The first special leave question, or perhaps the first special leave questions that your Honours see set out at page 51 of the application book, consistently with what the Commissioner has submitted this morning concern the GST treatment of taxable supplies, not input tax supplies.

The scheme of the Act in relation to taxable supplies is different in important respects from the scheme of the Act in relation to input tax supplies.  Where a supply is input taxed, it does not matter when consideration is received for it.  It does not matter how much consideration is received for it because it is not taxed by reference to consideration, so to take the lease, for example; where you make an input tax supply by way of lease, the supply is taxed as these leases were taxed, but they are taxed by the Commissioner collecting GST on the inputs that go into them by the supplier.  Whether or not the rent is a peppercorn, or whether it is a million dollars, and whether that million dollars is paid all on day one or paid over the term of the lease is of no consequence for GST purposes because it is input taxed; it is not taxable.

The remarkable consequences that the Commissioner describes, both in his summary of argument and also in submissions this morning, are consequences that might arise if the Act did not contain its own provision dedicated to ensuring that those circumstances do not arise in the case of taxable supplies; that is Division 156.  If your Honours go to the bundle of legislation and authorities behind tab 1(i) at page 26 of those materials, your Honours see section 156‑5 which ensures that:

The GST payable by you on a taxable supply that is made:

(a)      for a period or on a progressive basis . . . 

is attributable, in accordance with section 29‑5, as if each progressive or periodic component of the supply were a separate supply.

That provision applies in the case of leases by reason of section 156‑22, which your Honours see over the page towards the bottom of the page.  The effect of Division 156 is to ensure that the remarkable consequences to which the Commissioner points on this application do not arise in relation to taxable supplies.  But it is important, your Honours, in our submission to see that they could only ever arise in relation to taxable supplies because the Act is only concerned with GST on rent where the lease is a taxable supply.

GAGELER J:   I do not really quite follow this.  The tenant would be paying rent to the purchaser of the reversion, but it would not be consideration for a supply on the view taken by the Full Court, would it?

MR HMELNITSKY:   On the view taken by the Full Court, it would not be consideration for a supply, but on the view taken by the Commissioner it would be consideration for an input tax supply, in which case there is no GST on it in any event.  That is the difference between a taxable supply in the case of a lease and an input tax supply.  The Commissioner contends here, as he must in order to succeed, that the further supply made by the incoming purchaser of the reversion is an input tax supply, and one sees that in his draft notice of appeal.  He is really bound to put his case that way, but it has the consequence, your Honours, that the interesting questions raised in the first special leave question are questions that a court will not have occasion to consider if leave is granted because your Honours will only be concerned with an input tax supply.

GAGELER J:   Well, we are concerned at a higher level with the supply.

MR HMELNITSKY:   Your Honours would, but that would not be the end of the matter.  If your Honours were to take the view, for example, that contrary to what the Full Court in South Steyne had concluded, there was some supply here, it may or may not be an input tax supply.  One outcome, and an outcome for which we would contend in the alternative, is that there may be a supply but not an input tax supply.  That is a question that has never been decisive of any case at the intermediate appellate level.  It was considered briefly in Westley, but it did not actually matter to the outcome there ‑ ‑ ‑

KIEFEL J:   But the question which is said to be of importance and warrant special leave is the threshold question about supply, is it not?

MR HMELNITSKY:   We understand that to be the case, yes, your Honour.  But it is said to be of importance because of the consequences that it may have for taxable supplies, not input tax supplies, and my point – perhaps I am labouring it, your Honours – is simply that it is not a problem ‑ ‑ ‑

KIEFEL J:   You are talking about the ultimate outcome, though, are you not?

MR HMELNITSKY:   No, your Honour, I am saying that it is not a problem in the case of taxable supplies because Division 156 deals with it.  So whether or not ‑ ‑ ‑

GAGELER J:   In a way, it is still premised on the existence of the supply.

MR HMELNITSKY:   No, your Honour, because what Division 156 does is to treat what is unquestionably the supply at the outset as occurring from time to time, so the Act tells you that there is a supply from time to time.  The question of whether or not, absent Division 156, there would be a supply never comes to be considered in a case of taxable supplies, because it is dealt with by Division 156.

KIEFEL J:   Well, there may be a question about that.

MR HMELNITSKY:   Possibly so, your Honour, but it would not arise in this case.  It would arise in a case where Division 156 applied, which on any view, it cannot here.  Your Honours, the last point we would make in this regard concerns the second of those special leave questions, which concerns the ultimate question if the Court were to come to it; that is, whether or not any supply that is made by the purchaser of the reversion could be said to be an input tax supply, and we have indicated in our summary of argument why the Court would not prefer that construction. 

To the extent that question has ever been considered, it was in Westley, and the conclusion that the court came to in Westley, although it did not ultimately matter to the outcome there, was that any supply made by the purchaser of a reversion was not an input tax supply because it was not a supply by way of lease.  Your Honours, we say that is a conclusion that the Court is bound to come to by reference to the terms of section 40‑35.

KEANE J:   If one looks at that section:

A supply of premises that is by way of lease, hire or licence –

Putting aside the question of who is the supplier, the genus is “supply of premises” by any of those three means.  Why would not one conclude that the grant of an estate by the lessor to the lessee is not a feature which takes the species lease out of the genus?

MR HMELNITSKY:   We do not submit that it does or could, your Honour.

KEANE J:   So why is not the genus the provision of occupation of premises?

MR HMELNITSKY:   We would submit, your Honour, that the subject matter of the supply within the meaning of section 40‑35 is, as your Honour identifies, the premises – and we say that must mean some right to occupy premises, whether by way of lease, hire or licence – but one must be able to say of the supply that it is a supply of those premises in the sense that someone is supplying something to the occupant of the premises.  Here, by the time the respondent acquired these properties subject to lease, the lessees already had exclusive possession of the lease premises, and we say it cannot be said of anything done by the new landlord that it was a supply of those premises to which the tenants already had exclusive possession.

KEANE J:   But it only has quiet enjoyment of those premises because it continues to pay rent to the owner of the reversion.

MR HMELNITSKY:   That may be so, your Honour, but we say it does not follow from that that merely honouring an obligation which the incoming landlord is bound to honour is a supply.  Not everything that respects the rights of a tenant is a supply.  Of course, if there were an entry into an obligation to do so, then that could meet the description of a supply ‑ ‑ ‑

KIEFEL J:   You mean if there was an assignment, it would be different?

MR HMELNITSKY:   That is not what I had in mind, your Honour, but if the facts were to suggest the entry into some obligation in relation to the existing lease, then it might be said of the entry into that obligation that it meets the description of supply, but ‑ ‑ ‑

GAGELER J:   If there was a breach of the covenant of quiet enjoyment, would that not be a breach by the new landlord?

MR HMELNITSKY:   It would, your Honour, yes, and we would not contend otherwise.  What we say, really, your Honour, focuses on the reference to “premises” there and to the compound phrase, and we say that in order to be an input tax supply by way of lease, there must be something supplied by the incoming landlord to the tenant that can be said to be a supply of premises.  We say that the existing tenant already has exclusive possession, and nothing that the incoming landlord does can be said to be a supply of premises to the existing tenant.  I see my time is up, your Honours.

KIEFEL J:   Thank you.  Anything by way of reply, Mr Slater?

MR SLATER:   Briefly, your Honours.  Our friends essentially make four points.  The first is concerned with inconsistency between Westley and South Steyne as being the foundation of our case.  It is not.  The principal foundation of our case is that South Steyne is wrong, and that MBI was wrong to follow it.

The second proposition is that these issues were not argued below.  That in effect is the difficulty; it was not argued in South Steyne, and as Justice Keane pointed out, there are great difficulties in arguing it in MBI, and we freely accept that it was not argued in MBI, but nonetheless in our submission the decision is wrong, and whether it was argued below is not decisive.

The third proposition that he puts his case on rests on Division 156.  Division 156 is at page 26 of the materials book.  The difficulty with Division 156 is that in the case of the curious result that we say attracts the attention of a court, Division 156 simply does not apply.  It only applies to “GST payable by you on a taxable supply” and I took your Honours earlier to section 9‑40; GST is only payable on the supply that you make.  If the Full Court is right, then there is no supply made by MBI and Division 156 simply has no operation, whether the supply is taxable or input taxed.

The final proposition by way of lease as being something important, on the facts of this case there could be no contest that any supply was by way of lease, that any supply was by way of lease.  MBI expressly undertook to honour the lease.  Your Honours, in our submission, for the reasons given by the Property Council in effect, this is an important matter.  It warrants a grant of special leave, and for the reasons we have advanced, the decision below is plainly wrong and should be corrected.  If your Honours please.

KIEFEL J:   There will be a grant of special leave in this matter.  The Court notes the Commissioner’s undertaking to pay the costs of MBI’s taxed or agreed such costs to be funded from the Commissioner’s test case funding program.

MR SLATER:   Thank you, your Honour.

KIEFEL J:   Would the parties please obtain a copy of the timetable for submissions before they leave the premises?  Thank you.  The Court will now reconstitute.

AT 10.15 AM THE MATTER WAS CONCLUDED