South Steyne Hotel Pty Ltd & Ors v Commissioner of Taxation

[2010] HCATrans 99

[2010] HCATrans 099

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Sydney  No S354 of 2009

B e t w e e n -

SOUTH STEYNE HOTEL PTY LTD

First Applicant

MBI PROPERTIES PTY LTD

Second Applicant

MORGAN & BANKS INVESTMENTS PTY LTD

Third Applicant

and

COMMISSIONER OF TAXATION

Respondent

Application for special leave to appeal

FRENCH CJ
KIEFEL J

TRANSCRIPT OF PROCEEDINGS

FROM SYDNEY BY VIDEO LINK TO MELBOURNE

ON FRIDAY, 23 APRIL 2010, AT 10.50 AM

Copyright in the High Court of Australia

MR B.W. WALKER, SC:   May it please the Court, I appear with my learned friend, MR S.J. FREE, for the applicant.  (instructed by Balazs Lazanas & Welch LLP)

MR M.A. WIGNEY, SC:   May it please the Court, I appear with my learned friend, MR D.F.C. THOMAS, for the respondent.  (instructed by Australian Government Solicitor)

FRENCH CJ:   We can see you over the top of the screen.  Yes, Mr Walker.

MR WALKER:   Your Honours, there is just one point which is presented for special leave in this case after a number of other points have been dealt with in a case originally selected for the Commissioner’s test case program.  That one point concerns the attribution for the purposes of 40‑35, the notion of a supply of premises, of the actions or activities of an agent to a principal.  As such, it raises a matter which we submit is of transcendent importance to other, indeed many other, provisions in the Act.  One can exemplify that by reference to the authority we have drawn to attention in our written submissions, namely, Lilyvale Hotel v Commissioner of Taxation 175 FCR 491 which involved the application of a so‑called same business test.

The pervasive element of the general law concerning principal and agent in the conduct of business, particularly commercial business in which GST is so dominant, is one which is common and very important in cases raising the same business test, Lilyvale, because of the necessity to ask about the identity of who is operating the business before and after the critical date.  It is also obviously relevant in the fundamental integer in a GST question, namely, who is making the supply.  Division 40‑35, as your Honours appreciate, is the provision which was ultimately construed and applied in a way which, we hope we have identified in the written submissions, reveals error on the part of the majority in the Full Court.

That is an expression which starts by referring to a supply of premises which has a character of being input taxed.  As your Honours appreciate, being input taxed is of course fundamental to the mode of defining when one makes a taxable supply in section 9‑5 because one does not make a taxable supply if it is input taxed, itself of course defined in section 9‑30(2) so as to lead to Division 40 where I started – section 40‑35.  Section 9‑5 refers to making a taxable supply if you make the supply for consideration, among other matters.

In this case the uncontested facts about which the statutory interpretation issue we pose for special leave terms involved the simple scheme as follows.  One person, namely, MML, granted rights of management, as one sees in the application book at page 60 under an agreement called by a useful description a serviced apartment management agreement.  MML appointed MHL as the exclusive agent of MML.  The management and operation of the serviced apartment business was of course the exercise of those agency obligations – for reward of course – by which the overnight guest in question in the case before the Court were supplied for that one night.

The issues, in our submission, therefore come down to the matters which were, with great respect, cogently and correctly set out by Justice Edmonds contained conveniently on two pages, pages 76 and 77 of the application book.  Most conveniently, that contains, in our submission, all the elements of an argument the simplicity of which, in our submission, bespeaks its correctness and the reliance on general principle bespeaking its general importance.  Very conveniently it also contains the extract to which we have drawn attention in our written submissions from the explanatory memorandum, for what that is worth.  Your Honours will see at line 10 on page 76 the matter to which we have drawn attention by emphasis:

Nor does it refer to an agent that lets out premises on behalf of the owner of the premises.

As your Honours will have seen, in paragraph ‑ ‑ ‑

FRENCH CJ:   MML was a lessee in respect of this particular apartment?

MR WALKER:   Quite so.

FRENCH CJ:   It gave under the management agreement, I think, the benefit of such rights as it had as lessee to MHL for the purpose of allowing it to manage the apartment?

MR WALKER:   Quite so, yes.

FRENCH CJ:   Facilitating, but not making it a sub‑lessee in any sense?

MR WALKER:   Quite so.  There was no proprietary interest.  One sees that on page 77 in paragraph 121, line 10.  That is not a dissenting view about the legal analysis.  That is, as I say, conveniently said on these pages are references to and summations of the relevant facts and the argument which, in our submission, was compelling and should have been upheld.

FRENCH CJ:   But when the term “agent” is used, of course, that is not a suggestion that when MHL enters into a contract to provide residential accommodation in an apartment to, in this particular case, the person, Ms Young, it is doing so on behalf of MML as principal.

MR WALKER:   It was precisely making that supply for MML as principal, yes.

FRENCH CJ:   So you say there is a contractual relationship then established between MML and Ms Young’s employer at least?

MR WALKER:   Yes, quite so.  That is, entry into the overnight stay arrangement was by MHL as agent for MML.  Great significance was attached to the fact that the invoice to Ms Young was issued in the name of the agent but, with respect, there is no answer that can be given to the way in which that was disposed of by Justice Edmonds at paragraph 120 on page 76 between lines 50 and 60.  The issue of an invoice in the name of an agent does nothing to show that the supply was not by the principal when the services or the goods are supplied by the agent.

KIEFEL J:   Did the primary judge find that the supply by MHL was in its own right rather than as agent?  Was that the effect of her Honour’s findings?

MR WALKER:   Yes, that is so, your Honour.

KIEFEL J:   If that is so, does the proposed appeal turn largely then upon the terms of the arrangement between MML and MHL rather than as a question of statutory construction concerning the impost of tax?

MR WALKER:   To quote, for example, from Justice Finn at page 43 of the application book, paragraph 4, in the Full Court there was no reference to any doubt about the principal and agent relation under the serviced apartment management agreement by which the letting of rooms overnight to guests was done by MHL for its principal MML.  So the notion of MHL doing that in its own right but at the same time doing so as an agent for a principal, a confusing use of some general expressions about legal relations, finds no place in the statute and really finds no place in the Full Court decision.

So in answer to Justice Kiefel, no.  Because we seek special leave to appeal from the Full Court, it is critical to note that in the Full Court the majority reached its result notwithstanding the acceptance without demur that there was a principal and agent relation between the lessee of the room stayed in by the guest and the manager of the serviced apartment business operating as agent for that lessee.  Rather, perhaps an explanation, at least in part, of the approach taken in the Full Court might be seen, for example, by the way in which the paraphrase is expressed by Justice Emmett of the relevant provisions on page 53.

KIEFEL J:   Just before you go to Justice Emmet, when you were referring to Justice Finn’s reasons, were you referring to special leave book page 43, paragraph 4 at about line 35, “in supplying accommodation to Ms Young it contracted as a principal”?  That I thought was upholding the primary judge’s finding.

MR WALKER:   I was referring to about line 24, your Honour, “unquestionably that of principal and agent”.

KIEFEL J:   Is not the critical finding that in supplying the accommodation Mirvak Management contracted as a principal and is not that not consistent with the primary judge’s finding?

MR WALKER:   Your Honour, the difficulty is, there is no material to support the proposition that somehow, notwithstanding being MML’s agent, it was a principal, that is, with no role as a principal for MML as lessee in relation to licensing the room, exclusive possession to which was held by MML and the consideration for which had to be accounted to MML.  To say that in supplying accommodation to Ms Young it contracted as a principal is, in our submission, an impossible proposition bearing in mind that MML’s exclusive possession was being subjected to a licence, that there was unquestionably, as his Honour says in the same paragraph, the relation of principal and agent and that concerned in particular the way in which one received and dealt with the consideration for that overnight licence.

It is for those reasons that talk about contracting as a principle is really an error which involves suggesting that MML has no relationship with the guest, but MML’s proprietary interest as lessee is that which has the licence carved out of it overnight.  The relationship is obvious and, in our submission, is wholly governed by the serviced apartment management agreement.  The manner in which his Honour reaches that conclusion is not explained, but both in paragraph 4 of Justice Finn and in paragraph 35 of Justice Emmet at page 53 it can be seen that their Honours have gone, as it were, to a parenthetical exception in section 40‑35 rather than applying the general law and ordinary language and analysis to the opening words of 40‑35.  May I explain?

KIEFEL J:   If I may interrupt you, to return to my initial question, what you have just discussed about the approach that Justice Finn took, does not that identify as a large area for discourse on the proposed appeal the arrangements between the entities and the level of control which was given to Mirvak Management and would that not be involved in the proposed grounds 5 and 6 of the notice of appeal?

MR WALKER:   In a sense, yes, your Honour.  In our submission, the reference to control in relation to what I will call a putative agent, or somebody who is clearly an agent so far as their relationship with the owner or lessee of the premises is concerned, may itself justify attention by this Court because of the violence the majority approach threatens to do to the ordinary commercial expectations and, indeed, the commercial law of what an agent does, being the actions of the principal.  The fact that an agent is exclusive in the sense, for example, that the principal gives up the right during the term of the agency to conduct the housekeeping and room‑letting business that it is delegating to its agent, may provide in some sense of that word a measure of control to the agent, but is a control in carrying out work on behalf of the principal.  That is something which, in our submission, does justify attention by this Court on facts which are clear and plain and lend themselves to a consideration of an important matter.

In section 40‑35, could I draw to attention that the critical definition of that which is input taxed, which is therefore not a taxable supply, is a supply of premises.  The question in this case was, by whom was the supply?  That is the first question.  One goes to 9‑5 for that and one makes a supply when one, among other things, does it for consideration.  In this case there is no doubt but that – and no finding of fact stands in our way for this proposition – that the consideration paid by the overnight guest, Ms Young, is consideration which the agent, MML, held for, that is, on behalf of, its principal, MHL, holds for MML and has to account for it deducting of course the agreed commission, the commission it is paid as an agent for conducting on the principal’s behalf the business of letting out serviced apartments for short hotel‑like stays.

When one looks then at that course of the consideration, when one combines that with the lack of proprietary interest of the manager, one sees that the reference to control, borrowed, as it were, from the commercial fact or reality of an agent occupying the hotel premises, has been misused or gone to prematurely by the judges in the majority.  It appears in the statute in paragraph 40‑35(1)(a) only in the parenthetical exception to the proposition that a supply is input taxed if the supply is of residential premises.  The first question is whether the supply is of residential premises and the answer is that the supply clearly being by MML is just that. 

One then asks, that supply by MML, is that a supply of accommodation in commercial residential premises, and the answer is yes, but is it provided by the entity that owns or controls the commercial residential premises and it was, as your Honours have seen in paragraph 118 on page 76 at about line 28, it was common ground, a clear fact, that MML

was not an entity that controlled, and it certainly did not own, the commercial residential premises.  It did not own them, it was a lessee of part and it did not control them because that was split between various entities as noted in paragraphs 60 to 62.

For those reasons, in our submission, there may be an explanation of error in the way in which one sees Justice Emmet paraphrase the provisions on page 53, paragraph 35.  I am sorry if this appears at all pedantic, but one way of putting it is that there appears to be a misplaced closing parenthesis.  Could I draw to your attention the way that appears in the second‑last line of paragraph 35.  It is plain of course that that would read as a more accurate paraphrase if that closing parenthesis were shifted to the end of the sentence. 

FRENCH CJ:   Yes.

MR WALKER:   That may explain how it – it may not be a reason for, it may be a consequence of, of course, an attention which was, in our submission, clearly wrong, an attention first to an exception before asking whether the supply met the description in the first place.  For those reasons, in our submission, this is most apt for a grant of special leave.  It does raise questions in the area that Justice Kiefel was asking me about, namely, what does one do about the conduct of a business by a principal through an agent where the agent, by dint of contractual arrangements, controls what is actually done, as it is put, day to day.  It is in that context, in our submission, that this case, which was below a test case, carries in the remnant of the issues which we present the character for a grant of special leave.  May it please the Court.

FRENCH CJ:   Thank you, Mr Walker.  Yes, Mr Wigney.

MR WIGNEY:   May it please the Court.  Your Honours, special leave should, in our respectful submission, be refused for three reasons.  I will outline those reasons and then deal briefly with each of them in turn, although ultimately it is the third reason that is crucial.  First, in our submission, the finding by the primary judge in the Full Court that MHL supplied accommodation in the Sebel Hotel to guests in its own right and not as agent was a finding that was open on all the facts and circumstances and the evidence before the court turned in large part on an available construction of the provisions in the management agreement between MHL and MML and accordingly involved ‑ ‑ ‑

FRENCH CJ:   Are you particularly relying upon 4.1(b) of the management agreement there, are you?

MR WIGNEY:   Indeed, and 4.2, your Honours, as I will come to in due course, which permits and authorises MHL to enter into contracts; it says in its own name but it is clear when one looks at the clause that it also authorises it to enter into contracts as principal.  So, in our respectful submission, there was no error in the finding by the primary judge and the majority of the Full Court in that regard and, indeed, our submission is the finding was correct.  Secondly and likewise, the finding that MHL controlled, relevantly, the Sebel Hotel at the time that the accommodation was supplied was again a finding that was open on the evidence that was before the court and involved no error warranting intervention by this Court. 

Thirdly and perhaps most significantly, in our submission, once those two findings are made, that is, who supplied the accommodation and who controlled the hotel, that is the commercial residential premises, in our submission, the application and interpretation of the relevant exception in section 35‑1(a) of the GST Act that is in issue in these proceedings is uncontroversial, does not raise any issue or uncertainty warranting intervention by this Court. So, in our respectful submission, the answer to your Honour Justice Kiefel’s question as to whether this really is a case that turns on its own facts and does not raise an issue of statutory construction, we would submit that that is the case. It does not raise properly, on the facts as found, a question of construction of section 40‑35.

Can I touch very briefly on each of those points.  They are dealt with at some length in our written submissions.  The first of our points, as I said, your Honours, is that the finding that MHL supplied the accommodation as principal in its own right was a finding that was open on the facts before the court and, indeed, the interpretation of the management agreement.  We have set out in some detail in our written submissions the relevant clauses of the management agreement and other facts and circumstances that support the finding. 

Really, the high point of the applicant’s case is that under the management agreement clause 3.1 MML appointed MHL as its exclusive agent to “manage and operate the Serviced Apartment Business”, but the critical point is that, in our submission, it does not follow from that grant of agency or general appointment of agency that every act taken by MHL in the course of that business, every supply made in the course of that business was made by MHL as agent of MML.  As I said, that is so particularly when one has regard to a number of the provisions of the agreement.  The first, as your Honour the Chief Justice has pointed out, the provision we rely on is clause 4.1(b). 

That is one of the provisions that enabled MHL to supply the accommodation, that is, the room, by licence to Ms Young and others, enabled MHL to supply in its own name and as principal, that is, that MHL under that clause has the benefit of any right of MML under the apartment leases.  That right or those rights include, of course, the right to quiet enjoyment and exclusive possession of the apartments and in those circumstances, MHL, having the benefit of that right, is in a position to licence the room or rooms to guests in its own right as principal.  One of the other clauses that we place reliance on is clause 4.2(c)(iv) which, in our respectful submission, specifically enabled MHL to enter into contracts in its own name and, in our respectful submission, the only way to construe that provision is that it enabled MHL ‑ ‑ ‑

FRENCH CJ:   Where do we find that reproduced in the application book?

MR WIGNEY:   Regrettably, it is not fully reproduced, but the most convenient place to find it set out is in fact in the applicant’s reply at page 114 of the application book.  Your Honour will see it set out at about line 10:

(iv)entering into contracts in its own name ‑

and then it is emphasised by the applicant in these submissions –

or as agent of MML.

The point is that we accept that it says “in its own name” but when it is juxtaposed with “as agent of MML” the only way to construe that provision is that “in its own name” means as principal in its own right.  So it was both in a position to supply in its own right the accommodation in the hotel by licence to Ms Young and others and it was specifically authorised under the terms of the management agreement to do so.  So they are some of the critical provisions in the management agreement itself. 

The management agreement of course also, as our written submissions point out, contained a number of provisions that gave MHL exclusive control and discretion in relation to, effectively, every aspect of the operation of the business including the licence or provision of accommodation in the rooms in the hotel.  The important point is that unlike the situation one would expect if MHL was providing the accommodation as a mere agent, the control that MHL had in relation to the business, including the provision of accommodation, was effectively unfettered, that is, not subject in any way by MML.  As I said, that is a fact, the extent of control that it is relevant to have regard to, in our respectful submission, when one considers whether this particular supply or these particular supplies as part of the business of operating this hotel was a supply made by MHL in its own right.

The third point that we make in our written submissions in relation to this aspect of the matter is that other surrounding facts and circumstances supported the inference that MHL provided this accommodation as principal in its own right.  One of those matters that we point to that is contentious is that MHL provided a tax invoice in its own name that did not mention MML at all or the fact – and, indeed, there is no indication in the evidence of any indication in the dealings between the parties relating to the supply that MHL disclosed or revealed that it was in any way acting as an agent for anyone.  So it is not just the tax invoice, there is no indication in any of the relevant dealings that MHL was simply acting as an agent and not as principal.

We accept against us in this regard that under the GST Act one is able to issue a tax invoice in the name of an agent, but nonetheless, in our submission, it is a relevant fact to support the inference that ultimately was accepted by the primary judge and the majority below and it was certainly, as Justice Emmett pointed out, consistent with that finding. Finally on this particular point, the other surrounding facts and circumstances include that MHL had exclusive ownership and control of all of the other important parts of the hotel or the business including the management lot, which included reception, car park and the like. MML had no interest, certainly no proprietary interest, in those areas and no power or control in relation to the operation of those aspects of the business.

That is the first point or contention we make, that is, that that significant finding was open on the materials before the court, it discloses no error and there is no reason for this Court to disturb it.  Much the same can be said in relation to the second point which I can deal with briefly and that is who controlled the Sebel Hotel, that is, the relevant commercial residential premises.  Again we set out in some detail in our written submissions the material that was before the court below in relation to that matter.  It is unnecessary to detail it.  Most of the points that I have already made in relation to clauses 4.1 and 4.2 I have already dealt with and they are dealt with fully in our written submissions.

I think the point made against us in the written submissions is that the control that MHL, in our submission, indisputably had in relation to the commercial premises was exercised on behalf of MML.  That really deals with the first point, but again can I emphasise that the management agreement made it abundantly clear that MHL’s control was exclusive and unfettered and that is, it is not the sort of situation where one would expect if MHL was a mere agent in relation to every supply because MHL was not subject to the direction of MML at all.

Our final point, your Honours, is that having regard to those two findings, once they are made and not disturbed there is really no

uncertainty, ambiguity, division or issue in relation to the interpretation or operation of section 40‑35(1).  Essentially, once one makes the finding of who made the relevant supply and who was in control of the commercial residential premises at that time, it is a matter of simply plugging those two facts into the second exception in the parentheses in section 40‑35(1)(a) and that answers it.  There is really nothing exposed, in our respectful submission, in the reasons of the primary judge or the Full Court that gives rise to any uncertainty or ambiguity in relation to the operation of that provision, in our submission.

FRENCH CJ:   Thank you, Mr Wigney.  Yes, Mr Walker.

MR WALKER:   Your Honours, it is not useful, in our submission, to dub MHL a mere agent as my friend does in address.  In the agreement, tab 3 of the book, page 8, clause 3.1, as you are already aware, your Honours will see the appointment as an exclusive agent.  It is an “exclusive agent to manage and operate the Serviced Apartment Business” which does not thereby become the business of the exclusive agent.  It is operated for MML, the lessee, and, as your Honours know, in due turn MML as lessee and trustee has obligations to the so‑called owners of the individual lots.

Now, that makes this case, this decision, sit most oddly with the decision to which I have already referred, Lilyvale, where for the same business test approach there was no doubt in the Full Court, particularly in the emphatic concurrence of Justice Perram to which we have drawn attention, there was nothing whatever to detract from the proposition that a managing agent with very full powers of control, so‑called, every bit as full, probably further than obtain in this case, was nonetheless operating the business for the owner of the business so that there was the essential identity before and after the relevant date, notwithstanding the nature of the control of that erstwhile agent changed or was eliminated.

The two cases do not sit together in the application they call in aid of the pervasive, important and underlying propositions that what an agent does is what the principal does and what the agent does binds the principal.  In this case, could Ms Young have been evicted by the lessee halfway through the night’s stay on the basis that it was not bound by the licence granted “in its own right” by its agent?  It is an absurd proposition.  Of course the principal with the right of exclusive possession was bound by its agent’s authorised overnight licence granted in the agent’s name but on behalf of the principal as an agent.  The fact that that is undisclosed to the guest is of no moment whatever to the reality of the principal and agent relationship between the parties that are the two candidates only for supply.

That brings me to the next point.  Whenever an agent does something for a principal it can be said that there are two people who are doing the act. 

The law does not permit generally and certainly in relation to the GST provisions cannot tolerate the notion that when an agent supplies on behalf of a principal it is anything other than the principal’s supply for the purpose of the application of the GST law.  That is a critical and underlying matter which, in our submission, without due consideration has been departed from by the reasoning which we seek this Court to consider.

When one then looks at section 4.1(b) upon which reliance was placed by my learned friend, it can be seen quite plainly, as Justice Edmonds said, that is facultative in relation to the duties and responsibilities that the lessee has under the leases.  So its duties and responsibilities under the apartment leases – see section 4.1(a) – are those for which the benefit of correlative rights is given by section 4.1(b) to allow the manager to carry out those lessee’s duties and responsibilities.  In our submission, that cannot be read as a sublease, therefore there can be no suggestion that in its own right there is a licence granted by the agent of its own right of possession.  Rather, it is the rights of entry, et cetera, permitting carrying out the duties and responsibilities under the leases owed by the lease.

For those reasons, in our submission, there is nothing idiosyncratic about these facts.  They do throw up most important issues concerning the operation of principal and agent and, in particular, it throws up the opportunity to resolve what is otherwise a fundamental disparity between the reasoning of the Full Court in Lilyvale and the reasoning of the Full Court in South Steyne.  May it please the Court.

FRENCH CJ:   Thank you, Mr Walker.

The first and second applicants for special leave are the owners of strata title hotel rooms comprising the Sebel Hotel, Manly.  The third applicant is the employer of a person who stayed at the hotel for some 10 days in September 2007.

The application raises a question whether the supply of the hotel room by a management company, MHL, operating under a management agreement with the lessee of the relevant hotel room was or was not the supply of accommodation in commercial residential premises controlled by that management company. If the supply fell within that description it would not be able to be characterised under section 40.35(1) of the A New Tax System (Goods and Services Tax) Act 1999 (Cth) as an input taxed supply and would thereby attract GST.

The Full Court of the Federal Court, by majority, upheld the finding of the primary judge that the supply by the management company was in its own right and not as agent of the lessee of the relevant apartment. On this basis the supply fell within the exception in section 40.35(1)(a) and was held not to be an input taxed supply.

The application for special leave which challenges that finding, in our opinion, turns on the characterisation of the relationships between the management company and the lessee company by reference to particular terms of the management agreement between them.  In our opinion, no question of principle warranting the grant of special leave is disclosed.  Special leave will be refused with costs.

We will adjourn briefly.

AT 11.28 AM THE MATTER WAS CONCLUDED