The Commissioner of Taxation of the Commonwealth of Australia v Gloxinia Investments Limited

[2010] HCATrans 255

[2010] HCATrans 255

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Sydney   No S154 of 2010

B e t w e e n -

THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA

Applicant

and

GLOXINIA INVESTMENTS LIMITED AS TRUSTEE FOR GLOXINIA UNIT TRUST

Respondent

Application for special leave to appeal

HAYNE J
HEYDON J

TRANSCRIPT OF PROCEEDINGS

AT SYDNEY ON FRIDAY, 1 OCTOBER 2010, AT 9.47 AM

Copyright in the High Court of Australia

MR M.A.WIGNEY, SC:   May it please the Court, I appear with MR B.C. KASEP for the applicant.  (instructed by Maddocks Lawyers)

MR B.W. WALKER, SC:   May it please the Court, I appear with my learned friend, MR B.L. JONES for the respondent.   (instructed by KPMG Tax Lawyers Pty Ltd)

HAYNE J:   Yes, Mr Wigney.

MR WIGNEY:   Your Honours, this application gives rise to two short but important questions concerning the proper approach to the characterisation of supplies for the purposes of the GST Act. The particular issue concerning characterisation in this matter arises in the context of subdivision 40‑C of the GST Act which deals with the supply of residential premises but, in our submission, the questions raised have potentially broader application.

Those two questions which we set out in detail in our summary of argument, which are related, can be shortly stated as follows and they concern firstly the extent to which, when characterising a supply for the purposes of the Act, the Court should look beyond the particular transactional document which, in this matter, was a lease and consider the overall legal and commercial context, including other related transactions between the parties to the extent that the other transactions may impinge on the nature of the supply.

The second question is related and it concerns the extent, if any, to which, again when characterising a supply, regard should be had to concepts or notions, which have been referred to in a number of decisions in the Federal Court, of the social and economic reality of a transaction or the practical and business point of view.

Now, as I have said, your Honours, these questions arise in this case in relation to the supplies of residential premises.  The particular supplies in issue in these proceedings were the sale of newly constructed apartments by way of assignment of leases.  As your Honours know, the specific question in relation to these suppliers was whether or not they were input taxed by reason of section 40-65.  As your Honours know, in general terms, if input taxed, the supplier is not a taxable supplier and no GST is payable.  If not input taxed, GST is payable.

That question, that is, whether or not the suppliers were input taxed, in turn, depended on whether the apartments at the time of the sale or assignment of leases were new residential premises as that expression is defined in section 40-75 and, again, if they were new residential premises, the supply was not input taxed.  If they were not new residential premises, the supplies were input taxed and then by reason of the definition of “new residential premises” and the definition of “long-term lease” in section 195‑1 of the Act, that issue, in turn, depended on whether the apartments had previously been the subject of a supply by way of lease for 50 years or more by an Australian Government agency and it is common ground, and was common ground below that that was the main question in the proceedings.

HAYNE J:   Now, do I understand the essence of your argument on the first proposition you say arises to be captured at application book 57, paragraph 18.  It is really application book 57 to 58, paragraph 18.

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

HAYNE J:   What exactly is meant when it is said that if regard is to be had to legal and commercial context, et cetera, there was not a “supply of the Premises in any sense”?  What exactly is the process of reasoning which is said to be engaged in forming the conclusion thus asserted?

MR WIGNEY:   Well, if I can perhaps answer that question this way, your Honour.  If this was a case where the council was in possession of the properties, granted a lease to Gloxinia on the terms of the strata lot lease, no question involved there, but, as your Honour knows, when one considers the transactions that had earlier occurred and the agreements that had earlier been entered into between the council and Gloxinia, the situation was that, for all intents and purposes, Gloxinia had the apartments.  It had leasehold rights to occupy the apartments, albeit under the residential lease in a global sense, that is, the lease covered the entirety of the property upon which the apartment block was built and that obviously entitled them to use and possession of all of the apartments that it built on them.

HAYNE J:   But is a court to ignore the fact of the earlier lease in applying the definition of “new residential premises” and, in particular, that part of the definition that says that the premises have not previously been the subject of a long‑term lease?

MR WIGNEY:   Well, in our respectful submission, the court cannot ignore the earlier lease for this reason, that if your Honours go to the definition of “new residential premises” ‑ ‑ ‑

HAYNE J:   Section 40-75.

MR WIGNEY:   The relevant provision is paragraph (1)(a):

Residential premises are new residential premises if they:

(a)have not previously been . . . the subject of a long‑term lease –

One then goes to the definition of “long‑term lease” in the materials your Honour has ‑ ‑ ‑

HAYNE J:   But these premises had been previously the subject of a long‑term lease, hence my question, is the court simply to ignore that fact?

MR WIGNEY:   If your Honour goes to the definition of “long‑term lease” it is defined as meaning:

a supply by way of lease -

So the question is not and was not, is the property subject to a long‑term lease, that is, a lease in excess of 50 years?  The question is, has the property previously been the subject of a supply by way of lease for more than 50 years, et cetera.  That is the key point because ‑ ‑ ‑

HAYNE J:   I understand that.  Now, in the facts of this case, had these premises been the subject of a supply by way of lease, that is, the first lease, was that a supply by way of lease?

MR WIGNEY:   The residential lease?  Indeed it was.

HAYNE J:   The terms – I cannot keep the terms in my head - the first lease that was concerned?

MR WIGNEY:   The first lease indeed.  The first lease obviously was a long‑term lease but the apartments were not supplied as a result of the grant of that lease because they were not in existence at that time and that was common ground both at first instance and in the court below, that because the apartments had not even been constructed at the stage that that lease was granted, then it made no sense to talk about the supply of the apartments by way of that lease. 

So that is why one had to focus on the grant of the strata lot leases which, as we put in our summary of argument, really amounted to nothing more, and this was the judgment of Justice Dowsett, that it essentially just involved a subdivision of the residential lease, that is the first lease that your Honours referred to, into 28 strata leases and because, by the time that the strata lot leases were granted, the apartment block had been constructed by Gloxinia, for all intents and purposes Gloxinia had possession, had the right and interest in occupying the apartments that it had built and all that happened when the strata lot leases were granted is, as Justice Dowsett found, the residential lease was converted into 28 strata lot leases of equivalent term and conditions. 

Now, the short point is that the conversion of the residential lease into 28 strata lot leases in that way does not amount to a supply of the apartments.  That is the short point.  I can put it in five different ways but it does not get any better or worse than that.

HAYNE J:   But the first lease was a lease for 50 years of all of the apartments that had been constructed, was it?

MR WIGNEY:   I think the term was 99 years.  As I said, at the time it was granted there were no apartments.  Apartments were subsequently constructed and the agreements between the parties, in short, were that at a particular stage, that is the completion of the building of the apartments, then there would be this further strata lot subdivision and so by that time, your Honour, the residential lease, the first lease, did entitle Gloxinia to use and possession of all of the apartments it had since built, but they were not in existence at the time of the initial grant of that first lease.

HAYNE J:   Well, then, as I understand the point, it really turns about the definition of “residential premises” more than anything else, I think, because “residential premises”, behind tab 8 of your materials, means “land or a building” that either “is occupied” – at the time of the first lease there was no land or building occupied as a residence – or it means land or a building that “is intended to be occupied, and is capable of being occupied” and, at the time of the first lease, that was not so.

MR WIGNEY:   That is so, your Honour.  The other point to make whilst we are on the definition of “residential premises” is the point that his Honour Justice Dowsett made and I think also Justice Emmett at first instance, that what flows from this definition of “residential premises”, and this flows into other definitions including “new residential premises”, is that what the Act is talking about here is a tangible item, land or a building.  It is not talking about what was referred to below as the juristic rights associated with the land or the building so when ‑ ‑ ‑

HAYNE J:   The point, if there be one, is not one that is solved by talking about commercial construction or anything else.  If there be a point, it seems to me to be one that is found by simply tracking the definitions.

MR WIGNEY:   That is so, your Honour, I accept that.

HAYNE J:   Well, we seem to have a lot of appeal to considerations that, at least on one view of matters, lead you nowhere.

MR WIGNEY:   Well, all that we – by that if your Honour is referring to the practical business tax type line of authority in the Federal Court, what

we say in relation to the application of that sort of concept or notion here is that it simply required the court to not just look at the single instrument that granted the lease but to look at all of the sorts of circumstances that I have referred to, that is, the fact that there was the first lease, no buildings constructed at that stage, building then constructed and the subdivision and the grant of the lease really amounts to simply a leasehold subdivision.  As I said, the short point is simply that the leasehold subdivision by granting the 28 strata lot leases did not supply the residential premises, to wit the land or building – or rather the building comprising the apartments.

HAYNE J:   Yes.

MR WIGNEY:   As I said, I can put the matter in five other ways but that is the high and the low of it, your Honour.

HAYNE J:   Yes, thank you Mr Wigney.  Yes, Mr Walker.

MR WALKER:   Your Honours, the way in which this case was decided involved, I suppose, consideration of three supplies but there are only two that matter and it all triggers on the word “previously” in the definition which is at the heart of matters.  Could I lay out the scheme in this way.  There was the so‑called residential lease.  It is a misnomer, of course, because no one could take up residence.  It was a building site.  It was to produce residences – council to developer, my client. 

It had, and an associated contract had, a set of obligations and rights which were all fulfilled and that produced in due course the lodging for registration, after there had been physical completion of the enclosure of the air space which could be the subject of strata title upon the building being completed and being surveyed, the lodging of a plan for subdivision where by statute the antecedent lease, as well as pursuant to the contract, would come to an end.  There was a surrender to signify what, in fact, had already happened by operation of law.

The strata lot leases, the second supply if you like, were then issued by the council to my client.  It is our submission that what your Honours have read and heard from the applicant really amounts to this.  In some way, not signified by any words in the statute and not really supplied by my friend’s answer to Justice Hayne’s question this morning, in some way that is not a supply, but it was, of course, a supply in every sense.  It was a supply of rights, strata rights, with their particular aspects, particularly concerning common property, rights to common property, the ability to alienate the lawfulness of allowing people in this so‑called leasehold and strata subdivision to occupy as if, in every other way, they were owners of a fee simple enclosed air space.  Those special statutory rights were supplied by the council to my client.  That is the second supply. 

The third supply, which is the one which is the taxing point or not, is the contemplated and, in some cases, accomplished supply by contracts of sale to the people who presumably wish to occupy or themselves be landlords of these apartments, namely, by assignment of the strata lot lease.  So the only question in this case was, in relation to our, as developer, vendors, our assignment of those strata lot leases, was it of residential premises?  Yes.  Were they new residential premises?  Well, that depended upon whether they had been previously the subject of a long‑term lease.  Were the strata lot leases all long‑term leases?  Yes.  They were, after all, for the unexpired portion of the residential lease, so well in excess, both as a matter of likelihood and otherwise of 50 years.

The way in which Justice Middleton, agreed in by Justice Kenny, proceeded, is to say well, there is simply no room for moving away from what his Honour called the juristic concepts plainly described by familiar terms of art in section 9-10, the “Meaning of supply”.  Was there a supply by the council to the developer?  Yes.  Of the strata lot leases?  Yes.  Were they with respect to residential premises?  Yes.  So there is no problem about the building not being completed then.  The building had to be fully completed and surveyed by then.  Was that previous to the supply in question, which is not a supply to my client but a supply by my client?  The answer was, well, of course.  You have to have it in order to give it. 

In our submission, accordingly, there is nothing in the slightest degree alarming either as to its particular outcome or as to ramifications of the conclusions in the Full Court.  To the contrary, in our submission, an argument which, particularly without clear articulation suggests that there may be some sense – I choose the word advisedly because it is not our word – some sense in which that which is manifestly a supply and were at the taxing point unquestionably would be treated by a Commissioner as a supply, is not a supply.  That is because, instead of the legal and practical reality of completion of a building according to plan, measuring by survey, lodging of plan and the New South Wales statutory effect in relation to strata title thereafter, instead of that, it is all wrapped up in the bland expression “conversion to strata”.

Now, there is nothing unreal or unpractical or merely notional about a conversion to strata.  It is of the essence of the interests in real estate and the real estate is enclosed air space.  It is not soil.  None of it is soil, enclosed air space which is the subject of our supplies.  There is nothing in the statute that permits such an elision of the reality of what was happening.  There is nothing in any nebulous appeal to practicalities as opposed to legalities, a false dichotomy in a case of this kind which, in our submission, warrants a grant of special leave by this Court.  For those reasons, and not least because of the relatively specialised application in which this

reasoning will, in any event, apply the case is not a fit one for the grant of special leave.  May it please the Court.

HAYNE J:   Thank you, Mr Walker.  Yes, Mr Wigney.

MR WIGNEY:   One point in reply, your Honour. The relevant question here, your Honour, is not whether the strata lot lease has affected a supply of real property, as that term is defined in the GST Act, but as your Honour Justice Hayne observed earlier, whether there was a supply of residential premises and that is the point. It is not a question ‑ ‑ ‑

HAYNE J:   At that point when the strata lot lease was granted there were, were there not, residential premises as identified, namely land or a building intended to be occupied and capable of being occupied?

MR WIGNEY:   Yes.  That had not existed at the date of the first lease.

HAYNE J:   The first least, but at the time of the second lease it did and then, come the “sale” to the ultimate purchaser, there had been the intervening second lease.  Is that right?

MR WIGNEY:   Yes, that is so.  Did the strata lot leases affect the supply of real property, bundle of rights?  Absolutely.  In all of the circumstances having regard to what had already occurred did they supply residential premises?  In our submission, no.

HAYNE J:   We are of opinion that there are insufficient prospects of success to warrant a grant of special leave to appeal in this matter.  Special leave to appeal will be refused and must be refused with costs.

MR WIGNEY:   May it please the Court.

HAYNE J:   The Court will adjourn to reconstitute.

AT 10.07 AM THE MATTER WAS CONCLUDED