As indicated already, the respondents accepted that the applicant had paid the amount of $108,167.68 for after-hours charges. I accept Mr Kipen's evidence subject to the corrections made by Ms De Lucia. I also accept Ms De Lucia's evidence. Ms De Lucia deposed that the correct figure for operating expenses for the lease year ended 3 March 2004 was $256,025. Nothing turns upon the discrepancy.
14 At the applicant's request, Mr Willington, a valuer with particular expertise in the valuation of commercial premises, prepared a report ("the valuer's report") in which he stated that he assessed the fair market rental of the property as at 4 March 2004 as $633,514.20 per annum, inclusive of GST. In arriving at this figure, he estimated that, as at this date, the gross fair market rental value was $880,000 per annum. The valuer's report was that:
"The major supermarket groups have been prepared to pay gross rentals generally in the order of 2% to 2.5% of forecast turnover for new stores. The Greenslopes Supermarket is an existing tenancy with a proven trading performance of $35,597,909 for the year ending 3 March 2004. Applying a gross occupancy cost of 2.5% to this reported turnover produces a rental value of approximately $890,000 per annum which is generally in line with the adopted rental rate per square metre over an optimum tenancy area of 3,200 square metres.
Based on the above considerations, I estimate the gross fair market rental value of the tenancy to be $888,000 per annum as at 4 March 2004."
15 According to the valuer's report, the fair market rental value subject to the terms and conditions of the lease was $575,922 per annum. The deductions were the lessees' outgoings contribution ($297,002) and the lessees' promotion fund contribution ($7,076). In Mr Willington's opinion, the majority of modern supermarket leases to major supermarket groups did not include provisions for the lessor's recovery of outgoings or contributions to a promotions fund. The valuer's report stated that:
"Proper valuation principles and the interpretation of [the] market evidence requires that GST is added to the assessed Fair Market Rental of the premises. … Accordingly, the determined rental value of the premises on a GST inclusive basis is outlined as follows:
Deduced Fair Market Rental excluding GST $575,922.00 per annum
Fair Market rental value inclusive of GST $633,514.20 per annum
…."
16 The annual percentage rental provision (cl E of the First Appendix) presented particular problems. The valuer's report stated:
"It should be noted that the Lease includes a percentage rental provision with an adjustment to the turnover 'threshold' at the time of each base rent review. In the event that the above base rent was adopted at the commencement of the 19th Lease year (in lieu of the alternative base rent review mechanism outlined in the Lease, which is calculated as the average of the base rent and percentage rent for the 5 years prior to the base rent review date) there would be a substantial reduction in the turnover rental 'threshold'. This would result in a considerable payment by the Lessee for percentage rent after the base rent review on 4 March 2004.
I have calculated that the Lessee would be responsible for an additional percentage rental payment from the year commencing 4 March 2004 of an amount approaching $400,000 (subject to the achieved turnover for the year ending 3 March 2005) which would result in a gross rental for the premises approaching $1,280,000. This gross rental would result in a gross occupancy cost for the premises exceeding 3.5% of turnover which would generally be in excess of the Fair Market Rental Value of the premises. This result would normally require a further downwards adjustment in the base rent however, due to the application of the percentage rental provision contained within the Lease, any further reduction in the base rent will only result in a generally corresponding increase in the turnover rent.
I am unsure how to advise the Court of the treatment of this matter in my assessment of the Fair Market Rental Value of the premises, subject to the requirements of the First Appendix which include consideration of 'the terms of Lease'."
17 In examination in chief, with leave, Mr Willington said, amongst other things, that he assessed a fair rental value of the property in accordance with the requirements of the lease "on the basis of the negotiations that would happen in the market, where the tenants would negotiate a rent exclusive of GST, but then with the provision that GST would be added on". In cross-examination, he said that the parties would work out market value on an exclusive of GST basis and separately negotiate the passing on of the GST, although he would always allow for the GST in his valuations. He also gave some evidence concerning the operation of the variety store on the demised property at the commencement of the lease, noting that his report was concerned with the state of affairs in March 2004, when the variety store had ceased operation.
18 In re-examination, Mr Willington said that the reference to "sitting tenant" basis contained in the lease was "not a common term" but that he believed that it was intended to mean "taking account of what the tenant would be prepared to pay, given that he was an existing tenant in the premises". On the subject of percentage of turnover rental, he added:
"[T]he evidence of these older leases would suggest that the leases negotiated in the 1980s may have resulted in … occupancy costs, being rent and outgoings and turnover rent, being well in excess of 3 per cent and that was the nature of that market agreed back in the 1980s, but certainly by 2004 rents that are being agreed on a different basis. There's a greater emphasis on costs the by tenant groups with the result that the market seems to have found a level of gross occupancy costs, being rent and outgoings and turnover rental within th[e] range of 2 to 2 and a half per cent."
19 As the consideration that follows shows, there are some difficulties with the valuer's report and Mr Willington's evidence. I accept his statements of matters within his expertise. This does not extend to the construction of the lease. I note too that the respondents' counsel questioned Mr Willington about a valuation of the Greenslopes Shopping Centre prepared by his office in February 2003 and signed by him as a director. This valuation, which had been prepared for mortgage security purposes and based on different information, was admitted subject to the applicant's counsel's objection. The applicant's counsel's objection should be upheld. The February 2003 valuation can be put to one side for present purposes as having limited relevance and little weight, alternatively, no relevance at all.
20 As the amended application shows, the parties are in dispute about the effect of s 13 of the GST Transition Act on the liability to pay GST on the supply by way of the lease. Broadly stated, the applicant's position is that a 'review opportunity' within s 13(2) arose under the lease on 4 March 2004 and that, accordingly, the supply ceased to be GST‑free from this date. Whilst the applicant accepts that, since this date, it is liable to pay a monthly amount of $79,359.89 as rent, it maintains that the respondents are liable for the GST on the supply. The respondents' position is that there has been no 'review opportunity' within s 13(2) and that, accordingly, they are not liable to pay the GST on the supply, although, by operation of s 13(2), they will become so liable after 1 July 2005. In order to avoid this future liability, the burden of which they say they will otherwise be unable to pass on to the lessee, the respondents have invoked the regime established by Div 2 of Pt 3 of the GST Transition Act. Broadly speaking, this would operate to transfer the liability to pay the GST from the respondents to the applicant. As we have seen, the applicant is already receiving input tax credits.
21 This case, therefore, turns on s 13 of the GST Transition Act, which provides as follows:
"(1) This section applies if:
(a) a written agreement specifically identifies a supply and identifies the consideration in money, or a way of working out the consideration in money, for the supply; and
(b) the agreement was made before the day on which this Act received the Royal Assent.
(2) The supply is GST‑free to the extent that it is made before the earlier of the following:
(a) 1 July 2005;
(b) if a review opportunity arises on or after the day of Royal Assent - when that opportunity arises.
…
(5) In this section:
review opportunity, for an agreement to which this section applies, means an opportunity that arises under the agreement:
(a) for the supplier under the agreement (acting either alone or with the agreement of one or more of the other parties to the agreement) to change the consideration directly or indirectly because of the imposition of GST; or
(b) for the supplier under the agreement (acting either alone or
with the agreement of one or more of the other parties to the agreement) to conduct, on or after 1 July 2000, a general review, renegotiation or alteration of the consideration; or
(c) for the supplier under the agreement (acting either alone or with the agreement of one or more of the other parties to the agreement) to conduct, before 1 July 2000, a general review, renegotiation or alteration of the consideration that takes account of the imposition of the GST."
22 The question is whether the respondents, as the suppliers under the agreement, had a review opportunity arising under the lease. The applicant contends, and the respondents deny, that the respondents had an opportunity under the lease to conduct a "general review … of the consideration" (see sub‑ss 13(2) and (5)(b)) on the nineteenth anniversary of the lease. This was 4 March 2004.
23 In order to understand how this question arises, it is necessary to outline the relevant features of the GST Act and the GST Transition Act.
the gst act
24 Goods and Services Tax ("GST") is payable, relevantly, on "taxable supplies" (s 7‑1(1)). A person must pay GST on any taxable supply made by that person (s 9-40). Entitlements to input tax credits arise, relevantly, on "creditable acquisitions" (s 7‑1(2)). A person is entitled to an input tax credit for any creditable acquisition made by that person (s 11‑20). Generally speaking, the amount of the input tax credit for a creditable acquisition is an amount equal to the GST payable on the supply of the thing acquired (s 11‑25).
25 Amounts of GST and amounts of input tax credits are set off against each other to produce a net amount for a tax period (s 7‑5). Every entity that is registered, or required to be registered, has tax periods applying to it (s 7-10). A person is required to be registered if that person is carrying on an enterprise; and the annual turnover meets the registration turnover threshold (s 23‑5). The net amount for a tax period is the amount that the entity must pay to the Commonwealth, or the Commonwealth to the entity, in respect of the period (s 7‑15).
26 A registered person makes a taxable supply if that person makes the supply for consideration and the supply is made in the course or furtherance of an enterprise that that person is carrying on (s 9‑5). The supply is not a taxable supply to the extent, relevantly, that it is GST‑free (s 9‑5). A supply is GST‑free if, amongst other things, it is GST‑free under a provision of another Act, including the GST Transition Act.
27 The term 'supply' includes a grant, assignment or surrender of an interest in real property (s 9‑10(d); definition of "real property" in s 195‑1). For the purposes of Div 156 of Pt 4‑6, which is particularly concerned with attribution rules, a supply by way of lease is to be treated as a supply that is made on a progressive or periodic basis for the period of the lease (s 156‑22). The amount of GST payable on a taxable supply is 10% of the value of the taxable supply (s 9‑70). The value of a taxable supply is to be calculated according to a formula (s 9‑75).
28 A registered person makes a 'creditable acquisition' if that person acquires anything for a creditable purpose, the supply of the thing to the person is a taxable supply, and the person provides consideration for the supply (s 11‑5). An 'acquisition' is defined to mean any form of acquisition and includes the acceptance of a grant of an interest in real property (sub-ss 11‑10(1), (2)(d)). Generally speaking, a person acquires a thing for a creditable purpose to the extent that the person acquires it in carrying on the person's enterprise (s 11‑15(1)).
the gst transition act
29 The GST is payable, relevantly, on a 'supply' to the extent that it is made after 1 July 2000 (GST Act, s 1‑2; GST Transition Act, s 7(1)). The GST Transition Act deals generally with the introduction of GST (s 4). Pursuant to this Act, a supply or acquisition of real property is made when the property is made available to the recipient (s 6(3)).
30 Part 3 of the GST Transition Act concerns agreements spanning 1 July 2000. Section 12 applies if a person makes a supply under an agreement that provides that the thing supplied is to be supplied for a period, and that period begins before 1 July 2000 and ends on or after that date (s 12(1)). The section does not, however, apply to a supply of a long‑term lease (as defined in s 195‑1 of the GST Act) made before 1 July 2000. If s 12 applies, the supply is taken, for the purposes of the GST Transition Act, to be made continuously and uniformly throughout the period (s 12(2)). For the purposes of s 12, a supply by way of lease is taken to be a supply for the period of the lease (s 12(3)). To the extent that s 12 has an effect in relation to a supply, it has a corresponding effect in relation to the acquisition to which the supply relates (s 12(6)). The parties have not sought to rely on s 12 in this proceeding. The argument in this case focused on s 13 and, to a lesser extent, the provisions of Div 2 of Pt 3 of the GST Transition Act.
31 Section 13 (set out at [21] above) provides that certain supplies are to be GST‑free to the extent that they are made before the earlier of 1 July 2005 or the date upon which a review opportunity (as defined in s 13(5)) arises (s 13(2)). Section 13 applies if a written agreement: (i) specifically identifies a supply; (ii) identifies the consideration in money, or a way of working out the consideration in money, for the supply; and (iii) was made before 8 July 1999 (being the day on which the GST Transition Act received the Royal Assent).
32 By virtue of the Tax Laws Amendment (Long‑term Non‑reviewable Contracts) Act 2005 (Cth) ("the 2005 amendments"), the GST Transition Act was amended in order to introduce Div 2 of Pt 3. Division 2 also concerns agreements spanning 1 July 2005 and creates a regime specifically for long‑term non‑reviewable contracts. The Division provides for the payment of the GST on taxable supplies made on or after 1 July 2005 that would have been GST‑free under s 13 if they had been made immediately before that date (s 15A(1)). Where the relevant supply would have been GST‑free under s 13 if made before 1 July 2005, the GST is payable by the recipient of the supply if the recipient elects to pay the GST on the supply (s 15C(1)(c)(i)) or fails to accept an arbitrated offer by the supplier to change the consideration for the supplies made on or after 1 July 2005 that are specifically identified in the relevant agreement (s 15C(1)(c)(ii)). The recipient is taken to have failed to accept an arbitrated offer if the recipient gives the supplier a written rejection of the offer; or the final offer period referred to in s 15M expires without the recipient notifying the supplier that the recipient accepts the offer (s 15C(4)). An arbitrated offer is a final offer under s 15M - to change the consideration for supplies made on or after 1 July 2005 that are specifically identified by an agreement of the kind referred to in s 13(1) - following the initial offer under s 15K and an arbitration of change to the consideration under s 15L. Section 15K provides that the initial offer must be written, set out a change to the consideration for the supplies, and state the period for which the offer remains open, being at least 28 days. Section 15L, which concerns the procedure for arbitration, provides, amongst other things, that the supplier must apply to an arbitrator to appoint an assessor to determine an appropriate change to the consideration within 28 days of the end of the offer period. Section 15M provides for a final offer, which must be written, set out the assessor's determination of an appropriate change, and state the period for which the offer remains open, being at least 21 days.
the lease
33 Whether or not there has been a review opportunity depends on the terms of the lease, which was executed by Coles Myer Ltd and Lake Eerie Pty Ltd on 12 June 1987. The lease was for a twenty‑three year term commencing on 4 March 1986 and terminating on 3 March 2009.
34 Clause 1 of the lease defined numerous words and expressions, including "the Centre", "the Common Area", "the premises" or "the demised premises" and "the Lessee's turnover". For the purposes of the analysis that follows, it is useful to note generally the content of these definitions. "The Centre" meant, in substance, the Retail Shopping and Commercial Centre on the land identified in the lease. "The Common Area" was that part of the Centre provided by the lessor for common use, such as parking areas, roads, walkways, malls, courts, corridors, toilets, stairways, elevators and escalators. "The premises" or "the demised premises" were the premises demised by the lease, being "[t]hat part of the first and second floor of the building erected on the land as hatched on the Plan herein." Broadly speaking, the expression, "the Lessee's turnover" was defined as the entire amount of the actual sale price, subject to various exclusions, including "any purchase tax, receipt tax, consumption tax or similar tax or duty added on to the market or displayed selling price of the goods … and which is in effect collected at the point of retail sale".
35 The lease was subject to various covenants and conditions. Clause 2 dealt with the use of the Common Area and the demised premises. Clauses 4 and 5 distinguished between "rent" and "operating expenses of the Centre". Rent was the subject of cl 4. Subclauses 4(a) and (b) relevantly provided:
"The Lessee hereby expressly covenants with the Lessor: -
(a) The base annual rent payable is calculated in accordance with the formula in the First Appendix …
(b) The Lessee shall pay to the Lessor during the term hereof and any renewal thereof without any formal or other demand the annual rental calculated in the manner set out in the First Appendix hereto …"
36 The operating expenses of the Centre were the subject of cl 5, which relevantly reads:
"The Lessee further covenants with the Lessor as follows: -
(a) The Lessee will during the whole of the term pay to the Lessor free of exchange and all deductions the Lessee's proportion of the operating expenses of the Centre;
(b) The amount of the Lessee's proportion of the operating expenses of the Centre payable by the Lessee and herein called the 'Lessee's proportion' shall be calculated and payable as follows: -
(1) The Lessee will pay in each year on account of the Lessee's proportion for that year or part of a year ending on the 30th day of June or other date as the Lessor may from time to time determine … such amount as may be reasonably estimated by the Lessor to be the Lessee's proportion of the operating expenses of the Centre for that year or part thereof … such estimated portion to be payable by equal monthly instalments in advance on the days herein fixed for payment of the base annual rent.
(2) The Lessee's proportion shall be an amount equal to that proportion of the operating expenses of the Centre that the floor area of the demised premises … bears from time to time to the total floor area of the Centre …"
37 Since the lessee's contribution to the operating expenses of the Centre assumed some significance in the parties' arguments, it is helpful to explain the use of the expression. Broadly speaking, omitting various qualifications and exceptions, the expression, "operating expenses of the Centre," was defined in cl 5(b)(2) to mean:
"the total cost of all outgoings costs and expenses of the Lessor … now or hereafter properly and reasonably assessed charged or chargeable paid or payable or otherwise incurred upon or in respect of the Centre or upon the Lessor in relation thereto or in the conduct management and maintenance of the Centre and to the use and occupation of the same as a high‑class shopping and commercial centre."
This included taxes imposed on or in respect of the Centre, rates and charges of any public municipal or government body, insurance premiums, utility charges, the cost of repairs and maintenance, expenses associated with the operation of the parking areas, costs of the air‑conditioning of the Common Area, and the cost of maintaining services provided by the lessor for the lessees, occupiers, or visitors.
38 Clause 6 further concerned the use of the demised premises. In this clause, the lessee covenanted that it would not use the premises for any purpose other than a "shop kiosk or commercial premises and for carrying on the business of a Supermarket and variety store". Clauses 7, 8 and 9 concerned maintenance and repair, as well as insurance and indemnities. Under cl 10, the lessor undertook, amongst other things, to conduct the Centre during the term of the lease and to pay its operating expenses, subject to the lessee's obligation to pay a due proportion of the expenses. Clause 12 dealt with the termination of the lease.
39 Clause 13 concerned various unrelated matters. Relevantly, sub‑cl 13(g) made provision for the lessor to establish a fund for, amongst other things, the promotion of the Centre for the benefit of businesses operating it. Pursuant to this subclause, the lessee undertook to "make such contributions … as the Lessor may from time to time determine". Clause 14 provided an option for renewal.
40 The First Appendix dealt specifically with rent. Clause A provided that the annual rental payable by the lessee consisted of two components. They were: (1) the base annual rent; and (2) the annual percentage rental. Clause B is not presently relevant. Clause C, which is significant in this proceeding, stated:
"The base annual rent for the remaining years of the term shall be reviewed as at the commencement of the ninth, fourteenth and nineteenth years of the term to the greater of the two amounts namely: -
(a) an amount equal to one‑fifth of the total sum of the base annual rent and the annual percentage rental payable during the period of five years ending on the day last preceding the review date in question; or
(c) the then fair market rental for the demised premises calculated on a "sitting tenant" basis for the balance of the term with the options for renewed leases hereinbefore contained having regard to: -
(i) the rental being obtained at the relevant review date for premises of a similar size and quality in similar geographical locations;
(ii) the period of a balance of the term;
(iii) the terms of the Lease for the balance of the term;
(iv) the fittings and fixtures in the demised premises the property of the Lessor;
(v) the services facilities amenities and other benefits … available on the land or in the Centre or in the buildings for use by the Lessee or its customers, invitees, servants, agents, licensees or concessionaires or which may assist or enhance in any way the Lessee's business or the demised premises;
(vi) such other matters (if any) as to the Lessor or the Lessee may seem relevant.
The outgoings and other expenses likely to be incurred by the Lessor in respect of the land and the Centre during the balance of the term and which are not recoverable by the Lessor from the Lessee are not to be taken into account."
41 Clause E, which made provision for annual percentage rental during years 9 to 23, stipulated that:
"The annual percentage rental during the years 9 to 23 inclusive of the term is 2% of that sum by which in each of such years the Lessee's turnover exceeds an amount determined by the following formula: -
RY x T3
BR3
Where:
RY is the base annual rental for the year in question;
T3 is the Lessee's turnover during the year commencing on the 4th day of March, 1998; and
BR3 is the base annual rent paid by the Lessee to the Lessor for the year commencing on the 4th day of March, 1988."
42 Clause 13 of the Fourth Appendix provided for an after‑hours charge to be paid by the lessee.
the parties' submissions
43 The respondents' preliminary point was that, since the proceeding was really about a liability to the Commonwealth to pay the GST, then the Commissioner was a necessary party. The respondents relied on the decision of Gzell J in CSR Ltd v Hornsby Shire Council 2004 ATC 4966; [2004] NSWSC 946 at [27]‑[29] ("CSR Ltd"), in support of the proposition that the applicant had not raised any proper issue between the parties, and that the real issues were between the parties and the Commissioner. Counsel for the respondents submitted that the parties were not in dispute about the terms of the lease or the rent to be paid under it. On the contrary, the parties were agreed that, from 4 March 2004, the base annual rent, as calculated under cl C of the First Appendix ("clause C"), was $79,359.89 pcm (i.e., $952,318.72 per annum); and that this amount would not vary depending on whether there had been a review opportunity or the liability to pay the GST fell on them or the applicant.
44 In written submissions, the respondents said:
"The declaration sought, namely whether there was 'a review opportunity' affects the Respondents' liability to pay GST to the Commissioner of Taxation and the Applicant's right under the GST Act to claim an input credit. The first issue is of no concern to the Applicant. The second issue is of no concern to the Respondents, and as between the Applicant and the Commissioner this matter has been resolved by a ruling from the ATO dated 23 December 2004."
45 The respondents did not dispute that, if there had been a review opportunity, they could not take advantage of Div 2 of Pt 3 of the GST Transition Act. They submitted, however, that this did not overcome their preliminary objection because:
"[T]hat legislation does not affect any rights as between the parties. All that it does is impose a GST liability on the recipient of certain supplies: see s 15C(1). Any such liability is to the Commissioner of Taxation."
The respondents submitted that the only relevant consequence of a finding that there had been a review opportunity was that the arbitrated offer proceedings initiated by them under Div 2 of Pt 3 of the GST Transition Act would be ineffective, and therefore that they, not the applicant, would become liable to the Commonwealth for the payment of the GST after 1 July 2005. The respondents submitted that the issues were such that they could only be determined in proceedings to which the Commissioner was a party.
46 The respondents contended that there was no need for the applicant to know whether or not Div 2 of Pt 3 of the GST Transition Act applied in the present case because: (i) if there were no review opportunity, there could be no effective offer, and the acceptance of an ineffective offer could have no legal consequences for the applicant; and (ii) no determination as to whether Div 2 of Pt 3 applied could bind the Commissioner. The respondents submitted that a finding by the Court that there had been a review opportunity and, accordingly, that the respondents could not utilise the mechanism in Div 2 of Pt 3 could not preclude the Commissioner from taking a different view, although it would preclude them from invoking the provisions of Div 2 of Pt 3. Even if the respondents were not so precluded, a finding in this proceeding that there had been a review opportunity would postpone the time when an initial offer could be made and thereby delay the transfer of the GST liability to the applicant. Counsel for the respondents reiterated that the only possible effect of the making of an arbitrated offer was to determine who pays the GST to the Commissioner. The respondents' submission was, in substance, that it was inappropriate for the applicant to seek to resolve the issues raised in the proceeding without the Commissioner as a party since, on any view of the proceeding, the only relevant consequence would be to affect the rights and obligations as between each of the parties and the Commissioner.
47 Senior counsel for the respondents sought to bolster his contention that no declaratory relief should be given in the absence of the Commissioner by an argument that, since the respondents did not grant the lease, but merely purchased the reversion, they did not make a 'supply' under s 9‑10(2)(d) of the GST Act. I return to this argument below. Whilst senior counsel accepted that this was a 'curious' result, he maintained that the issue affected the Commissioner and that the resolution of it in this proceeding would not bind the Commissioner in any dispute with the parties.
48 In written submissions, the respondents outlined their argument that there was no supply in the following way. They noted that the leasehold interest was granted by Lake Eerie Pty Ltd to the applicant in 1987. Acknowledging that the grant of a leasehold interest was a supply within the GST Act (s 9‑10(2)(d)), the grantor of the interest, and hence, the supplier was, on the respondents' argument, Lake Eerie Pty Ltd and not the respondents. The respondents, so they submitted, did not make any supply. The effect of s 156‑22 of the GST Act was confined to Div 156 of Pt 4‑6 of the GST Act and concerned the periods in which GST is payable in respect of a taxable supply. On the respondents' argument, s 12(3) of the GST Transition Act has no relevant application.
49 In answer to the respondents' preliminary submission that the amended application did not raise any proper issue between the parties, the applicant contended that, in enlivening the provisions of Div 2 of Pt 3 of the GST Transition Act, the respondents were seeking to take advantage of a mechanism for changing the consideration, or price, provided for in the lease. Even if the respondents had properly invoked these provisions, with the result that the applicant was obliged to pay the GST to the Commissioner, the fact was, so the applicant said, that the respondents would also be changing the existing rights between them and the applicant. In substance, the parties were, so counsel for the applicant submitted, in dispute about the true effect of a variation of the contract price.
50 There was, so the applicant maintained, no reason for it to join the Commissioner because it sought no relief against the Commissioner. As between the Commissioner and the applicant, the ruling made by the Commissioner under s 37 of the Taxation Administration Act 1953 (Cth) had settled the relevant issues. This proceeding was irrelevant, so the applicant submitted, as between it and the Commissioner.
51 The applicant sought to distinguish CSR Ltd. The applicant's senior counsel informed the Court that the applicant, through its counsel and solicitor, had informed the Commissioner of the proceeding. Counsel for the respondents accepted that this had occurred. Counsel for the applicant submitted that the Commissioner could have nothing to add in this proceeding to the arguments put to the Court because the applicant was propounding the very arguments made by the Commissioner in the Commissioner's private ruling. The parties agreed that, so far as the Commissioner was concerned, the outcome of the case was largely revenue‑neutral. That is, the Commissioner would receive the GST, whatever the outcome of the proceeding. Accordingly, the applicant submitted that the absence of the Commissioner was not an impediment to the relief that it sought.
52 The applicant commenced its primary submission that a 'review opportunity' as defined in s 13(5)(b) of the GST Transition Act had arisen under the lease by reference to the policy underpinning s 13. Referring to the comments of Hill J in ACP Publishing Pty Ltd v Commissioner of Taxation [2005] FCAFC 57 ("ACP Publishing") at [44], the applicant submitted that:
"The policy thus enacted [in s 13] is that GST should become liable upon pre‑GST contracts where the supplier has the ability (whether or not exercised) to changed the consideration for the supply so as to 'build GST into the agreed price'."
53 The applicant contended that, on 4 March 2004, a review opportunity, within s 13(5)(b) of the GST Transition Act, arose under the lease because, on this date, clause C permitted the base annual rent payable under the lease to be reviewed to reflect fair market rent for the supply of the property. Referring to the observations of Bathgate DJ in Case M58 (1990) 12 NZTC 2333 ("Case M58") at 2338, the applicant contended that "[t]he width of review required by section 13(5)(b) is not that it be of all of the consideration", because "[s]uch a requirement would not be consistent with the balance struck between the competing objectives" underlying the provision. The applicant submitted that the supply of the supermarket space by way of lease was the relevant supply for the purposes of s 13 of the GST Transition Act. The consideration for this supply (see s 13(1)) was the rent for which provision was made in cl A of the First Appendix ("clause A"). That is, the consideration for the supply was the combination of the base annual rent and the annual percentage rental, of which the primary component was base annual rent. Drawing on Orti‑Tullo v Sadek 2001 ATC 4688; [2001] NSWSC 855 ("Orti‑Tullo"), the Commissioner's ruling in GSTR 2000/16 and the valuer's report, the applicant maintained that an opportunity to review rent to market enabled the supplier to make allowance for GST in re-setting the price for the supply.
54 It was sufficient, on the applicant's analysis, that there was an opportunity for the supplier to conduct a general review of the consideration. The existence of a review opportunity for the purpose of s 13(2) did not depend upon it being taken up in any way. Referring to DB Rreef Funds Management Ltd v Commissioner of Taxation [2005] FCA 509 ("Rreef") at [85] and [88] per Sackville J, the applicant submitted:
"Sub‑paragraph (b) … contemplates the occurrence of a review opportunity that does not necessarily take into account the imposition of GST, and it is not the case that any review opportunity under (b) must permit the supplier to increase the actual consideration to pass on the cost of GST to the recipient of the supply."
55 Referring to the respondents' submission that clause C(b) was inoperative, senior counsel for the applicant noted the absence of any pleading to this effect. He submitted that the valuer's evidence on this point was irrelevant since it was for the Court to construe the lease, by giving effect to the bargain made by the parties to it. Counsel submitted that, properly understood, Mr Willington had estimated that, as at 4 March 2004, the gross fair market rental of the property was about $880,000 per annum. This was, so counsel submitted, the valuation that his expertise entitled him to make.
56 The applicant contended that Mr Willington's comments about the operation of clause C(b) were wrong in law and ought to be disregarded. The applicant submitted that the problem, if any, lay in clause A, according to which the annual rental consisted of the two elements, namely, the base annual rent and the annual percentage rental. The first element was the subject of the review provided for in clause C, according to which, on the review, base annual rent was to be the greater of either the computed amount in clause C(a) or the fair market rental in clause C(b). The applicant's counsel submitted that, having regard to the terms of clause A, the fair market rental in clause C(b) was to be calculated without incorporating annual percentage rental into the calculation. The annual percentage rental was to be calculated in accordance with cl E of the First Appendix ("clause E"). The product of this calculation constituted the second separate element in the calculation of annual rent payable in clause A. The applicant submitted that it was wrong, having regard to clause A, to calculate fair market rental by incorporating the annual percentage rental provision, as Mr Willington had sought to do. Although clause C(b) required that there be regard to the terms of the lease for the balance of the term in determining fair market rental, having regard to clause A, this did not include clause E relating to annual percentage rental.
57 The applicant contended that, since the primary component of the rent was subject to review, then the lease provided for a general review of the kind contemplated by s 13(2) and s 13 (5)(b) of the GST Transition Act. The fact that the annual percentage rental was not subject to review did not affect this conclusion. The annual percentage rental was, so the applicant said, "merely a contingent amount payable as, in effect, an incremental accretion to the base rent if the contingency is fulfilled".
58 Counsel for the applicant submitted that, when the formula set out in clause E was worked out, it captured an annual percentage rental of around 2%. This was consistent, so counsel said, with the evidence given by Mr Willington on the subject. Counsel for the applicant submitted that:
"[W]hat the formula does over time … is to identify a portion of the rent in respect of which the landlord is never at risk. However, the landlord is at risk in respect of incremental increases over time."
59 In written submissions, the applicant contended:
"[I]n any event, the fact that percentage rent is not expressly reviewed does not prevent there being a general review of rent when percentage rent is adjusted annually by reference to 2% of turnover. The turnover adjustment is periodically 'rolled in' to the base rent upon application of the formula in paragraph C(a) of the First Appendix. An adjustment by reference to 2% of turnover is in substance equivalent to a market adjustment, it being the fact that a percentage of turnover of between 2 and 2.5% provides an estimate of market rent: see Mr Willington's report at pp 14‑15. The function and effect of these provisions of the lease is to create a mechanism to incorporate into the review clause the accepted industry benchmark of expected increases to fair market rent."
60 The applicant submitted that amounts paid by the lessee under cl 5 as the lessee's proportion of the operating expenses of the Centre, as well as the after‑hours charges and contributions to the promotion fund were not part of the consideration for the purposes of determining whether there has been a review opportunity.
61 The lease agreement required the lessee to make a number of payments and only some of these payments were properly characterised as "true rent" or "contractual rent". Counsel for the applicant submitted that the respondents were wrong in their analysis of Commissioner of State Revenue v Price Brent Services Pty Ltd [1995] 2 VR 582 ("Price Brent"). The applicant submitted that, in that case, the lessee's payment under the lease was characterised as contractual rent because, though perhaps not true rent, the parties to the lease treated it as if it were to be part of the true rent. This was not so in the present case, however, because the parties treated the sum total of true rent as that for which provision was made in clause A. Under the lease in this case, the lessee's contribution to outgoings under cl 5 was for the provision of such ancillary and incidental benefits and services that arose from being part of the Centre complex as a whole. The contribution was not for rent reserved.
62 According to the applicant, the after‑hours operations charge under cl 13 of the Fourth Appendix and the contribution to the promotion fund under cl 13(g) were also not part of the consideration for the purposes of determining whether or not there was a review opportunity. These amounts were properly characterised as reimbursements of expenses payable when and if incurred. None of these payments were properly regarded, so the applicant submitted, as the consideration in money for the supply for the purpose of s 13(1) of the GST Transition Act. Referring to Rreef at [75], the applicant also submitted that, even if these outgoings formed part of the relevant consideration (contrary to its primary submissions) the fact that there was no specific review of them did not preclude there being a review opportunity for the purposes of sub‑ss 13(2) and (5) of the GST Transition Act.
63 The respondents' central submission was, as we have seen, that there was no review opportunity on 4 March 2000, as the applicant claimed, and that the supply by way of the lease was GST‑free until 1 July 2005. Since there was no review opportunity, they were entitled to avail themselves of the mechanism in Div 2 of Pt 3 of the GST Transition Act.
64 Whilst it was common ground that the lease was an agreement of the kind described in s 13(1), the respondents contended that, having regard to the terms of the lease, there was no opportunity for them to conduct a general review, negotiation or alteration of the consideration within the meaning of s 13(5)(b). Since none of s 13(5) was satisfied, there was no review opportunity within the meaning of s 13(2).
65 Referring to the definition of "consideration" in s 9‑15(1)(a) of the GST Act, the respondents submitted, first, that, in this context, "consideration" includes any payment in connection with the supply of anything. Accordingly, so the respondents contended, the consideration in money identified in the lease for the supply by way of lease was made up of: (i) base annual rent; (ii) annual percentage rent; (iii) the lessee's proportion of the operating expenses of the Centre; (iv) after‑hours charges; and (v) the promotion fund contribution. Referring to Price Brent, the respondents submitted that, depending upon the terms of the lease, a lessee's obligation to pay a share of operating expenses may be "true rent" or "rent reserved" in the strict common law sense and, in any case, the lessee's contribution to outgoings and other charges was contractual rent, which together constituted the consideration in money for the right to occupy the premises. Annual percentage rental was also rent in the true sense. Referring to Rreef at [98] and Case M58 at 2337, the respondents said that the applicant's contention that these payments were not part of the consideration for the lease was clearly wrong.
66 The respondents submitted that the use of the word 'conduct' in s 13(5)(b)of the GST Transition Act was significant because it suggested some active role to be played by the supplier. In written submissions, the respondents said:
"The word 'conduct' is important bearing in mind the stated policy of the provision, namely '… that GST should apply to existing contracts only if the supplier can alter the consideration to pass on GST': ACP Publishing Pty Ltd v FCT [2005] FCAFC 57 per Hill J at [17]."
The respondents submitted that clause C operated of its own accord and that the lessor (or supplier) was not called on to do anything. The lease itself provided that, on the nineteenth anniversary, the consideration was the greater of two amounts. The exercise under the lease was, according to the respondents, simply to do a calculation. It was accepted, so the respondents said, that the calculation under clause C(a) was higher than under clause C(b); and the numeric calculation of $79,359.89 would be the same whether or not the GST was imposed.
67 Referring to Rreef at [99], the respondents further submitted that the opportunity to which sub-ss 13(2) and (5) referred was a real opportunity to conduct a general review; and that there would be no such opportunity unless the whole of the consideration was capable of being reviewed, subject to the application of the de minimis principle. Accordingly, in the present case, there was no real opportunity for a general review because there was no review opportunity in respect of that part of the consideration that constituted annual percentage rental, the lessee's contribution to the outgoings of the Centre, after‑hours charges and promotional charges. As a matter of fact, in this case, the lessee's contributions to operating costs were not insignificant. The respondents noted that the valuer gave evidence that the lessee's contribution to operating costs had to be taken into account in determining fair market rental. This analysis was, so the respondents said, consistent with the view that commended itself to Bathgate DJ in Case M58 at 2338. There would, so the respondents contended, only be a general review if the supplier could look at the consideration again, completely or almost universally.
68 Moreover, so the respondents submitted, consideration of the legislative context of s 13 supported this analysis. Thus, they said, in written submissions:
"If there is a review opportunity GST becomes payable by the Respondents on the whole of the consideration. It would be a perverse result if the opportunity to review part only of the consideration led to the consequence that the supplier was required to pay GST on the whole of the consideration and the recipient was entitled to an input credit for the GST on the whole of the consideration."
The respondent elaborated this submission at the hearing of the amended application. The respondents' counsel noted that, if the applicant's submissions were accepted, the respondents would pay GST, amounting to 10% of a figure agreed in 1987 whilst receiving only the 1987 figure by way of rent and having no chance to pass on the GST to the applicant. The applicant, on the other hand, would pay a figure agreed in 1987 and receive an input credit of 10%, thereby, at least commercially speaking, reducing the net rent payable by it by 10%.
69 Besides the fact that clause C operated of its own accord and a significant part of the consideration, on the respondents' analysis, fell outside the scope of clause C(b), there were, so the respondents said, a number of other reasons why clause C(b) did not permit the supplier to conduct a general review. These further reasons were:
(1) There is a restriction on the review under clause C(b) in that fair market rental is to be determined on a "sitting tenant" basis.
(2) Clause C(b) expressly excludes from consideration "the outgoings and other expenses likely to be incurred by the Lessor in respect of the land and the Centre during the balance of the term and which are not recoverable by the Lessor from the Lessee …".
(3) The evidence of the valuer in this case was that fair market rental is exclusive of GST.
(4) The evidence of the valuer was that the lease provides no opportunity for a general review because:
(i) his assessed fair market rent valuation of $575,922 per annum as the base rent under the lease could not constitute the base rent as it is less than the agreed sum calculated under clause C(a), namely, $952,318.72; and
(ii) if the figure of $525,922 were treated as base rent, then the threshold for the turnover rent would reduce and turnover rent would increase. As senior counsel for the respondent put it, "the snake would always swallow its tail". This led the valuer to say, in his report, that he was "unsure how to advise the Court of the treatment of this matter", in his assessment of the fair market rental value of the premises. In written submissions, the respondents contended that the valuer "comes to this state of uncertainty because he has proceeded on a hypothesis which is not permitted by the lease. Under the terms of this Lease there is simply no opportunity to adopt fair market rent if the amount in para (a) is greater". In oral submissions, the respondents' counsel submitted that clause C(b) was, practically speaking, unworkable, principally because of the provision in the lease for annual percentage rental and for the calculation of turnover rent.