Commissioner of Taxation v DB Rreef Funds Management Limited

Federal Court of Australia (Full Court)|2006-06-08|Before: Edmonds J, Ryan J, Heerey J, Edmonds JJ

I certify that the preceding paragraph is a true copy of the Reasons for Judgment herein of the Honourable Justice Heerey.

ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA

Introduction 3 This is one of two cases in which this Court, as constituted, heard appeals in the same sittings where the ultimate issue is whether Goods and Services Tax ('GST') applies prior to 1 July 2005 to a lease of premises, originally granted prior to 8 July 1999 (the day on which A New Tax System (Goods and Services Tax) Act 1999 (Cth) ('the GST Act') received the Royal Assent), the term of which, by reason of or pursuant to the original grant, extends beyond 1 July 2000 (the day on which GST commenced). 4 There is an anterior issue in the other case (Westley Nominees Pty Ltd v Coles Supermarkets Australia Pty Ltd VID 719 of 2005; an appeal from the judgment of Kenny J in Coles Supermarkets Australia Pty Ltd v Westley Nominees Pty Ltd (2005) 60 ATR 52 ('Westley')) which was not argued in the present case. That aside, it seems to be common ground that resolution of the ultimate issue in both cases turns on the construction and application of s 13 of the A New Tax System (Goods and Services Tax Transition) Act 1999 (Cth) ('the GST Transition Act'), in particular the definition of 'review opportunity' in subs 13(5).

Background 5 The background to this case is summarised by the primary judge (Sackville J) in his reasons at [4] - [7] inclusive (DB Rreef Funds Management Ltd v Commissioner of Taxation (2005) 218 ALR 144). By way of background it suffices, for the purpose of these reasons, to observe that:

In 1998, the predecessor in title of the respondent, DB Rreef Funds Management Limited ('Rreef'), had let eighteen floors of an office building in Melbourne (the 'Office Space'), together with 'Store Rooms' and the 'Car Park' (together 'the Premises'), to IBM Australia Limited ('IBM') for a term of two years effective from 24 January 1997. The 1997 lease ('the Subject Lease') contained options to renew for a number of additional terms, each of two years.
The appellant, the Commissioner of Taxation ('the Commissioner'), says that Rreef is liable to pay GST in respect of the supply of the lease for each of the renewed terms commencing after 1 July 2000 namely, those commencing on 24 January 2001 and 24 January 2003. Rreef says that the supply of the lease is GST-free, at least until 1 July 2005 after which, on any view, the GST Act imposes GST on rent paid in respect of the Premises under the Subject Lease or the renewed leases. Rreef points out that if the supply of the lease is not GST-free, it will be forced to bear the burden of GST without being able to pass on the cost to the lessee.
The issue arose in two proceedings, and correspondingly two appeals in this Court, the first against an 'appealable objection decision' in respect of the tax period 1 March 2002 to 31 March 2002 and the second, against an 'appealable objection decision' in respect of the tax period 1 March 2003 to 31 March 2003.

The Legislation 6 Section 13 of the GST Transition Act relevantly 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.'

Purpose of section 13 7 It is a fundamental premise of the GST Act that a supplier is entitled, and indeed expected, to pass on to the recipient of the supply the burden of the GST imposed on the supplier by including an amount by way of reimbursement for the GST. The primary judge's references to the Explanatory Memorandum at [2] of his reasons, recognise as much. 8 However, it may not be possible for a supplier to pass on the GST where the supply is made under a contract entered into before the introduction of GST was announced. Section 13 of the GST Transition Act was enacted to provide protection to suppliers in these circumstances by making the supply GST-free, at least for a supply made before 1 July 2005. 9 The purpose of s 13 is to avoid the unfairness which would result if the supplier, under a contract of the kind specified in subs 13(1), is made liable for GST in circumstances where the supplier is not able to take GST into account in arriving at the consideration payable for the supply. As Hill J observed in ACP Publishing Ltd v Commissioner of Taxation (2005) 142 FCR 533 at [6]: 'An obvious unfairness could clearly arise where contracts had been entered into before GST was even in contemplation where those contracts were to be implemented after the legislation had been enacted. The unfairness lies in the fact that the parties to such contracts would not have taken GST into account in determining the consideration that was to be paid. An obvious example is a long term lease of commercial premises entered into before the GST legislation where the rental was fixed. If GST were subsequently to be imposed upon the lessor the impact would be to reduce the return to the lessor to the extent of the 10% GST imposed. Section 13 of the Transition Act was enacted to alleviate such problems.' 10 Such a purpose is also evident from the context of s 13 and the extraneous materials referred to by the primary judge in his reasons at [100] to [108].

The concept of a 'review opportunity' 11 The definition of 'review opportunity' in subs 13(5) deals with three alternative situations. The first, found in par (a), is where the supplier has an opportunity (either unilaterally or with the agreement of another relevant party or parties) to change the consideration for the supply because of the imposition of GST. 12 The second and third situations (found in pars (b) and (c)) deal with something less advantageous to the supplier than the first - an opportunity for the supplier (either unilaterally or with the agreement of another relevant party or parties) to conduct a general review, re-negotiation or alteration of the consideration for the supply. Paragraph (b) applies where that opportunity arises on or after 1 July 2000 and par (c) applies where an opportunity arises before that date. The two paragraphs are otherwise identical except for the positive requirement in par (c) that the general review, re-negotiation or alteration of the consideration must take account of the imposition of the GST. 13 An explanation for this requirement is that, as par (c) concerns an opportunity arising before the GST came into force, it would be unfair to deny a supplier the benefit of GST-free treatment under s 13 unless the future imposition of the GST had been expressly taken into account. In contrast, par (b) is dealing with an opportunity arising after the imposition of the GST. It is appropriate in that situation for there to be no positive requirement that the potential imposition of GST was actually taken into account, because a supplier would normally be expected to take it into account in conducting a general review, re-negotiation or alteration of the consideration under the agreement. 14 It was submitted on behalf of Rreef that the difference in the wording of pars (b) and (c) does not indicate that par (b) was intended to apply where the relevant 'review, renegotiation or alteration' of the consideration does not allow the supplier to take GST into account and that the apparent conclusion of the primary judge to the contrary at [85] of his reasons is, with respect, incorrect. 15 I agree that it would be an odd result if par (b) could apply in circumstances where there was a relevant 'review, renegotiation or alteration' which could not take GST into account, given that the purpose of s 13 is to prevent the unfairness of that very situation. These are elements of the context of s 13 which need to be taken into account, in the first instance, in the construction of par (b) of subs 13(5): see CIC Insurance Ltd v Bankstown Football Club Ltd (1997) 187 CLR 384 at 408. 16 The proposition that par (b) must allow the supplier to take GST into account in any relevant 'review, renegotiation or alteration' of the consideration is not inconsistent with the proposition, accepted by the primary judge at [92] of his reasons, that a market rent review conducted on precisely the same basis as the original rent determination may be a review opportunity within par (b) even if the result of that review is that the rent goes down because market rents have fallen in the meantime. However, that is not the present case. 17 As the primary judge noted at [83] of his reasons, it was common ground that Rreef did not have an opportunity to change the consideration (the rent payable in respect of the Premises) because of the imposition of the GST. Nor did it have an opportunity to conduct, before 1 July 2000, a general review, re-negotiation or alteration of the consideration that took account of the imposition of the GST. It is for this reason that par (b) of subs 13(5) is critical to the resolution of this case.

The Issue 18 The specific issue upon which the case turned before the primary judge was identified by his Honour (at [9]) as being whether Rreef, as the 'supplier under the agreement', had a 'review opportunity' arising under the Subject Lease. The Commissioner asserted, and Rreef denied, that Rreef, as the supplier under the Subject Lease, had an opportunity under the Subject Lease to conduct a 'general review … of the consideration' in terms of par (b) of subs 13(5) of the GST Transition Act in 2001 and 2003, when a renewal of the lease occurred by exercise of the option conferred in the Subject Lease. 19 Having regard to the submissions of the parties on the appeals, that identification continues to be the specific issue on which the case turns. 20 The primary judge observed that the unusual feature of the case is that the rent fixed under the Subject Lease in 1997 was very much higher than the market rent at the time. He further observed that this was because the lessor undertook, at its own expense, an extensive fit-out of the Premises and sought to amortise the cost over the expected period of the lease (taking account of expected renewals). His Honour said (at [10]): 'Rreef acknowledges that it had a theoretical right under the lease to seek a rent review to market levels at the time the renewals took place in 2001 and 2003. However, the rent review clause in the Subject Lease provides that the rent cannot be less than the original nominal rental and requires the market rental to be set without reference to the fit-out of the Premises. Since the market rent for the Premises, calculated in this way, has never come close to the nominal rental, the theoretical right to review the rent has been of no practical utility. Rreef says that because of the constraints on the rent review process, it never had an opportunity under the Subject Lease to conduct a "general review of … the consideration". Thus, so it argues, the effect of s 13(2) of the GST Transition Act is that the supply under the Subject Lease is GST-free until 1 July 2005.'

The Primary Judge's Conclusion 21 The primary judge concluded (at [98] and [99]) that the Subject Lease, in particular cl C13.7, did not provide Rreef with an opportunity to conduct a 'general review, re-negotiation or alternation of the consideration' for the supply because: (a) The concept of a 'general review' for the purposes of par (b) of subs 13(5)of the GST Transition Act requires a complete or almost universal consideration of the same subject; (b) clause C13.7 did not provide an opportunity to conduct a general review of this kind because, due to the restrictions in cl C13.7(a) and (g), there was no opportunity for a review of that part of the consideration which related to the part of the Premises comprising the fit-out works; and (c) account must be taken of the substantial value of those fit-out works. 22 It is from this conclusion that the Commissioner appeals.

Rreef's Notice of Contention 23 Rreef filed a notice of contention in one of the appeals (and was granted leave by the Court to file an identical notice of contention in the other appeal at the commencement of the hearing), which contended that the decision of the primary judge below, that no 'review opportunity' within the meaning of par (b) of the definition in subs 13(5) of the GST Transition Act had arisen, should be affirmed on grounds other than those relied upon by his Honour below, namely:

(d) the market rent procedure under clause C.13 of the lease dated 16 March 1998 between the Perpetual Trustees Australia Limited as lessor and IBM Australia Limited as lessee (the "lease") did not provide the applicant with an opportunity to conduct a general review, re-negotiation or alteration of the consideration because, as a consequence of the lease incentive granted to IBM Australia Limited the only possible outcome of the market rent review was that the rent for the Office Space would remain unchanged; (e) alternatively, due to the constraints under which the rental value of the Office Space was to be determined under the market rent review procedure in clause C.13 of the Lease, it did not permit a review, re-negotiation or alteration of the rent which was general; (f) in the further alternative, paragraph (b) of the definition of "review opportunity" is not satisfied because clause C.13 of the Lease relates only to part of the consideration for the supply (i.e. the rent payable for the Office Space) and there was no mechanism under the Lease for a review, re-negotiation or alteration of the part of the consideration comprising the "Contribution to Operation Costs" (being approximately 18 per cent of the total consideration for the supply).'

The Facts 24 The primary judge's findings of fact are not in dispute. They are set out at length in his Honour's reasons at [4], [10] and [32] - [65] and, insofar as they are relevant to the issue on this appeal, are paraphrased below.

The Course of Events 25 On 14 June 1991, National Australia Trustees Ltd ('NAT'), the then trustee of the Southgate Trust, entered into an agreement to lease to IBM a portion of a building to be constructed in an area known as 'Southgate, South Melbourne' (the 'Agreement for Lease'). The terms and conditions of the proposed lease were set out in a schedule to the agreement (the 'Pro Forma Lease'). The Agreement for Lease also required the parties to perform and observe their respective obligations under the 'First Construction Agreement' and the 'Second Construction Agreement', both of which were to be executed simultaneously with the Agreement for Lease. 26 The First Construction Agreement recited that NAT, as lessor, had agreed to procure the completion and fitting out of the building at its own expense. NAT agreed to carry out certain fit-out works specified in the schedule at a cost which was not to exceed an amount calculated by reference to a formula. That amount, according to expert evidence, was in the order of $27 million. 27 A lease in terms of the Pro Forma Lease (the '1994 Lease') was ultimately executed on 29 April 1994 by Opalwood Pty Ltd, the then trustee of the Southgate Trust, as lessor and IBM as lessee. The 1994 Lease was for a term of one year commencing on 24 January 1994 in respect of the Premises which, as noted in [5] supra, comprised eighteen floors of Office Space, Store Rooms and Car Park. The annual rent was $10,519,740 for the Office Space; $97,920 for the Car Park; and $7,770 for the Store Rooms. The annual rent for the Office Space was apparently calculated on the basis of the sum of $420 per square metre per annum specified in the Agreement for Lease. As indicated at [20] supra, this was very much higher than the market rent for comparable office space when the Agreement for Lease was entered into in June 1991 ($240 per square metre per annum) and when the relevant lease renewals occurred, being January 2001 ($260 per square metre per annum) and January 2003 ($275 per square metre per annum) - see [52] and [53] infra. This discrepancy was attributable to the fact that the 'face rent' included an amount to recoup to the lessor the cost of the fit-out of the Premises - see [20] supra and [50] infra. 28 The 1994 Lease provided for options for a further thirteen terms, each of two years. The options could be exercised, either by the lessor or the lessee, except for the eighth further option and the eleventh further option, each of which could be exercised only by the lessee. Thus the minimum effective term of the lease, assuming the lessor exercised each of its options, was 15 years. 29 The lessor duly exercised the option in the 1994 Lease for a further two year term commencing on 24 January 1995. Opalwood Pty Ltd and IBM subsequently entered into a Deed of Renewal of Lease on 28 June 1995 providing for a two year lease commencing on 24 January 1995. The Deed of Renewal provided for the same annual rent as the 1994 Lease. 30 On 14 November 1995, Opalwood Pty Ltd contracted to sell the office development known as 'Southgate', including the Premises, to Perpetual Trustees Australia Ltd ('Perpetual'), as trustee of the Paladin Southgate Trust. The sale, which was completed on 20 December 1995, was subject to the lease of the Premises to IBM. 31 It appears that the lessor exercised its option for a further two year term commencing on 24 January 1997. During 1996, however, IBM and Perpetual negotiated with a view to executing a new lease substantially on the same terms as the 1994 Lease, but incorporating some minor variations. 32 On 16 March 1998 the parties executed the Subject Lease of the Premises for a two year term commencing on 24 January 1997. The definition of 'Demised Premises' in par (a) of the Definitions Clause of the Subject Lease included the fit-out undertaken by the lessor. The Subject Lease provided for the same annual rent of $10,519,740 as had hitherto applied for the Office Space. The annual rent for the Car Park was increased to $222,400, but remained the same ($7,770) for the Store Rooms. Clause A2 of the Subject Lease required the lessee to pay the rent reserved, the revised rent determined pursuant to cl C13 and any other moneys payable under the Subject Lease. Clause A3 required the lessee to pay or reimburse to the lessor the 'Operating Costs' calculated and payable in the manner specified in cl A4. 33 The Subject Lease made provision in cl C13 for review of the rent relating to the Office Space. A review could take place on the commencement date for each further term granted pursuant to the options granted by cl C14. 34 Clause C15 contained an acknowledgement by IBM that the terms and conditions set out in the Subject Lease and the agreements and deeds described in cl C15.3 contained the entire agreement between the parties. The agreements and deeds identified in cl C15.3 included the First Construction Agreement. 35 The lessor duly exercised the option for a further term of two years commencing on 24 January 1999, the fifth anniversary of the commencement of the 1994 Lease. On 3 December 1998, the parties executed a Deed of Renewal of Lease recording the renewal of the Subject Lease and specifying certain amendments to the lease to apply during the two year term. The annual rent for the Office Space, Car Park and Store Rooms remained unchanged from that applicable immediately prior to the renewal. 36 The Subject Lease was also renewed on 24 January 2001 and 24 January 2003, in each case apparently by the lessor exercising the option. Prior to the first renewal, Rreef had become the responsible entity and trustee of the Paladin Southgate Trust, succeeding Perpetual. Following the 2001 renewal, the parties executed a further Deed of Renewal of Lease, but did not do so until 11 November 2002. Similarly, following the 2003 renewal, the parties executed a Deed of Renewal of Lease, but not until 14 October 2003. 37 The 2002 Deed of Renewal provided that the lessor leased the Premises to IBM as lessee for a term of two years as from 24 January 2001. The annual rent specified in the 2002 Deed of Renewal for the Office Space remained as it was immediately prior to 24 January 2001 (that is, $10,519,740). The annual rent for the storage room also remained unchanged. However, the annual rent for the Car Park was increased as from January 2001 to $332,112, as a result of a review carried out pursuant to the terms of cl C16.6 of the Subject Lease. Presumably this review produced an increase because the annual rent for the Car Park stipulated in the Subject Lease was not substantially above market levels. 38 The 2003 Deed of Renewal of Lease took a similar form, adapted to take account of the renewal that had occurred as from 24 January 2001. The rent for the Office Space remained unchanged, as did the rent in respect of the Car Park and the Store Rooms.

Terms of the Lease 39 Clause C14 of the Subject Lease provided for options to renew for thirteen further terms of two years, the first such term to commence on the first anniversary of the commencement of the 1994 Lease and the last to commence on the twenty-fifth anniversary of the commencement of the 1994 Lease (cl C14.7). Except for the eighth and eleventh further terms, either the lessor or the lessee could exercise the option (cll C14.1 - C14.4). Only the lessee could exercise the options in respect of the eighth and eleventh further terms. The annual rent to apply during each further term was to be determined in accordance with cl C13: cl C14.5. 40 If an option was exercised, the lessor was to grant to the lessee and the lessee was to take a lease for the relevant further term in respect of the Premises 'on the same terms and conditions as those contained in [the Subject] Lease mutatis mutandis including … clause C14', subject to certain specified amendments: cl C14.8. 41 Clause C13 of the Subject Lease set out the procedure to be followed and the criteria to be applied in conducting a review of the rent relating to the Office Space (which was referred to in cl C13 as the 'Demised Premises' - see cl C13.1(ii)). 42 The procedure laid down by cl C13 is as follows: · Within a specified period before the commencement of the lease for a further term by reason of an exercise of the option conferred by cl C14, the lessor is required to serve a written notice on the lessee stating the lessor's estimate of the 'annual market rental value' of the Office Space taking into account the matters referred to in cl C13.7 (cl C13.3). · If the lessee fails to serve a written notice disputing the estimate, the annual rent is that specified by the lessor until the next renewal date (cll C13.4, C13.5). · If the lessee does serve such a notice, the rent value of the Office Space is to be the greater of the annual rent payable in the year immediately prior to the review date and the rent value determined in accordance with cl C13.6 (see, too, cl C13.12). Clause C13.6 provides for each party to appoint a valuer who is required to prepare a report as to the rent value of the Office Space. Each valuer is to proceed in accordance with cl C13.7. If the valuers cannot agree, provision is made for the appointment of a third valuer to resolve the matter. 43 Clause C13.7 provides as follows: 'In determining the rental value of the Demised Premises the valuers appointed pursuant to clause C13.6 shall take into account all factors relevant to determining the rental value of the Demised Premises to the extent they are not contrary to or inconsistent with the following: (a) deem the Demised Premises to be vacant, devoid of all Lessee's fixtures and fittings, devoid of those items of the Third Schedule Works listed in Part One of the Third Schedule and devoid of all fixtures and fittings paid for by the Lessee which have become Lessor's fixtures and fittings and then make his determination based on a lease granted with vacant possession between a willing but not anxious lessor; (b) subject to the provisions of paragraph (e) have regard to rentals of comparable premises in so far as they represent: (i) voluntary bargaining between a willing lessor and a willing lessee but neither of them so anxious that either of them would overlook any ordinary business consideration; (ii) both parties being acquainted with the comparable premises and aware of all circumstances which may affect the rent of the comparable premises either advantageously or prejudicially including the location, character, quality and age of the comparable premises and the relative efficiency of services supplied to the comparable premises and the terms, conditions and tenure of occupancy of the comparable premises; (c) have regard to the use of the Demised Premises permitted by this Lease; (d) have regard to the terms and conditions of this Lease and: (i) in respect of each Review Date occurring on the 1st to the 13th (inclusive) anniversaries of the commencement of the Original Lease, assume that at the relevant Review Date occurring on those anniversaries the term of this Lease is fifteen (15) years; and (ii) in respect of each Review Date occurring on the 15th to the 25th anniversaries (inclusive) of the commencement of the Original Lease, assume that at the relevant Review Date the term of this Lease is six (6) years; (e) when having regard to rentals of all comparable premises: (i) take into account, and have regard to, any concession or incentive or any period of rent abatement required to secure a tenant in the comparable premises; and (ii) treat any rentals agreed on a New Letting as primary evidence; and (iii) treat any rentals determined or agreed on a rent review as secondary evidence; (f) take no account of the rights granted to the Lessee under clauses C.2 [naming rights], C.11 [equipment on roof], and A.2(a)(iii) [no rent for a 'Desk Area']; (g) disregard any concession or incentive or period of rent abatement given or allowed to the Lessee at the time of the granting of the Original Lease; (h) Deleted. (i) having taken into account or having had regard to any concessions, incentives or periods of rent abatement in analysing rentals of comparable premises, and having made the necessary adjustments between the comparable premises and the Demised Premises in respect of all relevant matters, make no further adjustment in determining the rental value of the Demised Premises for the same type of concessions, incentives or periods of rent abatement; and (j) have regard to the fact that the Building is located outside the central business district of Melbourne and therefore place greater weight on rentals of comparable premises in the vicinity of the Building.' (Emphasis added.) 44 The expression 'Original Lease', which is used in cl C13.7(d) and (g), is defined in the Subject Lease to mean the 1994 Lease. The expression 'New Letting', which is used in cl C13.7(e)(ii), is defined to mean a letting of vacant premises and not to include any rents agreed on a rent review.

Rental Values 45 The primary judge found that, at about the time the GST regime came into force, Mr Maglione, the Asset Manager for Rreef, sought to negotiate with IBM with a view to including a 'GST Gross up clause' in the Subject Lease. IBM declined to entertain any such proposal. 46 He also found that, in 2000, Mr Maglione considered whether notice should be given to IBM pursuant to cl C13.3 in order to commence the rent review process. Mr Maglione decided not to give notice because he had received advice that the annual rent provided for in the Subject Lease was substantially above the market rent at that time for the Office Space. Since cl C13.6 provided that the rent for the Office Space during the term of the renewed lease should not be less than that payable in the year immediately prior to the renewed term, Mr Maglione considered that there was no point in pursuing the review process. Rreef also chose not to exercise its right to a rent review in relation to the Office Space following the 2003 renewal, for the same reason. 47 The primary judge referred to an affidavit from a valuer, Mr Jackson, which Rreef had read. Apparently, Senior Counsel for the Commissioner objected to the evidence on the ground of relevance, but agreed that it was appropriate to receive the evidence and to determine its relevance after the parties made submissions. The primary judge thought that the evidence was relevant to the issues and thus should be admitted. There was no challenge to the evidence. 48 Mr Jackson was specifically asked to address two questions, as follows: '1. Whether, as at 24 January 2001 and 24 January 2003, the market for premises similar to the subject [Premises], had responded to the imposition of GST by increasing rents on account of GST. 2. Whether the rental for the Office Space component of the [P]remises… as at: · 14 June 1991 · 24 January 2001 · 24 January 2003 exceeded the market rental value of the Office Space determined on the basis set out in Clause [C] 13.7 of the [Subject] Lease.' 49 Mr Jackson answered the first question in the affirmative. He opined that by January 2001 the office market had responded to the imposition of the GST by increasing rents, with market rent increases being negotiated on a GST-exclusive basis. By 2003 the market had widely accepted the imposition of the GST, with new leases, lease renewals and market-based reviews being concluded on a GST-exclusive basis. 50 In addressing the second question, Mr Jackson distinguished between the 'face rent' and the 'effective rent': '"Face Rent" is the nominated rental, inclusive of any leasing incentives. "Effective Rent" is the rent, excluding incentives. Effective Rentals are the yard-stick used within the Melbourne commercial property industry for comparison of leasing transactions on a like for like basis. The methodology for determining the market rental value of the Office Space under clause [C]13.7 of the [Subject] Lease ("Market Rent") requires that it be determined by reference to the Effective Rent of comparable premises. I have therefore, used the effective rental in this report when analysing the rentals of comparable properties.' 51 Mr Jackson referred to cl 6.7 of the First Construction Agreement, which required the Lessor to pay for the fit-out costs of the Premises up to the fit-out Cost Limit. According to the formula, as he interpreted it, the total Cost Limit for the building was $34.55 million. Adjusting that amount pro rata to allow for the area finally leased to IBM as a percentage of the total letting area of the building, the Cost Limit came to $27.043 million. Adopting a valuation methodology approved by the Australian Property Institute, he concluded that the face rent of $420 per square metre per annum for the Office Space under the Subject Lease equated to a net effective rent of $221 per square metre per annum, allowing for the amortised cost of the fit-out. This conclusion was based on his view that, while lessors commonly offered lessees incentives to lease commercial space in the early 1990s, the cost of a fit-out borne by a lessor was generally reflected in an increased rent over the term of the lease. 52 Mr Jackson considered that in June 1991 market rents for comparable office space were in the vicinity of $240 per square metre per annum. Thus, the face rent provided for in the Subject Lease was 75 per cent higher than comparable market rent. He attributed the 'inflated' face rent to the Lessor's desire to recoup the substantial incentive it granted at the commencement of the lease. 53 In January 2001, according to Mr Jackson, market rents for office space comparable to the premises were about $260 per square metre per annum. Thus the face rent of $420 per square metre under the renewed lease was about 61.5 per cent higher than the market rent. In January 2003, the market rent for comparable office space was about $275 per square metre per annum. Thus the face rent of $420 per square metre under the lease renewed that year was 52.7 percent higher than the comparable market rent. 54 In Mr Jackson's opinion, it followed that, had rent reviews been conducted in 2001 and 2003 in accordance with cl C13 of the Subject Lease, given the 'ratchet' clause, the rent payable for the Office Space would have remained unchanged. The primary judge found that this evidence confirmed the commercial soundness of Mr Maglione's decisions not to invoke the rent review clause in 2001 and 2003.

The Submissions 55 The primary judge referred (at [66]) to what he described as 'an opening flourish' in the initial oral submissions by Senior Counsel for Rreef that, so far as the Commissioner is concerned, the resolution of the legal issue in the present case is revenue neutral. The reason is that if Rreef is liable to GST on the supply to IBM, the latter is entitled to an input tax credit equal to the amount of GST paid. If, however, Rreef is not liable to GST, IBM has no entitlement to an input tax credit. Senior Counsel for Rreef suggested that from Rreef's perspective, the case was about whether IBM was entitled, at Rreef's expense, to a 'windfall gain' of one-eleventh of the rent it is required to pay. This submission was effectively repeated in Rreef's written submissions on appeal: 'If the supply made by the Respondent under the leases renewed in January 2001 and January 2003 was not GST-free by virtue of the operation of s 13 of the Transition Act, the return to the Respondent from the lease would be reduced one-eleventh and IBM would make a windfall gain equal to the GST payable by the Respondent (on the entire consideration payable under the lease) because it would be entitled to an input tax credit equal to that amount but not be required to increase the rent for the Office Space or otherwise reimburse the Respondent on account of the GST payable by the Respondent.' 56 The primary judge observed (at [67]) that the response of Senior Counsel for the Commissioner was that Rreef's analysis of the economic effects of the case was irrelevant and 'supremely distracting'. This was put in the context that the Commissioner's interest was simply in administering the legislation according to law.

Commissioner's contentions 57 In his written submissions, the Commissioner contended that the primary judge erred in the conclusion he reached - see [21] supra - because he confused the subject matter of the review, said to be the consideration for the supply, with the thing supplied itself, the lease of the Premises. The Commissioner contended that cl C13.2 provides that the annual rent in respect of the 'Demised Premises' - a term which included fit-out works - should be reviewed on each Review Date. He further contended that it is nothing to the point that there are prescriptions laid down by cl C13.7 as to how the valuers should go about their work. The prescriptions allow GST to be taken into account. It is enough that there is a possibility that the 'annual rent in respect of the Demised Premises' might thereby change. And finally he contended that no part of the 'annual rent in respect of the Demised Premises' is specifically apportioned to the fit-out works. The whole of the 'annual rent in respect of the Demised Premises' is the subject of the review. In consequence, it is said, his Honour erred in finding that the landlord had no opportunity for a general review of the consideration for the purposes of par (b) of subs 13(5) of the GST Transition Act. 58 In his oral submissions, Senior Counsel for the Commissioner put a similar substantive argument albeit with a different articulation or twist. He argued that what is being reviewed is the rent: 'What one gets in return for the rent isn't the fit-out, it's premises, demised premises, and the consideration for those is rent and also one has to pay operating costs.' The argument continued that the fact that the rent review has a particular mechanism built into it is not to the point. If the rent changes as a result of the review mechanism - '… the whole of the rent changes, not some apportioned amount. It's the whole. What is the result of that review, if advantage is taken of it, is not some alteration of part of the rent but the whole, hence the submission that it is a distraction - and this is the error committed - to look to the particular mechanism chosen by the parties' - particularly when that mechanism allows the incidence of GST to be taken into account; or at least does not say it cannot be taken into account. 59 Senior Counsel for the Commissioner returned to the same theme in reply: 'Our learned friends would have the tail wag the dog in the sense that the clause concerned still provides for a review of the annual rent and no amount of recourse to predecessor documents will change the focus of that clause. We all know, if we go off to history in this, that there was a fit-out, there was a construction agreement and all the rest. That doesn't change clause C 13.2. It's the annual rent that is being reviewed. It is, with respect, wrong to say that there is a focus on the clause on anything other than the annual rent. It's just that in doing that there is a particular charter laid out.'

Rreef's Contentions 60 Rreef, in its written submissions, rejects the Commissioner's contention that his Honour erred in the conclusion he reached because he confused the subject matter of the review provided for under cl C13.7 with the thing supplied. Rreef correctly, in my view, identified the subject matter of the review as being the rent for the Office Space - see cl 13.1(ii): 'Reference to "Demised Premises" in this clause C13 shall be a reference to the Office Space' - and identified the thing supplied as being a lease of the Premises - 'Demised Premises' being defined in the Definitions Clause to include not only the Office Space, but also the Car Park, Store Rooms, Desk Area and the fit-out works. 61 Rreef contends that the key to the primary judge's reasoning is his conclusion that the concept of a 'general review' requires a 'complete or almost universal consideration of the same subject'. In view of the restrictions contained in cl C13.7(a) and (g) of the Subject Lease, it cannot be said that the rent review provided for in cl C13.7 involved a consideration of the same subject - the original rent was set at an amount to enable the lessor to recoup the fit-out cost, which was a critical aspect of the leasehold interest that was granted under the Subject Lease, whereas the market rent review was constrained to establish a rent ignoring the fit-out cost. In effect, the restrictions on the rent review operate to protect the lessee and preclude the lessor from obtaining a review of the rent which reflects the true position - that the Premises include the fit-out works and the rent takes that into account. 62 Rreef submitted that its submissions below, referred to by his Honour (at [74]), put the matter in a slightly different way - that, due to the restrictions in the rent review mechanism (in particular cl C13.7(a) and (g)), the market rent review did not involve a comparison of 'like with like' and, for that reason, could not be said to involve a general review, re-negotiation or alteration of the consideration. The primary judge's observation at [99] was merely expressing the same fundamental point in a slightly different way. 63 In his oral submissions, Senior Counsel for Rreef submitted that the word 'general' as a qualification of the word 'review' refers not just to the extent of the review, but also to the quality of the review. This he said derived from the dictionary definition of the word, namely - 'complete or nearly universal involving or affecting all or nearly all parts.' 64 He further submitted that, reading the provision in context, the generality of the review must be one which allows GST to be taken into account in such a way that it can be passed on by the supplier to the recipient, not simply taken into account in some abstract or theoretical way, whether or not it is actually passed on. This looks not to outcome, but to whether the mechanism of review in the circumstances in which it operated permitted GST to be taken into account.

Conclusion 65 I am unable to identify the alleged error in the primary judge's conclusion which is said to be sourced in confusing the thing supplied, the Demised Premises, with the subject of the review, said to be the consideration for the supply (ground 3 of the Notice of Appeal). At [95] of his reasons, his Honour identified the supply in the present case as being 'the grant of the lease of the Premises, pursuant to the Subject Lease'. That is undoubtedly correct. He then said: 'The consideration for the supply was the annual rent for the Premises together with the lessee's obligation to reimburse the Operating Costs'. That is also undoubtedly correct. However, contrary to how ground 3 of the Notice of Appeal is framed, the consideration for the supply is not the subject of the review. The subject of the review in terms of s 13 of the GST Transition Act is the annual rent for the Office Space - see [60] supra - which is only consideration for part of the supply. This same flaw also infects grounds 2 and 4 of the Commissioner's Notice of Appeal. 66 This effectively emasculates the Commissioner's Notice of Appeal because ground 5 was not pressed upon us and ground 6 is conclusionary on what precedes it - grounds 2 to 5 inclusive. It is also a complete answer to the Commissioner's written submissions referred to at [57] supra and his Senior Counsel's oral submissions referred to at [58] supra. 67 However, in fairness to the submissions that were made, it is appropriate that I indicate my agreement with the conclusion of the primary judge referred to at [21] supra, that, for the reasons there referred to, the Subject Lease, in particular cl C13.7, did not provide Rreef with an opportunity to conduct a 'general review, renegotiation or alteration of the consideration' for the supply within the terms of par (b) of subs 13(5) of the GST Transition Act. In this regard, I agree with Rreef's written submissions referred to at [61] and [62] supra.

Rreef's Notice of Contention 68 Having regard to my conclusion expressed in [65] - [67] supra, it is not necessary to the outcome of this case that I address and determine the grounds of Rreef's Notice of Contention. Ground (b) is a true alternative in the sense that it is only relied upon if this Court did not accept the primary judge's approach, as expressed in his reasons, for his conclusion at [21] supra; or did not accept Rreef's submissions at [61] and [62] supra. 69 Grounds (a) and (c) raise discrete considerations. In deference to the submissions that were made and additionally, in the case of ground (c), its relevance to the outcome of Westley, I think I should address them.

Ground (a) 70 This ground asserts that no opportunity for a general review was provided because, as a result of the lease incentive granted to IBM, the only possible outcome of the market rent review was that the rent for the Office Space would remain unchanged. 71 Put another way, this ground asserts that for there to be an 'opportunity' of the relevant kind, it must be one which is real and substantive, and not merely a token opportunity. Notwithstanding its articulation in the notice of contention, Rreef submits that the point of the ground is not one that goes to the outcome of the review, which, taking GST into account, might be either to increase or decrease the consideration payable or even to leave it unaltered. The point is rather one that goes to the availability of a review in which GST can, in fact, be taken into account. 72 In making the submission at [70] supra, Rreef was no doubt aware of what his Honour, the primary judge, said on this subject at [90] - [93]: '[90] Ignoring cl C13.7(a) and (g) for the moment, cl C13.7 imposed no significant restriction on the factors to be taken into account in determining the annual market rental for the Office Space. Indeed the valuer not only could take into account the imposition of the GST, but was effectively required to do so, since (as Mr Jackson's evidence confirmed) leases of comparable premises at the relevant time would have been negotiated taking into account the effect of the GST on market rentals. [91] Clause C13.7 of the Subject Lease thus provided Rreef with the occasion to instigate a reconsideration of the rental payable in respect of the Office Space. Subject to the effect of cl C13.7(a) and (g), Rreef could secure an adjustment of the rental to bring it in line with market rentals. The fact that actual market forces might prevent an increase in the rental sufficient to enable the lessor to pass on the full cost of the GST to the lessee does not of itself prevent Rreef having an opportunity under the Subject Lease to conduct a general review of the consideration for the Office Space. In my opinion, the Commissioner was correct to submit that s 13(5) of the GST Transition Act is concerned with a particular kind of opportunity,not with the outcome of the process instigated when the lessor takes advantage of that opportunity. [92] If it were otherwise, s 13(5)(b) of the GST Transition Act would not be satisfied even if there was a market rent review conducted on precisely the same basis as the original rental determination, simply because the rental market had fallen in the intervening period. In this situation, the lessor would be unable to pass on the GST, not because there had not been an opportunity for a general review of the rent, but because the outcome had been influenced by a falling rental market. Nor could it make a difference that the lessor could invoke a ratchet clause to prevent the rental falling below its original level. I do not think that s 13 is designed to protect suppliers against market movements. [93] In other words, if one were to ignore the limitations on the rent review process imposed by cl C 13.7(a) and (g), Rreef had an opportunity under the Subject Lease to conduct a general review of rent for the Office Space. The review was to market and took into account GST. The fact that that the rent reviews (had they taken place) would not have increased the rent actually payable was due to the ratchet clause (cl C13.6), not to any restrictions inherent in the review process itself.' 73 I agree with these views and his Honour's conclusion at [93]. If it had become necessary, I would not have dismissed the appeal on this ground.

Ground (c) 74 This ground of contention was raised below. However, according to his Honour at [75] of his reasons, the point was not developed in oral submissions. In the circumstances, his Honour did not refer to it further. 75 The essence of the submissions on this ground is that the words 'the consideration' in par (b) of subs 13(5) refer to the whole of the consideration for the supply, not to a mere part of that consideration. This is consistent with the structure of the GST Act (in particular, the fact that GST, if payable, is payable under s 9-5 of that Act on the entire consideration for the supply) and the purpose of s 13 of the GST Transition Act. I agree with this submission. 76 The primary judge noted, at [17] of his reasons, that it was agreed by the parties that the Subject Lease of the Premises and renewals involved a single supply of the Premises comprising the Office Space, Store Rooms and the Car Park. This is undoubtedly correct. 77 The primary judge concluded, at [95] of his reasons, that the consideration for that supply comprised the rent for the Office Space, Store Rooms and Car park together with the contribution to Operating Costs. 78 The conclusion of the primary judge that the obligation of IBM to pay or reimburse the 'Operating Costs' pursuant to cll A3 and A4 of the Subject Lease was part of the consideration for the supply is clearly correct: see Commissioner of Stamp Duties v J.V. (Crows Nest) Pty Ltd (1986) 7 NSWLR 529 at 539 per McHugh JA; Commissioner of Stamp Duties v Commonwealth Funds Management Ltd (1995) 38 NSWLR 173 at 176 - 177 per Kirby P; Commissioner of State Revenue (Vic) v Royal and Sun Alliance Insurance Australia Ltd (2003) ATC 4998 at [27], [28] and [56]. In the first-mentioned case, McHugh JA said: 'In Yanchep Sun City Pty Ltd v Commissioner of State Taxation (WA) (1984) 15 ATR 1165; 84 ATC 4761, Olney J applied the statements made in United Scientific Holdings Ltd v Burnley Borough Council as to the meaning of '"rent". His Honour held that for the purposes of the West Australian stamp duties legislation a covenant by a lessee to pay all rates and taxes charged upon the land was not rent. Olney J said (at 1171; 4767) that it was not enough: "… to look merely for a contractual liability on the part of the lessee to pay money to or on behalf of the lessor. To be rent the payment must be one which is essentially a payment for the right to use the demises premises." The illustrations which Olney J gave in the course of his judgment together with his actual decision indicate that he thought that, if a payment by the lessee was directed to indemnifying a liability of the lessor, it was not a payment for the right to use property. The distinction which his Honour appears to make does not seem satisfactory. For it seems to call for a different result depending on whether the lessor calculates a single lump sum payment to compensate him for the cost of letting and maintaining his property or whether he segregates his various overheads from the nett return which the letting of property gives. His Honour's approach is also, I think, inconsistent with the meaning of "rent" as it is defined in the modern cases. That definition is concerned with whether the payment - whatever its purpose - is part of the consideration for the right to use the premises. It is immaterial that the payment may reimburse the lessor in respect of one of his obligations if the payment is part of the consideration for the use of the property. In most, if not all, cases a payment by a lessee of rates and taxes owing by the lessor is made as part of the consideration for the use of the premises and for no other purpose.' 79 Rreef submitted that the total consideration paid by IBM as a contribution for Operating Costs under cll A3 - A4 of the Subject Lease in the first tax period (March 2002) and the second tax period (March 2003) was approximately 17 per cent of the aggregate consideration. This was not disputed. 80 There is no provision in the Subject Lease for any review, renegotiation or alteration of the lessee's obligation to contribute to the 'Operating Costs', let alone one which would allow GST to be taken into account. 81 In his reasons at [75], the primary Judge suggested that the statement made at [80] supra may not be correct because the contribution to Operating Costs 'would seem to include a component for GST, since it was a reimbursement of expenses actually incurred'. Rreef submitted that this suggestion is not correct and I agree. This is best illustrated by way of the example that was put to the Court by Rreef's Senior Counsel: 'The lessor pays a cleaner $110 for cleaning services including a component for GST. The lessor gets an input tax credit for the GST component and the lessor is therefore out of pocket $100. It is that $100 that the lessor is out of pocket that the lessor recoups as contribution to Operating Costs. The difficulty for the lessor is the $100 recoupment is itself part of the consideration for the supply under the lease and so the lessor is stuck with one-eleventh of that $100 net amount being the amount of GST payable on that supply. So $9 is an additional tax that the lessor has to pay and that additional $9 tax simply cannot be recouped. There can be no adjustment under the provisions of this lease.' 82 Accepting that IBM's contribution to the Operating Costs was of such a quantitative component (17 per cent) of the consideration for the supply, the fact that such contribution could not be reviewed is fatal to the Commissioner's case because there is no review opportunity in relation to the whole or nearly all of the consideration for the supply: see Case M58 (1990) 12 NZTC 2,333 at 2,338. It also follows from the terms of subs 13(5)(b) itself. 83 For the foregoing reasons, the appeals must be dismissed with costs. I certify that the preceding eighty-one (81) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Edmonds.

Associate: Dated: 8 June 2006 Counsel for the Appellant: Mr J A Logan SC Mr D W Marks

Solicitor for the Appellant: Australian Government Solicitor

Counsel for the Respondent: Mr S J Gageler SC Mr M Richmond

Solicitor for the Respondent: Mallesons Stephen Jaques

At a glance

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