Commissioner of Taxation v Gloxinia Investments

Commissioner of Taxation v Gloxinia Investments - [2010] FCAFC 46 - FCAFC 2010 case summary — Zoe

[8]

DEFINITIONS 12 Middleton J sets out the definitions of the terms "new residential premises" and "supply" for the purposes of the A New Tax System (Goods and Services Tax) Act 1999 (Cth) (the "GST Act"). His Honour also sets out part of the definition of "long term lease". However I should state it in full. It is as follows: long-term lease means a supply by way of lease, hire or licence (including a renewal or extension of the lease, hire or licence) for at least 50 years if: (a) at the time of the lease, hire or licence, or the renewal or extension of the lease, hire or licence, it was reasonable to expect that it would continue for at least 50 years; and (b) unless the supplier is an Australian government agency - the terms of the lease, hire or licence, or the renewal or extension of the lease, hire or licence, as they apply to the recipient are substantially the same as those under which the supplier held the premises. 13 Subparagraph (a) speaks of a reasonable expectation as to the duration of the lease, hire or licence, such expectation to be "at the time of the lease, hire or licence", presumably the date of grant. It seems that at least at the time of commencement of these proceedings, the Strata Lot Leases had not been granted. See the application and the primary Judge's reasons at [13] and [14]. If that is correct, then it is difficult to understand how it is possible to determine what, at the time of grant, "was" reasonably to be expected as to the likely duration of the lease. This suggests that, at least in theory, Gloxinia's application for declaratory relief is, or was, premature. The respondent (the "Commissioner") has not taken the point, either at first instance or on appeal. I propose to deal with the matter on the basis adopted by the parties. Nonetheless I observe that this, and some other aspects of the case, hint at the possibility that they are seeking little more than an advisory opinion. 14 I also draw attention to the definition of "real property" which is as follows: real property includes: (a) any interest in or right over land; or (b) a personal right to call for or be granted any interest in or right over land; or (c) a licence to occupy land or any other contractual right exercisable over or in relation to land.

[9]

THE QUESTION IN ISSUE 15 The question is whether, when the Strata Lots are leased by the Council to Gloxinia, each will be the subject of a supply by way of long term lease for the purposes of s 40-75 of the GST Act. The Commissioner submits that the definition of the term "long term lease" requires that there be not merely a lease, but a supply by way of lease. The Commissioner then submits that in this case, pursuant to the previous dealings between the Council and Gloxinia, the latter has held the subject land as lessee since it received the assignment of the prior lease. The Residential Lease extended the term and varied the conditions upon which such land was held. Thereafter, Gloxinia has constructed, or is constructing, the building containing the Strata Lots. Thus it will hold the Strata Lots in their completed state before the Strata Lot Leases commence. I understand the case to have been conducted on the tacit basis that the Strata Lot Leases will not come into existence for any relevant purpose until the stipulated commencement date. In particular, it has not been suggested that they might be executed at some earlier stage so as to constitute a supply at that time for the purposes of the GST Act. The Commissioner submits that in those circumstances, there is no sense in which it can be said that any such lot will be supplied by a relevant Strata Lot Lease. 16 Counsel for Gloxinia submits that this point was not raised before the primary Judge but does not object to its being considered on appeal. I mention this matter out of fairness to the primary Judge. Gloxinia then submits that each Strata Lot Lease will supply the relevant Strata Lot by way of long term lease. It refers to s 9-10(2)(d) which provides that a grant of real property is a supply. Hence, Gloxinia submits, the grant of each Strata Lot Lease will be a supply of real property and therefore a supply by way of long term lease. This submission assumes that, as counsel submitted at TS 32-33: … In any event, the notion of handing over other than figuratively or metaphorically an apartment building in the sky is absurd. So its supply, in the same way as one supplies vegetables by handing it across the counter, is not in question in relation to residential premises where supply is, in our law, a matter of artificial social realities in terms of title and conveyance as well as the accompanying symbols of occupation and possession being given. Subsection (1) [of s 9-10] already tells you, unless the context is going to command it, you're not confining this notion to physically handing over physical or tangible matters. And why would you? When one looks at subsection (2) without limiting the literally limitless forms of supply which are in the definition of supply, all - any form of supply whatsoever. Without limiting that, there are specific inclusions which has in (d) a grant of real property and one of the several independent ways in which this court can and should dispose of the argument against us and dismiss the appeal is simply to ask the question, and I stress I am right at the - I have now done all the interpolations the statute requires, I am now at the definition of the term my friend relies upon - is simply to ask this question; is the strata lot lease or is it not a grant of real property. 17 Gloxinia also submits that each Strata Lot Lease is a creation or grant of rights within s 9-10(2)(e). It submits that each such lease creates rights and obligations different from those in existence under the Residential Lease and so is a supply of those rights.

[10]

SOME POINTS OF CURIOSITY 18 Three matters of curiosity arise in connection with terms used in subdiv 40-C of the GST Act. The subdivision forms part of Div 40 which is headed "Input taxed supplies". That division is, in turn, contained in Part 3-1 which is headed "Supplies that are not taxable supplies". Part 3-1 is part of Ch 3 which deals with "The exemptions". In effect Ch 3 contains provisions which exempt particular classes of transaction from liability to the tax (the "GST") imposed by the GST Act. The need for such exemption provisions arises from the very wide definitions of "supply" and "taxable supply" in ss 9-5 and 9-10 of the GST Act. The first curiosity is the meaning of the term "residential premises". The term "new residential premises" is defined in s 40-75. However that definition depends upon the definition of "residential premises" in s 195-1 as follows: residential premises means land or a building that: (a) is occupied as a residence or for residential accommodation; or (b) is intended to be occupied and is capable of being occupied as a residence or for residential accommodation; (regardless of the term of the occupation or intended occupation) and includes a floating home. 19 The meaning of the word "intended" is not clear. One might infer that it refers to the "intention" of either the landlord or the tenant (or both), or the intended use of the premises demonstrated by their nature or by the relevant instrument or other arrangement creating the tenancy. As originally enacted, the GST Act provided that the term "residential premises" meant "land or a building occupied or intended to be occupied as a residence, and includes a floating home". However the definition was amended in 1999 by the A New Tax System (Indirect Tax and Consequential Amendments) Act 1999 (Cth) (the "1999 Amending Act"), and again in 2006 by the Tax Laws Amendment (2006 Measures No 3) Act 2006 (Cth). The 1999 amendment inserted the definition in its present form, save for the words "or for residential accommodation" in paras (a) and (b) and the words in parenthesis. They were inserted by the 2006 amendment. The explanatory memorandum concerning the 1999 amendment stated at para 1.167: Item 157 repeals the definition of residential premises and substitutes a new definition. The new definition requires that for land to be considered residential premises it must be intended to be occupied, and capable of being occupied, as a residence. That is, it is permissible to use the land for residential purposes and the land has some facilities ordinarily associated with residences (i.e. water and sewerage). 20 The last sentence may have been intended to explain the whole of the definition as set out in the preceding sentence or only the phrase commencing with the words "and capable of". In the former case it would have the effect of removing the need to consider the intentions of the parties at the time at which premises are let. 21 The second curiosity arises out of s 40-75(1)(a). From the introduction of the GST, the primary criterion for distinction between new and other residential premises has been whether the premises have or have not previously been sold or subject to a long term lease. However the explanatory memorandum accompanying the original bill introducing the GST stated at para 5.167: The supply of real property as residential premises and the supply of residential premises by way of a long-term lease is input taxed to the extent that the residential premises are not: • 'commercial residential premises' such as hotels, motels, etc ('commercial residential premises' is discussed at 6.140); or • newly constructed residential premises. Subsections 40-65(2) and 40-70(2) Therefore the sale of new residential houses by registered businesses (such as builders and developers) and the sale of commercial residential premises will be taxed. 22 Thus it seems that the original intention was that the definition distinguish between newly constructed premises and other premises. However the primary mechanism used to give effect to this intention has been to distinguish between premises which have been previously sold or subject to a long term lease and premises which have not been so sold or leased. As this case demonstrates, that mechanism may not always produce the desired result. 23 The third curiosity also arises out of s 40-75(1)(a). The words "as residential premises (other than commercial residential premises)" follow the words "have not previously been sold as" and precede the words "have not previously been the subject of a long term lease". It may be arguable that the first-mentioned words relate only to a sale and not to a long term lease. In other words the subsection may be construed as providing that residential premises will not be "new" if they have previously been sold as residential premises or have been the subject of a long-term lease, whether or not the lease was for residential use. The definition, in more or less its present form, was first inserted into s 195-1 by the 1999 Amending Act. The explanatory memorandum to that act stated that the new provision defined the expression "new residential premises" to mean: Residential premises that: • have not previously been sold, or been the subject of a long-term lease, as residential premises; ... . Fortunately, it seems that I need not resolve any of the problems inherent in these curiosities.

[11]

OPERATION OF THE GST ACT 24 Division 40 can only be understood in the context of the overall structure of the GST Act. Concerning that matter Stone J, in Sterling Guardian Pty Ltd v Commissioner of Taxation (2005) 220 ALR 550 at [14]-[15], said: 14 … The underlying policy of the legislation is explained in the Explanatory Memorandum (EM) to the Bill that, without relevant amendment, became the GST Act: Broadly speaking, the GST is a tax on private consumption in Australia. The GST taxes the consumption of most goods, services and anything else in Australia, including things that are imported … This is generally achieved by: • imposing tax on supplies made by entities registered for GST; but • allowing those entities to offset the GST they are liable to pay on supplies they make against input tax credits for the GST that was included in the price they paid for their business inputs. 15 The offset of the GST an entity is liable to pay against input tax credits means that although suppliers are responsible for remitting the GST they do not bear its burden. The input tax credit reimburses the supplier for the GST paid on acquisition or importation and the GST remitted is included in the price of what they supply. Consumers, that is purchasers who make an acquisition for consideration other than in the course of the business where they are registered (or required to be registered) for GST purposes, do not get input tax credits so they bear the burden of the GST. The imposition of the GST at each step in the supply chain reflects its character as a value-added tax. The provision for reimbursement at each stage prior to acquisition by the consumer ensures that the ultimate consumer bears the tax, which amounts to 10% of the value-added price. 25 Division 40 effectively exempts an input taxed supply from GST, but also provides that the supplier will not be entitled to input tax credits for things acquired or imported in order to make the supply. The same explanatory memorandum stated, at para 5.164, concerning the supply of residential premises: When you supply residential premises such as houses and flats, the supply will be input taxed to ensure comparable treatment with owner occupiers. No GST will be payable on the supply of residential premises and you are not entitled to input tax credits for your acquisitions that relate to the supply. However, the residential premises will only be input taxed to the extent that the premises are to be used predominantly for residential accommodation. 26 An owner-occupier is generally not liable to pay GST on the supply of his or her residence to another because such supply will not usually be in the course or furtherance of an enterprise for the purposes of the definition of "taxable supply" in s 9-5.

[15]

CONSTRUCTION OF S 40-75 - "NEW RESIDENTIAL PREMISES" 31 If a supply of residential premises is to be input taxed, those premises must not be new residential premises. Residential premises which have previously been sold as residential premises or been "the subject of a long term lease" will not be new premises. The question, then, is whether the relevant premises have been sold or so supplied. As I have said, in construing s 40-75, one must identify precisely that which must be the subject of sale or supply. For present purposes a critical question is the precise meaning of the term "residential premises" in s 40-75. More particularly, the question is as to the meaning of the term "premises" in the definition of "residential premises" in s 195-1. The Shorter Oxford English Dictionary (6th ed, Oxford University Press, 2007) defines the term relevantly as "The houses, lands, or tenements previously specified in a deed or conveyance" or "A house or building with its grounds etc. Also, (a part of) a building housing a business etc". The former definition addresses the use of the term as a drafting device. It is unlikely that it is used in that sense in the GST Act. The better view is that the term is used to denote land and buildings, and that the term "residential premises" should be similarly understood. Whether a relevant Strata Lot will have been, prior to "sale" of the relevant Strata Lot Lease, the subject of a supply by way of long term lease, involves consideration of whether the grant of each Strata Lot Lease by the Council to Gloxinia will be a supply by way of long term lease of the relevant premises, that is the physical apartment comprising the Strata Lot. 32 Gloxinia submits that there can be no supply of the physical premises, and that the supply contemplated, for the purposes of s 40-75, must be of legal rights to the premises. However, in my view, there is nothing unusual or conceptually difficult about describing a person's actions in making physical premises available to another as a supply of those physical premises. In any event, for reasons which appear below, the distinction is of no significance for present purposes.

[16]

GLOXINIA'S INTEREST UNDER THE AGREEMENT FOR LEASE AND THE RESIDENTIAL LEASE 33 In identifying the effect of the grant of the Strata Lot Leases by the Council to Gloxinia one cannot, in my view, neglect the earlier transactions between them. Gloxinia has had possession of the whole of the subject land (retail shopping centre site and strata residential site) since its acquisition of the prior lease in May 1994. Until the Long Term Leases Commencement Date, it also had possession of the car park site. See Agreement for Lease at cl 1.5. The term of the prior lease was to expire on 4 May 2063. Pursuant to the Agreement for Lease the conditions of the prior lease were amended "to the extent necessary" for the purposes of that agreement. See cl 1.2. Pursuant to cl 1.2(c) upon commencement of the Long Term Leases or the Residential Lease, the prior lease was "… automatically surrendered and from that date [had] no further force or effect". Similarly, pursuant to cl 4.5 of the Residential Lease, that lease is to be automatically surrendered upon registration of the Strata Lot Leases and the Strata Common Property Lease. This would seem to abrogate the obligation pursuant to cl 13.1 of the Residential Lease to vacate the premises upon its expiry or earlier termination. 34 Prior to registration of the Strata Leasehold Plan and commencement of the Strata Lot Leases, Gloxinia's rights are held pursuant to the Agreement for Lease and the Residential Lease. I infer from its form that the Residential Lease was to be registered. Assuming such registration, until registration of the Strata Lot Plan and Strata Lot Leases, Gloxinia holds legal rights under the Residential Lease and equitable and contractual rights under the Agreement for Lease. Those rights include possession of the land on which the Strata Lots are being constructed and, as it is built, the structure itself. 35 Assuming compliance with its various obligations to the Council, Gloxinia will be entitled, under the Agreement for Lease and the Residential Lease, to compel the Council to take such steps as are necessary on its part in order to effect registration of the Strata Leasehold Plan, grant the Strata Lot Leases and have them registered, albeit at Gloxinia's expense. It seems that the Council is not entitled to any further payment in consideration of its performance of such obligations other than nominal consideration under the leases and reimbursement of its costs. Gloxinia presently holds the land (including the improvements constructed thereon) and may deal with it pursuant to the terms of the Agreement for Lease and the Residential Lease. Although, after construction and prior to registration of the Strata Leasehold Plan and the Strata Lot Leases, it may be able to sub-let individual Strata Lots, it will not be able to sell them individually. Registration of the Strata Leasehold Plan and the Strata Lot Leases will enable Gloxinia to dispose of individual Strata Lots by sale of the Strata Lot Leases. The Council holds its reversionary interest in the land with improvements thereon, including the structure containing the Strata Lots. There is no reason to doubt that upon completion of the building, the Residential Lease will take effect as an agreement for lease of each of the Strata Lots.

[17]

EFFECT OF THE STRATA LOT LEASES 36 I have previously referred to the fact that pursuant to cl 4.4 of the Residential Lease, the Strata Lot Leases and the Strata Common Property Lease are to commence upon registration of the Strata Leasehold Plan. Pursuant to cl 4.5 the Residential Lease is to be automatically surrendered upon registration of those leases. The term of each Strata Lot Lease is the balance of the 99 year term pursuant to the Residential Lease. In practical terms the effect of registration of the Strata Leasehold Plan and Strata Lot Leases will be to create new real property descriptions for the Strata Lots and the common property and to vest in Gloxinia legal title to the Strata Lot Leases. I have previously pointed out that the obligation upon Gloxinia pursuant to cl 13.1 of the Residential Lease to yield up the premises will be abrogated upon occurrence of the events contemplated in cl 4.5. 37 As far as I can see, the single substantial advantage derived by Gloxinia from registration of the Strata Leasehold Plan and the grant and registration of the Strata Lot Leases is that it will receive the capacity to give legal title to individual Strata Lots by assignment of such leases. No doubt this has marketing advantages and will assist a purchaser in obtaining finance. In other respects, as far as I can see, Gloxinia's legal, equitable and contractual rights after those events will be the same as they were before them. The Council's performance of such acts as are necessary in order to effect registration of the Strata Leasehold Plan and to grant and register the Strata Lot Leases will be performed in discharge of its obligations under the Agreement for Lease and the Residential Lease. Except for the payment of outgoings and the Council's expenses, Gloxinia has, after completion of the building, no significant obligations under the Residential Lease other than to attend to registration of the Strata Leasehold Plan and grant and registration of the various leases. 38 If the proper characterization of the effect of registration of the Strata Leasehold Plan and grant and registration of the Strata Lot Leases is that Gloxinia's leasehold title over the land and improvements is "converted" into numerous leasehold titles over the Strata Lots, without any change in Gloxinia's other legal, equitable and contractual rights, then it is difficult to describe the Strata Lot Leases as "supplying" the relevant premises to Gloxinia. The Council is not able to supply a new term of years for the period contemplated in each of those leases because Gloxinia holds the land and improvements for that same period pursuant to the Residential Lease. It follows that the Council may only effectively grant the Strata Lot Leases if Gloxinia enables it to do so by surrendering its existing interests to the extent necessary to facilitate such grant. In fact cl 4.5 of the Residential Lease contemplates surrender of the Residential Lease only upon registration of the Strata Lot Leases. Even if Gloxinia is implicitly to transfer any of its interest to the Council for the purpose of such re-supply, the Council will hold the transferred interest subject to Gloxinia's contractual and equitable rights pursuant to the Agreement for Lease and the Residential Lease, namely for the purpose of registering the Strata Leasehold Plan and granting and registering the various leases. Whilst the Residential Lease may still exist at law, each Strata Lot is already subject to it as an agreement for lease of such lot, enforceable in equity. However nothing in the Agreement for Lease or the other documentation demonstrates any intention that there be such transfer and re-supply. Further, as previously mentioned, cl 4.2(a) of the Residential Lease speaks of the "conversion" of the Residential Lease into the Strata Lot Leases and the Strata Common Property Lease. 39 Gloxinia's argument seems to assume such a notional transfer of rights by Gloxinia to the Council, and the re-supply of those rights by the Council to Gloxinia. That analysis is similar in principle to that which was rejected by the House of Lords in Abbey National Building Society v Cann [1991] 1 AC 56. The case concerned the acquisition of a registered freehold interest using borrowed funds. Repayment was to be secured by a mortgage over the subject property. After settlement, the purchaser's mother claimed an equitable interest in the property arising out of previous dealings entered into with the purchaser. She also claimed to have occupied the property after purchase and before registration of the mortgage. Pursuant to certain legislative provisions the rights of an occupier took priority over the rights of a subsequently registered mortgagee. The facts of the case are complex and not particularly relevant for present purposes. However one issue in the case was whether, in the case of a purchase using borrowed funds, with repayment secured by a mortgage over the purchased property, there is a notional period of time after settlement and before the charge attaches, a "scintilla temporis" as it is described in the decision. The House of Lords rejected this proposition. Lord Oliver of Aylmerton said at 89: It is argued, however, that because the creation of a charge on property in favour of the society necessarily posits that the chargor has acquired an interest out of which the charge can be created, there must notionally be a point of time at which the estate vested in him free from the charge and in which the estoppel affecting him could be "fed" by the acquisition of the legal estate so as to become binding on and take priority over the interest of the chargee. This is a puzzling problem upon which it is not easy to reconcile the authorities. 40 After an analysis of various conflicting authorities his Lordship observed at 92: One is therefore presented with a stark choice between [the authorities]. Of course, as a matter of legal theory, a person cannot charge a legal estate that he does not have, so that there is an attractive legal logic in the ratio in Piskor's case. Nevertheless, I cannot help feeling that it flies in the face of reality. The reality is that, in the vast majority of cases, the acquisition of the legal estate and the charge are not only precisely simultaneous but indissolubly bound together. The acquisition of the legal estate is entirely dependent upon the provision of funds which will have been provided before the conveyance can take effect and which are provided only against an agreement that the estate will be charged to secure them. … 41 At 93 his Lordship continued: The reality is that the purchaser of land who relies upon a building society or bank loan for the completion of his purchase never in fact acquires anything but an equity of redemption, for the land is, from the very inception, charged with the amount of the loan without which it could never have been transferred at all and it was never intended that it should be otherwise. The "scintilla temporis" is no more than a legal artifice and, for my part, I would adopt the reasoning of the Court of Appeal … . 42 This view found general favour amongst the other Law Lords. The case has been followed at first instance in Australia in Sogelease Australia Ltd v Boston Australia Ltd (1991) 26 NSWLR 1, by the Court of Appeal in New Zealand in Hadlee v Commissioner of Inland Revenue [1991] 3 NZLR 517 and by Eichelbaum CJ in Australian Guarantee Corporation (NZ) Ltd v Nicholson [1996] 1 NZLR 167. 43 In the present case, once it is accepted that Gloxinia's interest arises under the Agreement for Lease, and that the Residential Lease, the Strata Leasehold Plan and the Strata Lot Leases merely give effect to that agreement, it is quite artificial to postulate the transfer to Gloxinia, by the Strata Lot Leases, of anything other than the bare legal title to each lease. For conveyancing purposes, it may sometimes be necessary to contemplate such an artificial construct. However it should not be used to create artificial supplies in order to tax them or, as in this case, to avoid the incidence of taxation. 44 I have concluded that the reference to "residential premises" in s 40-75(1) is to physical premises, in this case the relevant Strata Lot. I conclude that Gloxinia holds that lot pursuant to the Residential Lease. Registration of the Strata Leasehold Plan and grant and registration of the relevant Strata Lot Lease will supply legal title, but nothing more. Those leases may supply legal title to individual Strata Lots but they do not supply the premises constituting each such lot. 45 If I am wrong in my view as to the meaning of the expression "residential premises" in s 40-75, then the subject matter of any relevant supply must be a bundle of rights over each Strata Lot, as Gloxinia submits. However the result will be the same. All of those rights, other than the bare legal title, will be vested in Gloxinia prior to registration of the Strata Leasehold Plan and grant and registration of the Strata Lot Lease. Supply of the bare legal title to Gloxinia, the holder of all other rights in the Strata Lot, can hardly be described as supply of the overall bundle of rights. Whichever interpretation of s 40-75(a) is adopted, the Strata Lot Lease will supply no more than the legal title to the Strata Lot. It follows that prior to its proposed sale, the Strata Lot will not have been the subject of a supply by way of long term lease.

[21]

KENNY J: 47 I agree with Middleton J that the appeal should be dismissed and would make the orders that he proposes. I would do so substantially for the reasons his Honour gives. 48 Broadly, GST is not payable under the A New Tax System (Goods and Services Tax) Act 1999 (Cth) ('the GST Act') on a supply that is input taxed under Division 40: see ss 7-1, 9-5 and 9-30. 49 For present purposes, it suffices to say that the effect of s 40-65 in Division 40 of the GST Act is that a sale of real property will be input taxed if it is a sale of residential premises other than commercial residential premises or new residential premises. Similarly, the effect of s 40-70 is that a supply of real property by way of long-term lease will be input taxed if it is a supply of residential premises other than commercial residential premises or new residential premises. 50 Under s 40-75, new residential premises are residential premises that, relevantly, "have not previously been the subject of a long-term lease". The expression "long-term lease" is defined in part as "a supply by way of lease" for at least 50 years: see s 195-1. As noted elsewhere the term "supply" is broadly defined in s 9-10 and includes a grant or assignment of real property, and a creation, grant or assignment of any right: s 9-10(2)(d) and (e). Under s 195-1, real property includes any interest in or right over land. 51 I refer to the facts as set out in the judgments of Middleton and of Dowsett JJ, which I have read in draft. I shall not repeat them. Under the Residential Lease, Gloxinia had rights and obligations with respect to the development of the land, including the construction of residential units. Also included in these rights was a right to possession of the land and the structure that was to become the units. When Gloxinia surrendered the Residential Lease on the registration of the Strata Leasehold Plan (according to the Residential Lease), Gloxinia acquired another set of leasehold rights with respect to a different subject matter - the strata lots created under the relevant State legislation (i.e., the Strata Schemes Leasehold Development Act 1986 (NSW)). This new set of leasehold rights constituted the Strata Lot Leases granted by the Council to Gloxinia on registration of the Strata Leasehold Plan under that Act. The primary judge found that there was "every reason to expect that the term of each of the Strata Lot Leases will exceed 90 years". This finding was not challenged. 52 When the Council gave Gloxinia the Strata Lot Leases, the Council made a grant or assignment of real property or created or assigned rights, and thus made a supply within s 9-10 of the GST Act, by way of a long-term lease of each of the residential premises that is the subject of a lot in the Strata Leasehold Plan. 53 Accordingly, assignments of the leases of the units to third parties are not taxable supplies since they are to be input taxed under Division 40 of the GST Act. I agree with the primary judge that Gloxinia was entitled to a declaration to that effect. I certify that the preceding seven (7) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Kenny.

[25]

THE GST ACT 58 The legislation was described by the trial judge, although it is convenient to briefly describe its main elements for the purpose of this appeal. 59 Under s 7-1 of the GST Act, GST is payable on taxable supplies. Under s 9-10, a supply is any form of supply whatsoever and includes a grant, assignment or surrender of real property. Under s 195-1, real property includes any interest in or right over land. 60 However, under s 9-5, a supply is not a taxable supply to the extent that it is input taxed. Under s 9-30(2) a supply is input taxed if it is input taxed under Div 40. 61 Subdivision 40-C of Div 40, which consists of ss 40-65 to 40-75, deals with residential premises. Under s 40-65(1) a sale of real property is input taxed, but only to the extent that the property is residential premises to be used predominantly for residential accommodation, regardless of the term of occupation. However, under s 40-65(2) the sale is not input taxed to the extent that the residential premises are new residential premises. Similarly, under s 40-70(1), a supply is input taxed if the supply is of real property, but only to the extent that the property is residential premises to be used predominantly for residential accommodation, regardless of the term of occupation, and the supply is by way of long-term lease. Again, under s 40-70(2) the supply is not input taxed to the extent that the residential premises are new residential premises. 62 Section 40-75(1) provides that: (1) Residential premises are new residential premises if they: (a) have not previously been sold as residential premises and have not previously been the subject of a long-term lease; or (b) have been created through substantial renovations of a building; or (c) have been built, or contain a building that has been built, to replace demolished premises on the same land. 63 However, under s 40-75(2), the premises are not new residential premises if, for the period of at least five years since the premises first became residential premises or were last substantially renovated or were last built, the premises have only been used for making supplies that are input taxed because of s 40-35(1)(a). Section 40-35(1)(a) relevantly provides that a supply of premises that is by way of lease, hire or licence is input taxed if the supply is of residential premises. 64 Under s 195-1, residential premises are land or a building that is occupied as a residence or for residential accommodation or is intended to be occupied, and is capable of being occupied, as a residence or for residential accommodation. Section 195-1 also provides, relevantly, the definition of a long-term lease, namely: Long-term lease means a supply by way of lease, hire or licence (including a renewal or extension of a lease, hire or licence) for at least 50 years… 65 Importantly for the purposes of this appeal, the term 'supply' is a term that is defined in s 9-10 of the GST Act. Section 9-10 provides: 9-10 Meaning of supply (1) A supply is any form of supply whatsoever. (2) Without limiting subsection (1), supply includes any of these: (a) a supply of goods; (b) a supply of services; (c) a provision of advice or information; (d) a grant, assignment or surrender of *real property; (e) a creation, grant, transfer, assignment or surrender of any right; (f) a *financial supply; (g) an entry into, or release from, an obligation: (i) to do anything; or (ii) to refrain from an act; or (iii) to tolerate an act or situation; (h) any combination of any 2 or more of the matters referred to in paragraphs (a) to (g). Real property includes a lease.

[26]

FACTUAL BACKGROUND 66 The factual background is not in dispute. 67 Gloxinia is a company incorporated under the law of the British Virgin Isles and is the trustee of the Gloxinia Unit Trust. Gloxinia carries on a business of property investment. At the time of the trial, it was engaged in the development of a site situated at Double Bay, New South Wales ('the Site'). As at October 2007, the improvements on the Site consisted of a hotel, a public car park, community facilities and the Cosmopolitan Centre Retail Area. 68 The Site is owned by Woollahra Municipal Council ('the Council'). A lease of the Site was granted by the Council to Double Bay Shopping Centre Pty Ltd on 20 January 1969 for a term expiring on 4 May 2063 ('the Existing Lease'). By successive transfers, the Existing Lease was transferred to PT Limited, Permanent Trustee Company Ltd and, by transfer of 11 May 1994, to Gloxinia. 69 On 22 October 2007, Gloxinia entered into an agreement for lease with the Council ('the Agreement for Lease'). The Agreement for Lease provides for the consideration payable by Gloxinia to the Council. Part of the consideration has been paid and the Council issued a tax invoice to Gloxinia in respect of the monetary consideration. The tax invoice included GST. 70 Pursuant to the Agreement for Lease, the Council agreed that, subject to Gloxinia complying with its obligations under the Agreement for Lease in relation to the Works, as defined, and registering the Plan of Subdivision, as defined, the Council would grant and Gloxinia would accept the Retail Lease, as defined, and the Residential Lease, as defined. The Residential Lease is a lease of the Residential Lot, as defined, in the form of lease annexed to the Agreement for Lease. Residential Lot is defined as proposed stratum lot 3 in a plan of subdivision in the form of the plan annexed to the Agreement for Lease. The term of each of those leases is to be 99 years. 71 Under the Agreement for Lease, Gloxinia may, at its own cost, subdivide or consolidate the Site by one or more plans of subdivision and may develop the Site in stages. 72 Provision is made in the Agreement for Lease for the Council and Gloxinia to take all steps necessary to effect the registration of the proposed plan of subdivision. Gloxinia is required to undertake the development in a staged manner, although Gloxinia may undertake the Works contemporaneously. The Works consist of the Retail Works, the Car Park Works and the Residential Works. The final stage of the Works consists of the Residential Works. On completion of the Retail Works and the Car Park Works, Gloxinia must surrender the Existing Lease and the Council will then grant to Gloxinia the Retail Lease and the Residential Lease. 73 The trial judge observed that, in accordance with the Residential Lease, Gloxinia has demolished part of the improvements on the Site and was constructing the Residential Works, consisting of a complex of 28 residential units above the Retail Works and the Car Park Works in the stratum that will be the subject of the Residential Works. 74 The trial judge went on to observe that upon completion of the Residential Works, Gloxinia will subdivide its leasehold interest under the Residential Lease into individual strata lots. Under the Residential Lease, when a strata leasehold plan is registered in respect of the Residential Lot, namely Lot 3, Gloxinia will surrender the Residential Lease and the Council will grant leases to Gloxinia over each of the 28 individual residential strata lots in that strata leasehold plan. Those leases are described as Strata Lot Leases in the Agreement for Lease. The owner's corporation will be granted a lease of the common property in that strata leasehold plan. 75 The Residential Lease provides that the Strata Lot Leases will commence upon registration of the Strata Leasehold Plan and will have a term equal to the unexpired term of the Residential Lease. Thus, as the trial judge indicated, there is every reason to expect that the term of each of the Strata Lot Leases will exceed 90 years. 76 Finally, the trial judge found that Gloxinia intended that, after completion of the Residential Works and the grant of the Strata Lot Leases by the Council, it would sell to third party purchasers each of the residential premises that were the subject of a lot in the proposed strata leasehold plan. Gloxinia intended that the sale of each lot would be pursuant to a contract for sale that was substantially identical to a contract for the sale of land dated 14 August 2008 between Gloxinia as vendor and Vicki Vidor as purchaser in respect of Apartment 5F in the proposed residential development. On completion of each such contract for sale, Gloxinia would assign to the purchaser the Strata Lot Lease granted to it by the Council in respect of the unit that was to be the subject of the contract for sale. 77 It seems to me that the important matter to appreciate from the above set of transactions is the difference between the position before and after the grant of the Strata Lot Lease. Under the prior transactions (including the Agreement for Lease and Residential Lease), Gloxinia had rights and obligations with respect to the development of the site, and the site did not have the Premises constructed upon it. The strata unit building was to be constructed after the entering into of the Residential Lease and before the registration of the Strata Leasehold Plan. After the grant of the Strata Lot Lease, Gloxinia had additional rights and obligations with respect to the strata title to be created. It is in this context the submissions of the Commissioner should be viewed.

[27]

SUBMISSIONs OF THE COMMISSIONER 78 The Commissioner's principal submission was that in characterising the transaction involving the grant of the Strata Lot Lease, the Court should approach the matter from a practical and business point of view and consider the 'social and economic reality' of the transaction: see Westley Nominees Pty Ltd v Coles Supermarkets Australia Pty Ltd (2006)152 FCR 461 at 477 [59]; Saga Holidays Ltd v Commissioner of Taxation (2006) 156 FCR 256 at 268[43]; Brady King Pty Ltd v Commissioner of Taxation (2008) 168 FCR 558 at 564 [30]. 79 Further, the Commissioner submitted that in characterising transactions and construing the relevant provisions of the GST Act, regard should be had to the context and apparent statutory purpose of the provisions in the GST Act and 'the mischief which the statute was designed to overcome and the objects of the legislation': see CIC Insurance Ltd v Bankstown Football Club Ltd (1997) 187 CLR 384 at 408. 80 It was submitted by the Commissioner that if approached this way, the grant of the Strata Lot Lease could not be characterised as a supply of the Premises to Gloxinia by way of lease for at least 50 years because Gloxinia already possessed the land held under arrangements entered into before the grant of the Strata Lot Lease. It was submitted that the grant of the Strata Lot Lease was merely part of the process of the subdivision of Gloxinia's leasehold interest. It followed then that when Gloxinia sold the Premises, it would sell 'new residential premises' because the Premises have not previously been the subject of a long-term lease. 81 The Commissioner submitted that the wrong question was asked by the trial judge. The wrong question posed by the trial judge was whether the Strata Lot Lease was a lease with a term of at least 50 years? The Commissioner submitted that the answer to that question would obviously be in the affirmative on the facts before the trial judge. 82 The Commissioner submitted that the proper question to ask was whether the Strata Lot Lease amounted to the supply of the Premises by way of lease for at least 50 years? It was submitted that having asked himself the wrong question, the trial judge took an unduly narrow approach to the relevant transaction that fell to be characterised, and failed to focus on the importance of the need for there to be a supply of the Premises by way of the long-term lease.

[28]

CONSIDERATIONS 83 Only the supply of 'new residential premises' can be a taxable supply. The plain object of Subdiv 40-C of the GST Act is to make a supply of residential premises that has been previously the subject of a long-term lease input taxed. That is because the premises are, by definition, not 'new residential premises'. 84 In the present case there is no dispute that the Strata Lot Lease is itself a 'long-term lease'. 85 I accept that, as the Commissioner submitted, the central issue is whether the Premises had previously been the subject of a supply by way of a long-term lease. 86 I have already referred to the definition of supply in s 9-10(1) of the GST Act. 87 Subsection 9-10(1) indicates that a narrow or restricted interpretation is not intended by the notion of supply and in particular it does not permit, unless the particular context of the provision in question requires it, any restriction to what was posited as physical supply as opposed to other forms of supply. Furthermore, s 9-10(2), without limiting the forms of supply which are within the definition of supply, provides specific inclusions; for example, a grant or assignment of real property (s 9-10(2)(d), and a creation, grant, transfer, assignment or surrender of any right (s 9-10(2)(e)). 88 The Strata Lot Lease, that which was given to Gloxinia, as the developer, by the Council, was either the creation or assignment of a right, or the grant or assignment of real property within the meaning of the term "supply". 89 Especially in the written submissions, the Commissioner sought to elevate the 'social and economic reality' of the transaction over its strictly legal form and effect. In these submissions and orally at the hearing, the Commissioner submitted that the Council's grant of the Strata Lot Leases was merely the subdivision of a leasehold interest that Gloxinia in fact already held. The Commissioner submitted that there was in fact no supply of the 'physical premises'. 90 It was not contended by the Commissioner that the grant of Strata Lot Leases was a sham or subject to any tax avoidance legislative provisions. 91 The Court cannot ignore the legal effect of the grant of the Strata Lot Leases by the Council. 92 Nothing in any of the cases referred to by the Commissioner, including Brady King (2008) 168 FCR 558, dictates that the Court should ignore the legal effect of the transactions involved, particularly the grant of the Strata Lot Lease. 93 In this case, references to 'social and economic reality' or 'practical and business' points of view do not assist in resolving the issue in dispute because the meaning of the relevant statutory provisions is clear. The supply of rights affected by the grant of the Strata Lot Leases resulted in change of the juristic rights entitling Gloxinia to the use and occupation of the Premises. Undoubtedly, the arrangements between Gloxinia and the Council prior to the Strata Lot Lease involved the development of the site and the giving of a possessory right to Gloxinia to the site itself. However, the GST Act does not just focus attention on the physical aspects of the premises, but specifically includes within the notion of "supply" juristic concepts. The supply is the creation in law of a strata lot in accordance with the Strata Schemes Leasehold Development Act 1986 (NSW). This affords Gloxinia additional rights, including the capacity to give legal title to third parties of individual strata units. 94 On the above analysis, it is impossible to reach a conclusion other than the one ultimately reached by the trial judge, namely that the Premises were the subject of a long-term lease, i.e., the Strata Lot Lease.

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