DB Rreef Funds Management Ltd v Commissioner of Taxation

Federal Court of Australia|2005-04-29|Before: Sackville J

the proceedings 1 The Goods and Services Tax ('GST') is a broad-based indirect tax, which replaces the wholesale sales tax and a number of State and direct taxes. The GST was introduced by A New Tax System (Goods and Services Tax) Act 1999 (Cth) ('GST Act'), which received the Royal Assent on 8 July 1999 and commenced on 1 July 2000. GST is payable on a 'supply' or 'importation' to the extent that it is made after 1 July 2000: A New Tax System (Goods and Services Tax Transition) Act 1999 (Cth) ('GST Transition Act'), s 7(1). 2 The Explanatory Memorandum for the GST Act characterises the GST as 'a tax on private consumption in Australia'. According to the Explanatory Memorandum, the GST is 'effectively borne by consumers when they acquire anything to consume' and suppliers of goods and services 'do not bear the GST because the tax is included in the price of what they supply'. 3 The introduction of the GST required Parliament to give consideration to the application of the new tax to subsisting transactions. What was to happen under agreements which were entered into before the GST regime came into force, but which set the price of goods and services supplied after 1 July 2000? Was GST to apply in such situations? If so, who was to bear the burden of GST in the absence of an agreement specifically addressing the issue? 4 The present case involves such an agreement. In 1998, the predecessor in title of the applicant ('Rreef') leased eighteen floors of an office building in Melbourne (the 'Office Space'), together with storerooms and a car park area (together 'the Premises'), to a tenant 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. For reasons that will be explained, the rental payable by the tenant in effect has remained constant since 1997, despite provision being made for a review of rent on each biennial renewal of the Subject Lease. 5 The respondent ('the Commissioner') says that Rreef is liable to pay GST in respect of the 'supply' of the lease for each of the renewed terms. Rreef says that the supply of the lease is GST-free, at least until 1 July 2005 when, on any view, the GST Act imposes GST on rental 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. 6 The issue arises in two proceedings that are before the Court. Each is an appeal pursuant to s 14ZZ(a)(ii) of the Taxation Administration Act 1953 (Cth) (TA Act) against an 'appealable objection decision' of the Commissioner made on 16 January 2004. By each decision, the Commissioner disallowed Rreef's objection against an assessment made by the Commissioner pursuant to s 22(1) of the TA Act of the 'net amount' within the meaning of the GST Act. The first decision related to the tax period 1 March 2002to 31 March 2002 (NSD 351 of 2004), while the second related to the tax period 1 March 2003 to 31 March 2003 (NSD 352 of 2004). 7 In the first period Rreef received from IBM, pursuant to the lease as renewed in 2001, $876,645 as rent for the Office Space and $180,921.57 as a contribution to operating costs. The assessment was for GST on both amounts, totalling $96,142.42 ($79,695 in respect of the rent and $16,447.42 in respect of the contribution). The assessment of GST was calculated as one eleventh of the combined rent and contribution. The amounts in dispute are very similar for the second period. The amount of GST in dispute, if calculated for a period of twelve months, is therefore in the order of $1.2 million. 8 The parties agree that the resolution of the dispute turns on the construction of s 13 of the GST Transition Act. Section 13 provides what has been described as a 'safe harbour rule' for agreements made before 8 July 1999, the day on which the GST Transition Act received the Royal Assent. Section 13 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.' 9 The specific issue upon which the case is said to turn is whether Rreef, as the 'supplier under the agreement', had a 'review opportunity' arising under the Subject Lease. The Commissioner asserts, and Rreef denies, that Rreef as the supplier under the Subject Lease had an opportunity under the Subject Lease to conduct a 'general review … of the consideration' (s 13(5)(b)) in 2001 and 2003, when a renewal of the lease occurred by exercise of the option conferred in the Subject Lease. 10 The unusual feature of the case is that the nominal rental fixed under the Subject Lease in 1997 was very much higher than the market rent at the time. 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). 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 has 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. SOME COMMON GROUND AND SOME QUERIES 11 The case was argued on the basis that s 13(1)(a) of the GST Transition Act applies to the Subject Lease. In their written submissions the parties accepted that the Subject Lease is a written agreement which: (a) specifically identifies a 'supply', namely the grant of an interest in the Premises; (b) specifically identifies the consideration in money, or a way of working out the consideration, by specifying the annual rent and a means of reviewing the rent; and (c) was made before the date of Royal Assent to the GST Transition Act, namely 8 July 1999. 12 The way in which the oral argument proceeded suggested to me that the parties may have assumed that the Subject Lease was still in force when the options to renew were exercised in 2001 and 2003. After the hearing, I formed the view that if the parties had made this assumption, it appeared to be incorrect. At common law, the exercise of an option to renew in a lease brings into existence a new lease; it does not simply extend the term of the existing lease: Gerraty v McGavin (1914) 18 CLR 152, at 163, per Isaacs J; Newcrest Mining (WA) Ltd v Commonwealth (No 2) (1993) 46 FCR 342, at 419, per French J. In any event, as the recitation of the facts will show, the parties entered into successive Deeds of Renewal of Lease following exercise of the options. I invited the parties to make further submissions on this point. 13 On 23 February 2005, the parties forwarded a joint submission in response to the invitation. The submission accepted that a new lease was granted on the exercise of each option to renew. It continued as follows: '4. Section 13(1) of the [GST] Transition Act provides that s 13 applies where two requirements are satisfied. First there must be "a written agreement which specifically identifies a supply and identifies the consideration in money, or a way of working out the consideration in money, for the supply". It will be seen that the subject supply must be identified by the written agreement - it is not necessary that the subject supply be "under" that written agreement. Second, that agreement must have been made before, relevantly, 8 July 1999. 5. So far as the supplies in the first tax period and second tax period were concerned, the [Subject Lease] was such an agreement: ACP Publishing Pty Limited v [Commissioner of Taxation [2004] FCA 824] ATC 4734; 56 ATR 245, at [22], [25], [31]. 6. Section 13(5) then goes on to define "review opportunity", for a written agreement falling with s 13(1), to mean "an opportunity that arises under the agreement" which falls within any of (a), (b) or (c). The word "under", in the context in which it appears, directs attention to the source of the rights and obligations of the parties which constitute the relevant opportunity: see [Commissioner of Taxation] v Sara Lee Household and Body Care (Aust) Pty Ltd (2000) 201 CLR 520 at [42]. The source of the rights and obligations of the parties in respect of any rent review was the [Subject Lease]. The bargain in 1998 was that cl C13 be incorporated in a new lease on renewal (cl C14.8). No new bargain was made upon the unilateral exercise of the put options. In context, the question is then whether the bargain made in the [Subject Lease] permitted the supplier a review opportunity, albeit during a later term and when acting under corresponding provisions of the later lease. 7. The treatment of the [Subject Lease] as the written agreement for the purposes of s 13(1) is not anomalous or inconsistent with the purpose underlying s 13. The terms of a written agreement are either the starting point … or the only basis … for determining whether a review opportunity has arisen. The terms of the leases arising from the exercise of the options to renew (post the introduction of GST) in 2001 and 2003 were required to correspond with the terms of the [Subject Lease], subject to limited modifications not presently relevant, by operation of clause C14.8 of the [Subject Lease]. In other words the provisions of the leases arising from the renewals in 2001 and 2003 were determined by a bargain struck and recorded in a written agreement [Subject Lease] before the introduction of the GST legislation and the date the GST legislation received Royal Assent and not by a bargain struck by the parties after those dates.' 14 In ACP Publishing, Dowsett J held (in accordance with the Commissioner's submission in that case) that s 13(1) of the GST Transition Act does not require the relevant supply to be made 'under the written agreement'. Given the decision in ACP Publishing, the parties' construction of s 13(1)(a) of the GST Transition Act appeared to be correct. However, at the time the present case was argued, the decision in ACP Publishing was the subject of an appeal to the Full Court. The parties indicated that they would have no objection to the judgment in the present case awaiting the outcome of the appeal in ACP Publishing. They took this approach on the basis that if the judgment of the Full Court happened to cast doubt on the parties' joint submission, further submissions could be sought. 15 It will be seen from the joint submission that the parties took the view that Rreef's right to initiate rent reviews in 2001 and 2003 arose 'under the Subject Lease' for the purposes of s 13(5) of the GST Transition Act. In a subsequent further written submission, Mr Gageler SC, who appeared with Mr Richmond for the Taxpayer, said that although new leases had come into effect in 2001 and 2003 on the exercise of the options to renew, the contractual terms of the Subject Lease had not been subsumed by the Deeds of Renewal. For this reason, the Taxpayer accepted that any opportunity to review the rent of the Premises arose 'under the Subject Lease'. 16 The Commissioner also filed a supplementary submission. Mr Logan SC, who appeared with Mr Marks for the Commissioner, supported the parties' joint position by reference to the reasoning of the High Court in Griffith University v Tang (2005) 213 ALR 724, a case concerned with the expression 'under an enactment'. He contended that a supplier of a lease has an opportunity 'under' the original lease, if the terms of that lease have played a relevant part in affecting or effecting the opportunity, even though the opportunity might also be said to arise under the terms of a renewed lease. 17 The parties were also in agreement that there was but a single supply under each of the Subject Lease and the renewed leases. That supply was said to be the grant of a lease of the Premises (GST Act, s 9-10(2)(d)) for an aggregate consideration. Since the supply was made after 1 July 2000 (notwithstanding that the 'opportunity' arose under the Subject Lease), GST was payable unless the supply was GST-free pursuant to s 13 of the GST Transition Act. 18 The Full Court delivered its judgment in ACP Publishing Pty Ltd v Commissioner of Taxation on 13 April 2005: [2005] FCAFC 57 ('ACP Publishing (FC)'). By majority, the appeal was dismissed (Hill and Finn JJ; Gyles J dissenting). Two members of the Court appear to have taken the view that s 13(1) of the GST Transition Act contemplates that the relevant supply must be under the written agreement made before 8 July 1999: see at [33], per Hill J; at [71], per Gyles J. 19 In view of the observations made by Hill and Gyles JJ, I inquired of the parties whether they still wished me to proceed on the basis outlined in their letter of 23 February 2005. The parties replied as follows: 'If, contrary to the submission made by the parties in their letter of 23 February 2005, s 13(1) of the [GST] Transition Act, on its true construction, requires that the relevant supply be made "under" the agreement that identifies the consideration, the result in this case is no different, as there is no dispute between the parties that the 2001 and 2003 leases were each supplied "under" the [Subject Lease]. Even on this construction of s 13(1), the dispute between the parties continues to be whether a "review opportunity" for the purposes of s 13(5) arose "under" the [Subject Lease].' 20 In my opinion, the position jointly adopted by the parties is arguable. In these circumstances, it is appropriate for me to proceed on the basis of their joint position: cf Australian Communication Exchange Ltd v Deputy Commissioner of Taxation (2003) 201 ALR 271, at 281 [41], per McHugh, Gummow, Callinan and Heydon JJ.

the legislation 21 Although the case turns on s 13 of the GST Transition Act, it is useful to outline the essential features of the GST regime established by the GST Act and the GST Transition Act.

GST Act 22 GST is payable, relevantly, on 'taxable supplies': ss 7-1(1). A person must pay the GST on any taxable supply made by that person: s 9-40. Entitlements to input tax credits arise on 'creditable acquisitions': s 7-1(2). 23 Amounts of GST and amounts of input tax credits are set off against each other to produce a net amount for a tax period: s 7-5. Every entity that is registered, or required to be registered, has tax periods applying to it: ss 7-10, 23-5. The tax periods may be quarterly or monthly, depending on the circumstances: ss 27-5, 27-10, 27-15. The net amount for a tax period is the amount that the entity must pay to the Commonwealth, or the Commonwealth to the entity, in respect of the period: s 7-15. 24 A registered person makes a taxable supply if he or she makes the supply for consideration and the supply is made in the course of an enterprise that is carried on: s 9-5. However, the supply is not a taxable supply to the extent that it is GST-free: s 9-5. A supply is 'GST-free' if, inter alia, it is GST-free under a provision of another Act: s 9-30(1). This of course includes the GST Transition Act. 25 The term 'supply' includes a grant of an interest in real property: s 9-10(d). The amount of GST on a taxable supply is 10 per cent of the value of the taxable supply: ss 9-70, 9-75. Section 9-75 specifies a formula for calculating the value of a taxable supply. The formula requires the gross price payable on the supply (without any discount for GST payable on the supply) to be multiplied by 10/11. The product of this formula plus 10 per cent of the amount so derived, equals the price. 26 A person is entitled to the input tax credit for any 'creditable acquisition' he or she makes: s 11-20. Generally speaking, the amount of the input tax credit for a creditable acquisition is an amount equal to the GST payable on the supply of the thing acquired: s 11-25. 27 A registered person makes a 'creditable acquisition' if that person acquires anything for a 'creditable purpose', the supply of the thing to the person is a taxable supply, and the person provides consideration for the supply: s 11-5. An 'acquisition' is defined to mean any form of acquisition and includes the acceptance of a grant of an interest in real property: s 11-10(1), (2)(d). Subject to certain exceptions, a thing is acquired for a 'creditable purpose' to the extent that it is acquired in carrying on an enterprise: s 11-15(1). Thus a person acquiring something for consumption does not acquire it for a creditable purpose.

GST Transition Act 28 Section 6 of the GST Transition Act deals with the time of supply or acquisition. It provides that a supply or acquisition of real property is made when the property is made available to the recipient: s 6(3). GST is, however, only payable on a supply to the extent that it is made on or after 1 July 2000: s 7(1). 29 Part 3 of the GST Transition Act is concerned with 'agreements spanning 1 July 2000'. Section 12 applies if a person makes a supply under an agreement that provides that the thing is to be supplied for a period and that period begins before 1 July 2000 and ends on or after that date: s 12(1). If s 12 applies, the supply is taken, for the purposes of the Act, to be made continuously and uniformly throughout the period: s 12(2). For the purposes of s 12, a supply by way of lease is taken to be a supply for the period of the lease: s 12(3). To the extent s 12 has an effect in relation to a supply, it has a corresponding effect in relation to the acquisition to which the supply relates: s 12(6). 30 Section 13 of the GST Transition Act has been reproduced earlier in this judgment (see [8] above). The GST Transition Act does not define some of the key terms used in s 13(5)(b), namely 'opportunity', 'general', 'review', 'renegotiation' or 'alteration'. However, the word 'consideration' is broadly defined and includes any payment in connection with the supply of anything: GST Act, s 9-15(1)(a); GST Transition Act, s 5(2). 31 The parties have taken the view that s 12 of the GST Transition Act is not relevant to this case. They have taken that view because (they say) the relevant supplies (the grants of fresh leases) were made after 1 July 2000. Accordingly, s 12 of the GST Transition Act has no application to the question of whether GST applies to rental paid in March 2002 and March 2003. This is said to be consistent with their position that s 13(1) applies to the Subject Lease.

the course of events 32 On 14 June 1991, National Australia Trustees Ltd ('NAT'), the then trustee of the Southgate Trust, entered into an agreement to lease to IBM Australia Ltd ('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'). 33 The Agreement for Lease provided that the annual rent payable in respect of the 'Office Space' was to be $420 per square metre (cl 9), although it provided for an abatement of rent for the first two months of the term of the lease (cl 19). 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 (cl 3.6). 34 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. 35 The Second Construction Agreement required IBM, as lessee, to provide the design and documentation of certain 'Works'. The cost of the design, development and 'correction' in accordance with the Second Construction Agreement was to be paid by NAT and IBM, respectively, as stipulated in that agreement. 36 NAT and IBM executed Deeds of Variation on 19 December 1992, 30 August 1993 and 7 February 1994. These amended the Agreement for Lease, the First Construction Agreement and the Second Construction Agreement in a variety of ways. The first Deed of Variation made elaborate provision for a further abatement of rent in the event that the cost limit specified in the Agreement for Lease exceeded the actual cost of the works. There was no evidence as to whether there was in fact a further abatement of the rent. 37 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 I have noted, comprised the Office Space, a car park and storerooms. The annual rental was said to be $10,519,740 for the Office Space; $97,920 for the car park; and $7,770 for the storerooms. 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. However, provision was made for abatement of rent in the circumstances addressed in the Deeds of Variation. 38 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. 39 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 rental as the 1994 Lease. 40 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. 41 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. 42 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' 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 storage 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. 43 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. 44 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 and Second Construction Agreements. No provision was made in the Subject Lease for any abatement of rent. 45 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 rental for the Office Space, car park and storage rooms remained unchanged from that applicable immediately prior to the renewal. 46 The Subject Lease was also renewed on 24 January 2001 and 24 January 2003, in each case apparently by the lessor exercising the option. (There appears to be a typographical error in the 2003 Deed of Renewal.) 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. 47 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 rental 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. 48 The 2002 Deed of Renewal stated that the two year lease was to be 'with the benefit of the Lessee's and Lessor's covenants and conditions as are contained in the Lease'. The 'Lease' was defined to mean the '[Subject] Lease as renewed by the 1999 Lease and as renewed and amended by this Deed'. However, the 2002 Deed of Renewal also provided for certain amendments to cl C14.8 of the Lease. 49 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 50 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 and 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. 51 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. 52 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'). 53 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 rental 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 rental 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 rental 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. 54 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.) 55 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 rentals agreed on a rent review.

rental values 56 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. 57 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 rental provided for in the Subject Lease was substantially above the market rental 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. 58 Rreef read an affidavit from a valuer, Mr Jackson. Mr Logan 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. I think that the evidence is relevant to the issues and thus should be admitted. There was no challenge to the evidence. 59 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.' 60 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 rental levels 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. 61 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.' 62 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 rental of $420 per square metre per annum for the Office Space under the Subject Lease equated to a net effective rental 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 rental over the term of the lease. 63 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 rental provided for in the Subject Lease was 75 per cent higher than comparable market rental. He attributed the 'inflated' face rental to the Lessor's desire to recoup the substantial incentive it granted at the commencement of the lease. 64 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 rental of $420 per square metre under the renewed lease was about 61.5 per cent higher than the market rental. In January 2003, the market rental for comparable office space was about $275 per square metre per annum. Thus the face rental of $420 per square metre under the lease renewed that year was 52.7 percent higher than the comparable market rent. 65 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. This evidence confirmed the commercial soundness of Mr Maglione's decisions not to invoke the rent review clause in 2001 and 2003.

an opening flourish 66 Mr Gageler commenced his oral submissions by pointing out 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. Mr Gageler 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 rental it is required to pay. 67 Mr Logan's response was that Mr Gageler's analysis of the economic effects of the case was irrelevant and 'supremely distracting'. He said that the Commissioner's interest was simply in administering the legislation according to law.

rreef's contentions 68 Rreef submitted that it did not have an opportunity 'to conduct … a general review … of the consideration' within the meaning of s 13(5)(b) of the GST Transition Act. Mr Gageler contended that the words used in s 13(5)(b)should be given their ordinary meaning having regard to the context and the purpose of the legislation. In particular, he argued that the word 'opportunity' should be read as limited to the situation where 'there exists a coalition of circumstances which by operation of the agreement allow or permit a general review to occur'. In other words, in order for there to be an 'opportunity' of the kind envisaged by s 13(5)(b), it must be one that is 'real or of value, and not merely illusory'. 69 The expression 'general review' so Mr Gageler contended, should be construed as referring to a mechanism for review that 'is general as distinct from specific or limited'. A review, renegotiation or alteration of the consideration could not be 'general' if the methodology used to conduct it is 'artificially constrained'. It followed that a rent review clause that does not entitle the lessor/supplier to take account of the imposition of the GST does not provide an opportunity to conduct a general review of the rent. Otherwise, a supplier could have its income effectively reduced by ten per cent because it would be unable to pass on GST to the recipient of the taxable supply. 70 Mr Gageler submitted that Rreef had not had any 'review opportunity' within the meaning of s 13(5) of the GST Transition Act on either of the renewal dates (24 January 2001 and 24 January 2003) for three alternative reasons. 71 First, the market rent review procedure set out in cl C13 of the Subject Lease did not provide an 'opportunity' to conduct a general review of the consideration, because the only possible outcome of the review was that the rent for the Office Space would remain unchanged. Because of the level of the market rent at the renewal dates and the ratchet provision in the Subject Lease (cl C13.6), Rreef had no entitlement under the Subject Lease to conduct a review which would take into account GST on the consideration payable for the Office Space. Thus nothing of value to Rreef could come out of the review procedure and it could not recoup the cost of the GST from the lessee. Such a result, so Mr Gageler argued, is not consistent with the intent of s 13, which is designed to ensure that a supplier is not liable for GST unless it is able to pass on the GST to the recipient of the supply. 72 Secondly, cl C13 of the Subject Lease did not provide for a 'general' review of the rent. Clause C13.7 directed the valuer to compare the 'face rental' of the Premises with the 'effective rental' of comparable premises. As the expert evidence showed, this direction, when combined with the 'ratchet' provision, required the market value of the Premises to increase by an artificially large amount before the rental could rise to a level that enabled Rreef to recoup the GST. 73 This argument seemed to involve two related strands. One was that there could be no 'general review' of the consideration for the Premises unless the impact of the GST in the rent could be passed on to the lessee. Since the constraints imposed on the valuer by cl C13.7 of the Subject Lease did not permit the GST to be passed on to IBM, the review could not be characterised as 'general'. 74 The other strand emerged, or at least was refined, in oral argument. The contention, as I followed it, was that there could not be a 'general review … of the consideration' for the Premises unless the valuer, in 2001 and 2003, could compare 'like with like'. Clause C13.7 did not permit such a comparison, as it provided for a determination of the effective market rent. By contrast, the 'face rental' specified in the Subject Lease was not the effective market rent, but a nominal rental that incorporated the amortised cost of the fit-out works undertaken by NAT pursuant to the First Construction Agreement. Mr Gageler pointed particularly to cl C13.7(g) of the Subject Lease which directs the valuer to ignore any concession or incentive allowed to the lessee at the time of the 1994 Lease, thereby requiring the valuer to determine the market rent of the Office Space without regard to the cost of the fit-out undertaken by the lessor. Implicit in this argument is the proposition that there could not be a general review of the consideration (which Mr Gageler identified as the rental payable pursuant to the renewed leases) unless it was conducted by reference to the same criteria that produced the consideration specified in the Subject Lease. 75 Thirdly, Rreef contended that if there had been an opportunity for a general review of the consideration, it did not relate to the whole of the consideration, but only part. This was said to be because the Subject Lease contained no mechanism for a general review of IBM's contribution to Operating Costs (even though that contention would seem to include a component for GST, since it was a reimbursement of expenses actually incurred). The point, however, was not developed in oral submissions. In these circumstances, it need not be referred to further.

commissioner's contentions 76 The Commissioner submitted that s 13 of the GST Transition Act is concerned with whether an opportunity of a particular kind has arisen, not with the outcome of a lessor availing itself of that opportunity. Mr Logan contended that s 13(5) of the GST Transition Act, in particular, is concerned with a review that permits GST to be taken into account; it is not concerned with the outcome of that general review. A 'general review', so he contended, is not the same as an unlimited review. The language of cl C13.7 of the Subject Lease in no way prevented the net effect of the imposition of GST to be taken into account in determining the market rent of the Premises. 77 Mr Logan said that s 13 of the GST Transition Act does not reflect an assumption that during a transitional period a supplier would always pass on to the recipient of a supply the burden of GST imposed on a supplier. All that s 13 contemplates is that the burden of GST is one factor that can be taken into account.

section 13 of the gst transition act 78 It is convenient to commence with some observations about the drafting of s 13 of the GST Transition Act. 79 First, it is important to appreciate what s 13 does not do. Parliament might have chosen to ensure that each supplier of goods or services could always pass on the cost of the GST to the recipient of those goods or services, regardless of the terms of any agreement between the supplier and the recipient. Something like this was done in s 70B(1) of the Sales Tax Assessment (No 1) Act 1930 (Cth), which allowed a contractor to pass on to a customer any increase in sales tax on materials in consequence of an alteration in the law unless it was 'clear from the terms of the contract that the alteration of the law [had] been taken into account in the contract price'. 80 The GST Transition Act does not take this approach. Instead, s 13 provides that certain supplies identified in the section are to be GST-free for a period - that is, until 1 July 2005, or the date a 'review opportunity' arises, whichever is earlier. Section 13(1) states that the section applies if a written agreement: (i) specifically identifies a supply; (ii) identifies the consideration in money, or a way of working out the consideration in money,for the supply; and (iii) was made before 8 July 1999. 81 It follows from s 13(1) of the GST Transition Act that a supply of goods or services under an oral agreement cannot be GST-free by virtue of s 13(2). Similarly, a supply of goods or services under a written agreement that does not identify the consideration in money (or a way of working out the consideration in money) is not GST-free under s 13(2). Thus a supply pursuant to an agreement that provides for a consideration other than in money will not have the protection of s 13 and the supplier will be liable to GST without necessarily being able to pass on the cost to the recipient. Accordingly, it is not correct to suggest, as Rreef's submissions seemed to imply, that the GST Transition Act is predicated on the assumption that a supplier of goods or services will always be able to pass on the cost of GST to the recipient: see ACP Publishing (FC), at [50], [59], per Finn J. 82 Secondly, the definition of 'review opportunity' is satisfied only if the supplier has an opportunity under the written agreement referred to in s 13(1) to do one of the three things identified in s 13(5)(a), (b) and (c). Thus in the present case, there was a 'review opportunity' only if Rreef, as the supplier under the Subject Lease, had an opportunity to · change the consideration directly or indirectly because of the imposition of GST (s 13(5)(a)); or · conduct, on or after 1 July 2000, a general review, renegotiation or alteration of the consideration (s 13(5)(b)); or · conduct, before 1 July 2000, a general review, renegotiation or alteration of the consideration that takes account of the imposition of the GST. 83 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, renegotiation or alteration of the consideration that took account of the imposition of the GST. It is for this reason that s 13(5)(b) is critical to the resolution of the present case. 84 Thirdly, both s 13(5)(b) and (c) use the same language, namely 'to conduct … a general review, renegotiation or alteration of the consideration'. This language is somewhat awkward. It is usual to speak of conducting a review or renegotiation, but it is not customary to speak of an entitlement 'to conduct … [an] alteration'. Be that as it may, it seems clear enough (as both parties accepted) that the word 'general' is intended to qualify each of 'review', 'renegotiation' and 'alteration'. This contention is supported by the absence of the indefinite article before the last two words. 85 Fourthly, although both s 13(5)(b) and (c) use the language reproduced in the previous paragraph, s 13(5)(c) adds the words 'that takes account of the imposition of the GST'. No doubt the words were added to s 13(5)(c) because the subsection posits a review, renegotiation or alteration that took place before the GST came into force. Even so, the contrast in language between pars (b) and (c) of s 13(5) seems to imply a lessor can conduct a 'general review … of the consideration' for the purposes of s 13(5)(b) that does not necessarily take account of the imposition of the GST. While it is perhaps possible that the words may have been omitted from par (b) simply because the drafter assumed that a 'general review, renegotiation or alteration' would take account of the imposition of the GST, the more natural reading is that the omission was deliberate. 86 Fifthly, s 13(5) of the GST Transition Act is concerned with an 'opportunity' under the agreement to conduct (relevantly) a 'general review … of the consideration'. The dictionary definitions of the key words include the following:

Opportunity · 'an appropriate or favourable time or occasion' (Macquarie Dictionary); · 'a time … or condition of things favourable to an end or purpose, or admitting of something to be done or effected; occasion, chance' (Oxford English Dictionary). Review · 'to view, look at, or look over again; a viewing again; a second or repeated view of something; contemplation or consideration of past events, circumstances, or facts' (Macquarie Dictionary); · 'a general survey or reconsideration of some subject or thing' (Oxford English Dictionary). General · 'not restricted to one class or field; miscellaneous' (Macquarie Dictionary); · 'completely or nearly universal; including, involving or affecting all or nearly all parts of cases or things; not partial, particular, local or sectional' (Oxford English Dictionary). 87 As I have noted, the word 'consideration' is defined in the GST Act (a definition adopted in the GST Transition Act) to include any payment in connection with the supply of anything (see [30] above).

passing on the cost of gst 88 To the extent that Rreef's argument depends on it being able, in the light of market forces, to increase the actual rent payable under the Subject Lease, or to pass on the cost of the GST to the lessee, I do not think it is well-founded. If Rreef's 'like with like' argument is put to one side for the moment, it had an opportunity under the Subject Lease to conduct a review of the rental for the Office Space to the effective market level. Had it chosen to do so, Rreef could have invoked, in 2001 and 2003, the rent review procedure provided for by C13.7 of the Subject Lease. The valuer would then have had to determine the annual market rental for the Office Space, taking account, among other things, the rental value of comparable premises, particularly those in the vicinity of the Premises (cl C13.7(e), (j)). 89 There is nothing remarkable about the formula which is to be taken into account by the valuer (in the absence of agreement between the parties) in determining the annual market rental value of the Premises. As Williams J said in Re McCafferty [1994] 2 Qd R 538, at 541: 'It is not uncommon to find detailed provisions in the lease agreement as to the method by which the valuer is to arrive at his determination of the rent. In such clauses one frequently finds provisions stating that certain matters are "relevant", or that the valuer "shall have regard to" certain matters, or should "disregard" specified matters.' In particular, in assessing market rental there is nothing unusual about a direction to take into account concessions or incentives in analysing rentals of comparable premises (cf cl C13.7(e)(i)): see Ropart Pty Ltd v Kern Corporation Ltd [1991] NSW ConvR 55-598 (NSWCA). The object of the exercise mandated by cl C13.7 is to ascertain the annual market rental for the Office Space. 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 C13.7(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.

the restrictions on the rent review process 94 Is the position different because of the effect of cl C13.7(a) and (g) of the Subject Lease? Do these provisions prevent the rent review pursuant to cl C13.7 being a 'general review … of the consideration' for the purposes of s 13(5)(b) of the GST Transition Act? The parties accepted that cl C13.7(a) and (g) had the effect of directing the valuer to ignore the fit-out works undertaken by Rreef pursuant to the First and Second Construction Agreements, prior to the commencement of the Subject Lease. The valuer himself took the same view in undertaking his assessment of the annual market rental value of the Premises. 95 The 'consideration' referred to in s 13(5)(b) is, plainly enough, the consideration for the 'supply' specifically identified in the written agreement referred to in s 13(1). The supply in the present case was the grant of the lease of the Premises pursuant to the Subject Lease (which the parties took to include the grant of fresh leases by reason of the exercise of the options to renew contained in the Subject Lease). The consideration for the supply was the annual rent for the Premises, together with the lessee's obligation to reimburse the Operating Costs. 96 It is important on this aspect of the case to appreciate that the 'Demised Premises' identified in the Subject Lease (and in the Deeds of Renewal) comprised not only the Office Space but the fit-out works undertaken by the Lessor pursuant to the First and Second Construction Agreements. The Construction Agreements were also specifically referred to in cl C15 of the Subject Lease as constituting part of the agreement between the parties. 97 It follows that s 13(5)(b) is not satisfied in the present case unless Rreef had an opportunity for a general review of the consideration for the supply of the Premises including the fit-out works. On the evidence, the consideration for the grant of the lease of the Premises included a substantial component as compensation to the lessor for the very substantial cost of those works. It will be remembered that the definition of 'consideration' in the GST Act includes any payment in connection with the supply of anything. 98 The dictionary definitions to which I have referred suggest that a 'general review' for the purposes of s 13(5)(b) requires a complete or almost universal consideration of the same subject. Clause C13.7 of the Subject Lease provides, in effect, for a review of part only of the consideration for the grant of the lease of the Premises. This is because the review is to take place on the basis (contrary to the fact) that the Premises do not include the fit-out works. The opportunity to review the rent is limited because the valuer cannot assess the value of that portion of the Premises comprising the fit-out works. 99 The point is not so much that the review does not involve a comparison of like with like (although that was the point emphasised in Rreef's submissions). It is that Rreef had an opportunity under cl C13.7 of the Subject Lease to obtain a review of part only of the consideration for the grant of the Premises. The restrictions in cl C13.7(a) and (g) prevented the valuer carrying out the review in a manner that permitted review of that part of the consideration that related to the fit-out works. Given the substantial value of those fit-out works, it cannot be said in my opinion that Rreef had the opportunity for a general review of the consideration for the purposes of s 13(5)(b) of the GST Transition Act.

extraneous materials 100 I have not found it necessary to refer to the extraneous materials to which the parties drew my attention. In my opinion, there is nothing in these materials that sheds particular light on the construction of s 13(5)(b) of the GST Transition Act. However, for the sake of completeness, I shall trace the legislative history. 101 The first version of the legislation that ultimately became the GST Transition Act was A New Tax System (Goods and Services Tax Transition) Bill 1998 (Cth). Clause 12 of this Bill was the forerunner to s 13 of the GST Transition Act. However, the definition of 'review opportunity' was in a somewhat different form: 'review opportunity, for an agreement to which this section applies, means an opportunity that arises under the agreement to change the consideration directly or indirectly because of the imposition of GST or to conduct a general review, renegotiation or alteration of the consideration.' 102 The Explanatory Memorandum to the 1998 Bill stated (at par 2.33) that there would be no 'review opportunity' unless there was an opportunity 'to vary the consideration or the method for calculating the consideration, or to alter the consideration for the supply in any other way'. It then gave two examples: '1. Company A has an agreement to supply steel. The consideration is calculated by a formula that allows for adjustments to reflect exchange rates. This of itself would not cause the agreement to be treated as having a review opportunity. 2. Company B has a similar contract to company A, but Company B's agreement provides a date upon which both parties could negotiate a change in the consideration, which is broad enough to allow for the GST to be taken into account, or in the quantity to be provided for the same consideration. This agreement would be considered to have an opportunity for review.' 103 Subsequently, the Explanatory Memorandum made these observations: '2.34 Agreements entered into … prior to … Royal Assent of the Transition Bill, but under which supplies will be made after 1 July 2000, may contain provisions such that the agreed consideration does not include GST and the consideration cannot be reviewed to take it into account. Such agreements are often called "non-reviewable contracts". 2.35 Unless the Transition Bill has provisions to relieve this, GST may be payable on supplies made under the agreement, but the supplier would be unable to pass on the tax. 2.36 If you have an opportunity to review an agreement or otherwise build any GST into the agreed price, you would normally be expected to do so.' … 2.45 If an agreement provides a review opportunity making it possible to take the GST into account in some way, any supply made under the agreement after that opportunity for review (or 1 July 2005, if that is earlier) is no longer GST-free.' 104 Rreef sought to gain some comfort from these extracts, suggesting that they showed that an opportunity to review the consideration which did not take into account the imposition of GST was not a 'review opportunity'. One difficulty is that the definition of 'review opportunity' was different in the 1998 Bill from that ultimately adopted. More importantly, the examples in the Explanatory Memorandum, upon which Rreef placed reliance, cannot be taken to be exhaustive: they are merely illustrations of how the legislation would work. Paragraph 2.35 might have been intended to reflect the general position that a supplier will pass on the GST. However, it could not have been intended to be exhaustive either bearing in mind that cl 12(1) of the 1998 Bill was worded in a manner that plainly prevented some suppliers passing on the GST to recipients. Paragraph 2.45 merely says that if GST can be taken into account, the supply will no longer be GST-free. 105 In the course of debate of the 1998 Bill in the Senate, amendments were moved to cl 12(5). The amendments had the effect that cl 12(5) took a form identical to s 13(5) of the GST Transition Act, except that s 13(5)(c) was not yet included: see Hansard, S, 25 June 1999, at 6498. According to the Supplementary Explanatory Memorandum accompanying the Requests for Amendment to the 1998 Bill, the reason for the amendment was to make it clear that it was the supplier - not the recipient - who was to have the opportunity for review of the consideration. The House of Representatives accepted the amendment. 106 Section 13(5)(c) was added to the GST Transition Act by A New Tax System (Indirect Tax and Consequential Amendments) Act 1999 (Cth). The Explanatory Memorandum explained the amendment this way: '6.11 A review to market price is a review opportunity. However, a review to market price that takes place before 1 July 2000 will not allow indirect tax changes, such as the GST, to be reflected in subsequent contract payments. 6.12 The definition of review opportunity in section 13 of the GST Transition Act is amended to ensure that a review that does not allow indirect tax changes to be reflected in contract payments (either directly or indirectly) is not a review opportunity. 6.13 This restores the original policy intent that GST should apply to existing contracts only if the supplier can alter the consideration to pass on GST.' 107 These comments, however, were made in the context of a provision designed to deal with a situation where there was an opportunity to review to market before 1 July 2000. As I have noted, s 13(5)(c) of the GST Transition Act specifically includes the words 'that takes account of the imposition of the GST', words that are not included in s 13(5)(b). Moreover, on no view does s 13 of the Transition Act implement a universal policy that GST applies only to contracts where the supplier can alter the consideration to pass on the GST. 108 At the hearing my attention was drawn to the Tax Laws Amendment (Long-term Non-reviewable Contracts) Bill 2004 (Cth). That Billreceived the Royal Assent on 22 February 2005. I do not think it bears on the question of construction before me.

conclusion 109 The appeal in each matter should be allowed. In each matter the appealable objection decision made on 16 January 2004 should be set aside and Rreef's objection against the assessment to GST allowed. I certify that the preceding one hundred and nine (109) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Sackville.

Counsel for the Applicant: SJ Gageler SC with M Richmond

Solicitor for the Applicant: Mallesons Stephen Jaques

Counsel for the Respondent: JA Logan SC with DW Marks

Solicitor for the Respondent: Australian Government Solicitor

A New Tax System (Goods and Services Tax) Act 1999(Cth)ss 7-1, 7-5, 7-10, 7-15, 9-5, 9-15, 9-30, 9-40, 9-70, 9-75, 11-5, 11-10, 11-15, 11-20, 11-25, 27-5, 27-10, 27-15

A New Tax System (Indirect Tax and Consequential Amendments) Act 1999(Cth)

Sales Tax Assessment (No 1) Act 1930(Cth)s 70B

Tax Laws Amendment (Long-term Non-reviewable Contracts) Act 2005(Cth)

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