ASSIGNMENT IS AN INPUT TAXED SUPPLY
17 The respondent, the Commissioner of Taxation (the Commissioner), contends that each assignment of a Strata Lot Lease will be a taxable supply for the purposes of the GST Act. Gloxinia, on the other hand, contends that each such supply will be input taxed in accordance with subdivision 40-C of the GST Act and, accordingly, will not be a taxable supply.
18 It is common ground that, at the time of the grant of the proposed Strata Lot Leases by the Council to Gloxinia, the unit or apartment that is the subject of that lease will be residential premises within the meaning of subdivision 40-C. Further, it is not suggested that a contract for sale such as the Sale Contract is a supply. Thus, the question is whether it is correct to say that residential premises consisting of a completed unit or apartment in the proposed residential development, at the time of the assignment of a Strata Lot Lease in respect of that unit or apartment pursuant to a contract for sale, in the form of the Sale Contract, will not have previously been the subject of a long term lease. Gloxinia's simple contention is that a Strata Lot Lease is a long term lease within the meaning of the GST Act and that, at the time of the assignment of such a Strata Lot Lease, the residential premises that are the subject of that Strata Lot Lease, being a completed unit or apartment in the residential development, will have been the subject of that lease, albeit not for a long period of time.
19 The Commissioner says that, whether or not s 40-75(1) applies to the residential premises should be determined from a practical and business point of view, rather than upon the juristic classification of the legal rights secured, employed or exhausted in the process (see Westley Nominees Pty Ltd v Coles Supermarkets Australia Pty Ltd (2006) 152 FCR 461 at [59]). Accordingly, he says, juristic concepts of land law ought not to define the operation of Subdivision 40-C and the GST Act should not be interpreted by reference to abstract propositions about interests in land.
20 The Commissioner contends that to treat the residential premises to be sold by Gloxinia as having previously been the subject of a long term lease from the Council ignores the substance and economic reality of the transaction. The Commissioner says that analysis of the transaction in a substantive fashion shows that the Council will merely replace the Residential Lease with the 28 Strata Lot Leases. The Commissioner places store on the fact that the Council will not be selling the units or apartments to Gloxinia. Rather, Gloxinia will construct the units or apartments on its own account and will obtain the fruits of that development. The grant of the Strata Lot Leases, upon surrender of the Residential Lease, is simply to facilitate the development by Gloxinia of Lot 3, which is the subject of the Residential Lease.
21 The Commissioner places reliance on the following matters:
· Gloxinia is developing the Site in its own right and at its own risk and is responsible under the Agreement for Lease for all aspects of the development.
· Gloxinia will obtain the benefit of the Residential Works and not the Council.
· Under the Residential Lease, Gloxinia is subject to the same responsibilities and liabilities in relation to the residential premises as if it were the owner of the premises.
· There is no separate consideration payable by Gloxinia for the grant of the 28 Strata Lot Leases: rather, the consideration paid by Gloxinia is for the total amalgamation of rights acquired pursuant to the Agreement for Lease.
22 Further, the Commissioner says, the value of the residential premises that are to be constructed by Gloxinia does not in any real sense pass to the Council. The Commissioner says that the GST Act manifests an intention to treat the supply of a long term lease in the same manner as a sale of freehold. The grant of the Strata Lot Leases is simply the mechanism by which the Council divests itself of its interest in the Site, on which Gloxinia is constructing the residential premises. He says that the surrender of the Residential Lease simultaneously with the grant of the Strata Lot Leases, which is to occur on registration of a strata leasehold plan, is no more than a conversion of Gloxinia's leasehold interest under the Residential Lease into leasehold in respect of the lots in the Strata Leasehold Plan in order to enable Gloxinia more easily to dispose of leasehold interests in the individual lots to unrelated parties.
23 The Commissioner contends that the construction contended for by Gloxinia does not preserve the essential characteristics of GST as a value added tax. He says that a construction that preserves the character of GST as a value added tax ought to be preferred over a construction that seeks to avoid the object and purpose of GST. The Commissioner's approach may be appropriate where there is some ambiguity in the language of a provision of the GST Act. However, there is no ambiguity in the language of s 40-75(1)(a). It may be that the consequence contended for by Gloxinia was not foreseen by the drafter of s 40-75(1)(a). Such an inference may possibly be drawn from the subsequent provisions of s 40-75(1). Be that as it may, however, that is not a basis for reading the words of s 40-75(1)(a) in a way that is different from the way in which they would clearly be understood as a matter of ordinary English. At the time of an assignment the relevant residential premises will have been the subject of a long term lease, namely, the relevant Strata Lot Lease granted by the Council to Gloxinia in respect of the relevant unit or apartment. It is not to the point, as the Commissioner contends, to say that the construction contended for by Gloxinia is divorced from the economical reality of the transaction between it and the Council. Either the transaction falls within the provisions or it does not.
24 Alternatively, the Commissioner places reliance upon the notion that the subject matter of the assignments that will take place pursuant to a contract in the form of the Sale Contract for sale is a leasehold interest. He says that that leasehold interest will not have previously been the subject of a long term lease. Therefore, the relevant unit or apartment will be new residential premises. However, that contention involves an impermissible confusion between the physical residential premises and the juristic rights conferred in relation to the residential premises. In a sense, it is refutation of the proposition referred to above upon which the Commissioner places reliance.
25 It may be that, for the purposes of s 40-70(1) there is a supply of real property in the sense of a supply of a leasehold interest in the relevant unit or apartment. However, s 40-70(1)(a) contemplates a supply to the extent that the property, namely the real property, is residential premises. The residential premises that are referred to must be the physical unit or apartment and not the juristic rights to the use or occupation of that unit or apartment. It is clear that the residential premises referred to in s 40-75 are the physical premises. It is equally clear that those physical premises, the unit or apartment in the completed development, is the subject of the long term lease consisting of the Strata Lot Lease.
26 I do not consider that either of the Commissioner's contentions has any substance. The proposed assignments of leases of units or apartments in the proposed residential development will be input taxed and, accordingly, will not be taxable supplies. Gloxinia is entitled to a declaration to that effect.
27 The parties have agreed that there be no order as to the costs of the proceeding and accordingly, I will make no order as to costs.
I certify that the preceding twenty-seven (27) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Emmett.