South Steyne Hotel Pty Ltd v Commissioner of Taxation

The issues 9 At issue in this proceeding is the characterisation of four categories of supply. Those supplies are:

1. The supply by way of lease from South Steyne of each Hotel room to MML.
2. The sale of Hotel rooms to investors, including the sale of rooms 111, 304 and 604 by South Steyne to MBI;
3. The continuation of the leases of Hotel rooms 111, 304 and 604 by MBI which, as purchaser of those rooms, took title subject to the ongoing lease of those rooms to MML; and
4. The supply of accommodation in Hotel room 403 to Emily Young as a guest. 10 The respondent submits that the first and third categories of supply were input taxed pursuant to s 40-35 of the GST Act, "because the Apartments supplied were residential premises to be used predominantly for residential accommodation. They were not commercial residential premises". In relation to the second category, the respondent submits that this category was "neither GST-free pursuant to s 38-325 of the Act nor input taxed pursuant to s 40-65 of the Act". The respondent also submits that the supply of accommodation to Emily Young as a guest was a taxable supply because it was supplied "by an entity (MHL) which relevantly controlled the Sebel Complex". 11 The applicants' primary position is that none of the supplies is input taxed and that the second supply is GST-free. However the applicants put two alternative propositions: first they say that if the third supply is held to be input taxed then the second supply is also input taxed; secondly they say it that if both the first and third supplies are input taxed then the fourth supply is also input taxed.

Relevant legislation 12 There is no issue between the parties as to whether, in the four categories described above, there was a supply within the meaning of the GST Act. The issue is whether the supplies, or any of them, were taxable supplies, GST-free supplies or input taxed supplies. Crucial to this issue, in the present context, is the distinction between the supply of residential premises, the supply of commercial residential premises and the supply of residential accommodation. It is also necessary to consider the issue in the light of the amendments to the GST Act which followed the decision of the Full Federal Court in Marana Holdings Pty Ltd v Commissioner of Taxation (2004) 141 FCR 299. The amendments to the GST Act made following this decision (the Marana Amendments) were inserted by the Tax Laws Amendment (2006 Measures No 3) Act 2006 (Cth) and took retrospective effect from 1 July 2000 (Amendment Act). 13 The GST Act distinguishes between taxable supplies and those that are not taxable; s 9-5. A person who makes a taxable supply is liable for GST in respect of that supply (s 9-40) and may be entitled to input tax credits for things acquired or imported to make the supply; see Division 11. Supplies that are GST-free or input taxed are not taxable supplies and GST is not payable on them. The difference between them is that if a supply is GST-free any entitlement to an input tax credit for things acquired or imported to make the supply is not affected whereas, if a supply is input taxed, there is no entitlement to an input tax credit for things that are acquired or imported to make the supply. 14 The circumstances in which a supply is GST-free or input taxed are found in Divisions 38 and 40 respectively. Provisions relevant to the present issue are set out below. The Marana Amendments are underlined. 9-30 Supplies that are GST-free or input taxed GST-free (1) A supply is GST-free if: (a) it is GST-free under Division 38 or under a provision of another Act; or (b) it is a supply of a right to receive a supply that would be GST-free under paragraph (a). Input taxed (2) a supply is input taxed if: (a) it is input taxed under Division 40 or under a provision of another Act; or (b) it is a supply of a right to receive a supply that would be input taxed under paragraph (a). 38-325 Supply of a going concern (1) The supply of a going concern is GST-free if: (a) the supply is for consideration; and (b) the recipient is registered or required to be registered; and (c) the supplier and the recipient have agreed in writing that the supply is of a going concern. (2) A supply of a going concern is a supply under an arrangement under which: (a) the supplier supplies to the recipient all of the things that are necessary for the continued operation of an enterprise; and (b) the supplier carries on, or will carry on, the enterprise until the day of the supply (whether or not as a part of a larger enterprise carried on by the supplier). 40-35 Residential Rent (1) A supply of premises that is by way of lease, hire or licence (including a renewal or extension of a lease, hire or licence) is input taxed if: (a) the supply is of residential premises (other than a supply of commercial residential premises or a supply of accommodation in commercial residential premises provided to an individual by the entity that owns or controls the commercial residential premises); or (b) the supply is of commercial accommodation and Division 87 (which is about long-term accommodation in commercial premises) would apply to the supply but for a choice made by the supplier under section 87-25. … (2) However: (a) the supply is input taxed only to the extent that the premises are to be used predominantly for residential accommodation (regardless of the term of occupation); and (b) the supply is not input taxed under this section if the lease, hire or licence, or the renewal or extension of a lease, hire or licence, is a long-term lease. 40-65 Sales of residential premises (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). (2) However, the sale is not input taxed to the extent that the residential premises are: (a) commercial residential premises; or (b) new residential premises other than those used for residential accommodation (regardless of the term of occupation) before 2 December 1998. 40-75 Meaning of new residential premises (1) Residential premises are new residential premises if they: (a) have not previously been sold as residential premises (other than commercial 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. 15 The Dictionary to the GST Act (s 195-1) contains the following definitions of "residential premises" and "commercial residential premises": 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. commercial residential premises means: (a) a hotel, motel, inn, hostel or boarding house; or … (f) anything similar to residential premises described in paragraphs (a) to (e).

Reasons and conclusions 16 As mentioned above, the Marana Amendments to the GST Act were enacted following the Full Federal Court decision in Marana. Before considering any of the supplies at issue here that decision and the legislative response to it must be considered.

The Full Court decision in Marana v Commissioner of Taxation 17 The issue in Marana was whether the sale of a strata-titled unit was input taxed pursuant to s 40-65 of the GST Act. The relevant facts were set out at 300-301 of the Full Court judgment as follows: · the appellant companies are the members of a partnership which is registered for the purposes of the GST Act; · on 7 May 2002 Tarfex Pty Ltd (Tarfex), on behalf of the appellants, agreed to purchase from Hajuku Pty Ltd (Hajuku) a motel in Gladesville, Sydney for $5,700,000; · Hajuku had operated the premises as a motel until two days before the settlement of the agreement; · the sale was settled on 4 September 2002; · in October 2002 Tarfex obtained council approval to use the premises as residential apartments; · on 19 November 2002 Tarfex applied to convert the motel to strata title; · the physical modifications to the unit were completed on 30 July 2003; · on 4 August 2003 Tarfex entered into a contract with Susan Wells for the sale of proposed lot 46 (previously room 202 in the motel) and proposed lot 100 (a parking space) which lots together comprised unit 46; · the sale price was $229,000; · room 202 had contained queen-size and single beds, a coffee table, a lounge, a television, a radio, an iron and ironing board, a kettle, some glasses, cups and cutlery, bedding and a shower. It had not contained clothes-washing facilities, a refrigerator or cooking facilities; · on 22 September 2003 an application by Tarfex to convert the motel into strata title was approved, with the motel being divided into 134 strata title lots, 65 of those lots being residential units; and · the sale to Ms Wells was settled on 22 September 2003. 18 At first instance Beaumont J dismissed the appellants' application for a declaration that the sale of the unit to Ms Wells was input taxed pursuant to s 40-65 of the GST Act. The Full Court dismissed an appeal from his Honour's decision. The Full Court noted, at 303: It is common ground that the sale of unit 46 was a sale of residential premises to be used predominantly for residential accommodation, thus satisfying s 40-65(1). It is also common ground that unit 46 was not, at the time of sale to Ms Wells, "commercial residential premises" so that it was not excluded from the operation of s 40-65(1) by s 40-65(2)(a).

19 The Full Court held, however, that the sale was excluded from the operation of s 40-65(1) by s 40-65(2)(b) because it was "new residential premises" and it had not been used for residential accommodation prior to 2 December 1998. It can be seen that the Full Court's finding that lot 46 comprised "new residential premises" was based on its view that use of room 202 as a motel room, was not use for "residential accommodation" and that the sale by Hajuku to Tarfex was not a sale of residential premises. The Full Court also rejected the appellant's submission that even if the unit met the definition of "new residential premises" it had been used for residential accommodation before 2 December 1998. 20 In reaching these conclusions the Full Court considered separately the meanings of "residence" and "residential". Referring to the definitions given in the Oxford English Dictionary (OED), the Shorter Oxford English Dictionary (Shorter Oxford) and the Macquarie Dictionary, Revised 3rd ed (Macquarie) the Court said, at 306: All three references stress the relationship between the word "residential" and the word "residence", suggesting the aspect of permanent or long-term occupation to which we have previously referred. They recognise use of the expression in connection with hotels but generally suggest that such usage describes an hotel that caters for long-term residents. We accept that it is not uncommon to speak of long-term residents in an hotel, but when one speaks of persons who stay for shorter terms, the more common usage is to describe them as "guests".

21 The Full Court referred to several English decisions in which it had been held that the expression "residential accommodation" was significantly wider than the term "residence" and encompassed lodging, sleeping or overnight accommodation irrespective of the term of the occupation: Urdd Gobaith Cymru v Commissioner of Customs and Excise [1997] V & DR 273; Denman College v Commissioners of Customs and Excise [1998]V & DR 399; Owen v Elliott (Inspector of Taxes) [1990] 1 Ch 786. Rejecting this wider meaning of "residence" and "residential", the Full Court agreed with the trial judge that the statutory definition focused upon the word "residence" and held, at 310, that: … such definition, taken in isolation, can only include premises which are either used as a residence or are intended to be, and are capable of being so used. In common usage, that dictates the element of permanent or long-term occupation to which we have referred. The Full Court concluded, at 312, that there was no other aspect of the GST Act that compelled a wider meaning of the word "residence" and therefore of the expression "residential premises".

The Marana Amendments 22 These amendments made two important changes to the definition of "residential premises" by inserting: (1) the expression "regardless of the term of the occupation or intended occupation" into the definition; and (2) the expression "or for residential accommodation" into paragraph (a); see [14] above. In the light of the reasoning in Marana, these additions to the definition invite the conclusion that the effect of the amendments is to embrace the wider meaning rejected by the Full Court. 23 In my view the explanatory memorandum for the Amending Act (EM), with its specific reference to Marana, puts the matter beyond doubt. Paragraph 15.1 of the EM states: Schedule 15 to this Bill amends the A New Tax System (Goods and Services Tax) Act 1999 … to ensure that following the decision of the Full Federal Court of Australia in Marana Holdings Pty Ltd v The Commissioner of Taxation [2004] FCAFC 307 … supplies of certain types of real property are input taxed. This confirms the Government's policy intent. 24 The EM referred to the view in Marana that the terms "reside" and "residence" connote a permanent or at least a long-term commitment to dwelling in a particular place and to the difficulties and uncertainties that might arise from this interpretation. In particular the EM noted that the Marana view "could add to complexity and the compliance burden for taxpayers". Paragraph 15.6 of the EM states that the amendments: · ensure that supplies of certain types of real property are input taxed to confirm the policy intent that the words 'residential' and 'residence' are not limited to extended or permanent occupation; · confirm that residential premises which have only previously been sold as commercial residential premises or as a part of commercial residential premises are still regarded as new residential premises; and · confirm that a supply of accommodation provided to individuals in commercial residential premises by an entity that owns or controls the premises remains subject to GST. 25 Paragraph 15.12 of the EM notes that the amendments do not change the definition of "commercial residential premises" nor is the GST treatment of accommodation in hotels and similar premises altered. Specifically, paragraph 15.13 states that "a sale of residential premises (other than new residential premises) comprising a strata titled unit in commercial residential premises, such as a hotel or motel, will be input taxed". 26 To illustrate the effect of the amendments to the definition of residential premises, the EM gives a number of examples. Example 15.1 entitled, "Serviced apartment for short-term stays" is relevant to the present circumstances: Marek leases a strata titled unit in a serviced apartment complex to Phil who lets apartments in the complex to guests in his own right. Permitted use of the apartment is restricted to short stays. The lease of the unit is input taxed because it is a lease of residential premises. The prohibition on long-term occupation of the apartment does not prevent the unit being characterised as residential premises. Under these amendments, residential premises are not limited to those occupied or intended to be occupied permanently or for an extended period.

27 However clear the expression of intent in the EM, it cannot be substituted for interpretation of the words of the statute. "The function of the Court is to give effect to the will of Parliament as expressed in the law"; Re Bolton; ex parte Beane (1987) 162 CLR 514 at 518 per Mason CJ, Wilson and Dawson JJ. The EM may, however, be considered in ascertaining the meaning of the provision; Acts Interpretation Act 1901 (Cth) s 15AB(1) and (2)(e). In this case, even without reference to the EM, the amended definition is not susceptible of the same narrow interpretation as the definition considered by the Full Court in Marana. The explanation and examples given in the EM lend additional support to this conclusion.

The first supply 28 The first applicant leased the individual hotel rooms or apartments to MML. If the proposition that this is an input taxed supply is to be made good it must be shown, inter alia, that the leased property is "residential premises", is not "commercial residential premises" and is to be used predominately for residential accommodation; s 40-35(1)(a) and (2)(a).

Residential premises 29 While the Marana Amendments remove the particular difficulty that confronted the taxpayer in Marana, the necessity for some degree of permanence or long-term commitment to the occupation of premises was only one aspect of the concept of residential premises. There is nothing in the Marana Amendments that detracts from other aspects of the Court's reasoning in that case. In particular, it is still helpful to consider the meanings of the words "reside" and "residence", disregarding however the need for any element of permanence or long-term occupation. The question is, taking out those elements, what is left of the concepts. 30 In Marana, at 304-306, the Full Court comprehensively surveyed the definitions of "reside" and "residence" in the OED, the Shorter Oxford and the Macquarie. The definitions have not changed significantly since that time and, for convenience, I quote the summary: In commencing this discussion we will first consider the word "reside". OED defines the word to mean: · To settle; to take up one's abode or station; · To dwell permanently or for a considerable time, to have one's settled or usual abode, to live, in or at a particular place; and · Of persons having some special status or position. Hence to live (at a place) for the discharge of official duties; to be "in residence". As to the word "residence" OED offers the following meanings: · To have one's usual dwelling place or abode; to reside; · To take-up one's residence, to establish oneself; to settle; · So to have (etc) residence; · The circumstance or fact of having one's permanent or usual abode in or at a certain place; · The fact of residing or being resident; · The fact of living or staying regularly at or in some place for the discharge of special duties, or to comply with some regulation; also, the period during which such stay is required of one; · The place where one resides one's dwelling place; the abode of a person (especially one of some rank or distinction); and · A dwelling, abode, house, especially one of a superior kind; a mansion. Shorter Oxford defines the term "reside" relevantly as: · Settle; take up one's station; · Of a person holding an official position: occupy a specified place for the performance of official duties; be in residence; and · Dwell permanently or for a considerable time, have one's regular home in or at a particular place. The expression "residence" is said to mean: · The circumstance or fact of having one's permanent or usual abode in or at a certain place; the fact of residing or being resident; · The fact of living or staying regularly at or in a specified place for the performance of official duties or for work; a period of time required for this; · The action of remaining in a place for a limited period of time; lingering; procrastination (said to be obsolete); · The place where a person resides; the abode of the person; and · A dwelling, a house, especially an impressive, official or superior one; a mansion. Macquarie defines the word "reside" as: · To dwell permanently or for a considerable time; have one's abode for a time. Of the word "residence" it says: · The place, especially the house, in which one resides; dwelling place; dwelling; · A large house; and · Living or staying in a place of official or other duties. … Residential Of this word OED says: · Serving or used as a residence; in which one resides; · Adapted or suitable for the residence of those belonging to the better class; characterised by houses of a superior kind; · connected with, pertaining or relating to, residence or residences (in general or specific sense); and · A residential hotel (as a noun, i.e. a "residential"). OED refers to Bradshaw's Railway Guide (April 1910) where an hotel was described as "[F]irst-class family and residential". The word "residential" was obviously meant to suggest something other than ordinary hotel accommodation. OED also refers to the expression "[a]n untidy boarding house in Torrington Square, Bloomsbury, which called itself a Residential Hotel" … and to the statement that "[t]he Inns of Court … operated like residential clubs or hotels"…. These usages suggest that the word "residential" implies a special kind of accommodation, probably long-term. Shorter Oxford gives the following meanings: · Serving or used as a residence; · Suitable for or characterised by private houses; and · Connected with, entailing, or based on residence. Macquariegives the following meanings: · Of or relating to residence or residences; · Adapted or used for residence; a residential district; and · Of an hotel etc, catering for guests to stay permanently or for extended periods. 31 With these meanings in mind it is not difficult to see why the Full Court reached the conclusion that an element of permanent or long-term occupation was necessary before premises could be described as residential premises. As indicated above, however, the definition of "residential premises" in the GST Act now requires the term of the occupation or intended occupation to be disregarded. In my view, that leaves as necessary only the element of shelter and basic living facilities such as are provided by a bedroom and bathroom. The applicants submitted that it leaves much more, and that for occupation to be "residential" it must be "established" or "settled" occupation: The length of the term of occupation or intended occupation of a building may be indicative of such "established" or "settled" occupation, but it is not the sole indication of such characteristics and is not necessarily conclusive. Thus a property may be occupied for a short duration, even a matter of days, and yet assume the character of a residence because of the settled nature of the occupations/intended occupation. Conversely, occupation (or intended occupation) which by its very character (and regardless of the term of the actual or intended occupation) is transient, temporary and not settled or established, lacks the character of "residential" occupation. 32 A major difficulty with this approach would be distinguishing between established or settled occupation and transient and temporary occupation without taking into account the duration. The applicants' further submission that the "the character of the Hotel Rooms is necessarily for transient, temporary and not settled or established occupation" seems to me to be impermissibly focusing on duration without specifically referring to it. 33 The applicants also submitted that "[m]ost tellingly, use of the Hotel Rooms as a 'residence' would be contrary to the planning provisions governing the Hotel". This is a reference to paragraph (b) of the General Conditions of Consent attached to the development approval for the strata subdivision of the Hotel site which states: "[t]he use of the existing development ... is for short-term accommodation and cannot be used or converted to use as a permanent accommodation or a residential flat building without the prior consent of the Counsel and a by-law to this effect shall be registered with the strata plan". 34 This submission does not take account of the fact that, by providing that the term of occupation or intended occupation is to be disregarded, the amendment to the definition of "residential premises" have substituted a special meaning of the term for the ordinary natural meaning. Premises may be "residential premises" within the meaning of the GST Act without being used for permanent accommodation or as a residential flat building as those terms are used in the conditions to the development consent. That being so the accommodation described in [7]-[8] above meets the, now special, meaning of "residential premises" in the GST Act even without regard to the inclusion of "residential accommodation". 35 The fact that the definition now expressly includes "residential accommodation" puts the matter beyond doubt. In the English decisions referred to in [20] above the term was given the wider meaning rejected in Marana. Those cases (Urdd Gobaith Cymru; Denman Collegeand Owen) considered premises similar to those under consideration here. 36 In Denman College the issue before the Tribunal was whether accommodation provided for students at the college was correctly described as residential accommodation. The Tribunal described the accommodation thus: Each study-bedroom has a single bed, desk and at least one arm chair and a bathroom or shower room. … Although each room has a kettle, teapot and cup and saucer and tea and coffee, there are no other cooking facilities in either building. The college has a dining room in which students attending courses can eat. The Tribunal accepted that the building was not a "residence" but said that it did not follow that it was not "residential" accommodation. 37 Urdd Gobaith Cymru concerned the same statutory words as Denman College. The accommodation was for students attending for short periods (the average period was four days) mainly to learn the Welsh language. The Tribunal chairman agreed that "a residence" clearly implied a building with a significant degree of permanence of occupation but added: However, the word loses that clear meaning when used as an adjective. In ordinary English "residential accommodation" merely signifies lodging, sleeping or overnight accommodation. It does not suggest the need for such accommodation to be for any fixed or minimum period.

38 In Owen the Court of Appeal expressed a similar view as to the meaning of "residential accommodation" used in the context of the Capital Gains Tax Act 1979. The position was put succinctly by Leggat LJ who said: In my judgment the expression "residential accommodation" does not directly or by association mean premises likely to be occupied as a home. It means living accommodation, by contrast, for example with office accommodation.

39 The applicants submit that to characterise the premises supplied to MML as residential premises is to adopt a meaning of "residential" which is at odds with the very essence of that term as ordinarily understood. They submit that the meaning advocated by the respondent is "an unnatural use of language", arguing that the legislature should not be taken to have intended such a result "unless the conclusion is clear and unescapable, and no sound alternative construction is available". In principle, I agree with this proposition, however, as explained above, the words of the GST Act as varied by the Marana Amendments, direct this meaning. It is not uncommon for legislation, for specific purposes, to ascribe an "unnatural" meaning to a word. Here the specific purpose is to avoid the conclusion reached in Marana. Moreover the applicants fail to take account of the fact that the expanded definition of residential premises in s 195-1 includes the notion of "residential accommodation" which, to my mind, conclusively indicates that Parliament intended the term to have the meaning explained above.

Commercial residential premises 40 It is a separate question whether the residential premises leased by South Steyne to MML are "commercial residential premises" and therefore fall within the exception in s 40-35(1)(a). The first example given in the definition of commercial residential premises is "a hotel, motel, inn, hostel or boarding house". At one level of generality, the lease to MML of all 83 apartments in the Hotel might be seen as falling within this first example. Certainly there would be no distinction apparent to users of the premises (guests in the Hotel) between the facilities on offer at the Sebel Complex and the usual facilities of a hotel. Guests have access to reception, conference and restaurant facilities. Individual apartments are provided with room service, housekeeping and laundry services, bathroom and kitchen supplies and so on. There is no doubt that the Sebel Complex, as a whole, operates as a hotel. 41 For present purposes, however, the experience of a guest at the Hotel or the characterisation of the operation of the complex as a whole is not relevant. The issue is the nature of the supply made. Each room/apartment, having some or all of the characteristics described above at [7]-[8], was the subject of a separate supply made under an individual lease agreement. Although each supply was made under a separate lease, the terms and conditions of the leases were relevantly identical. 42 In particular, under clause 7 of the lease, MML was required to use the apartment as part of a serviced apartment business and to operate and manage it in a manner and to a standard specified in that clause. The lease contemplates that the apartment will be used as part of the serviced apartment business operated by MML which is responsible for setting the rates and collecting fees, advertising and promotion and dealing with travel and tourist agents. Revenue generated by the serviced apartment business is pooled and shared between MML and the owners of the individual hotel rooms participating in the scheme, irrespective of the level of occupation of particular rooms. 43 The lease provides that the owner (South Steyne) and the lessee (MML) must not dispose of their respective interests in the apartment unless the assignee of the interest is required to participate in and abide by the requirements of the serviced apartment business in the same way as the assignor. It also provides that the parties may withdraw from that business only by terminating the lease, having given the required notice. It is clear that the serviced apartment business is the raison d'etre of the lease. 44 I am satisfied that the supply made under the lease is not the supply of a "hotel, motel, inn, hostel or boarding house". This still leaves for consideration whether it is a supply of "anything similar" to a hotel, motel, inn, hostel or boarding house and therefore commercial residential premises under paragraph (f) of the statutory definition. The Macquarie defines a "hotel" as a "building in which accommodation and food, and usu. alcoholic drinks are available". Similar definitions are given in the OED and the Shorter Oxford. The definitions of motels, inns, hostels and boarding houses indicate that, in common with hotels, they provide accommodation, although of varying types. In addition to providing accommodation they also have in common that, large or small, they provide for multiple occupancies. The terms are not used where only one apartment, room or other space is provided. 45 It is clear from the terms of the lease described above that the lease contemplates that more than one room or apartment will participate in the serviced apartment business. While as a practical matter the serviced apartment business could not be carried on without more than one (perhaps the majority) of the rooms/apartments participating in the business, the lease does not require this. Each lease is a separate supply of only one accommodation space, albeit that within that space it may be possible to sleep two or more persons. The links with the other apartments and the commercial necessity for other apartments to be included in the business are contemplated in the lease but not mandated. As the written submissions of the respondent point out: No section of the Act, and no underlying policy of the Act, or any division of it, provides or suggests that the characterization of an individual supply can be approached by treating it as if it were, contrary to the events that actually occurred, the aggregate of the supply and other supplies, particularly where some of the other supplies were made to a different party. The property that was the subject of each supply by South Steyne to MML was an individual apartment. An individual Apartment is clearly not a hotel.

46 Nor, I would add, is it like a hotel, motel, inn, hostel or boarding house. The fact that the Sebel Complex, taken as a whole, is a hotel or is "similar" to a hotel does not make an individual room/apartment similar to a hotel. In my view neither para (a) nor para (f) of the definition of "commercial residential premises" applies to the supply. 47 My interpretation of "commercial residential premises" is consistent with the intention expressed in the EM to the Amendment Act which states at paragraphs 15.13-15.14 and 15.16: Broadly, these amendments ensure that a sale of residential premises (other than new residential premises) comprising a strata titled unit in commercial residential premises, such as a hotel or motel, will be input taxed.

For example, a sale of one or several units in a hotel complex will not constitute a supply of commercial residential premises. This is because the sale of a single unit or several units in, for example, a hotel or motel is not a supply of a hotel or motel.

However, a supply comprising only the accommodation units in a hotel complex, without other parts of the hotel, such as the reception, is not a supply of commercial residential premises. It is a supply of residential premises.

Predominant use for residential accommodation 48 Section 40-35(2)(a) provides that a supply of residential premises is input taxed "only to the extent that the premises are to be used predominantly for residential accommodation (regardless of the term of occupation)". The applicants' submissions that this exception applies in the present case are based on a meaning of residential premises that I have rejected. I accept the respondent's submission that once it is accepted that the apartments/rooms are residential premises, "there is no basis for concluding other than that each apartment was to be used predominantly for residential accommodation". 49 The words of the subsection show that it is focused on the concepts of apportionment and predominance. In this case no such question arises. The applicants submitted that the intended use of the apartments was by MML as part of its serviced apartment business. This submission fails to distinguish between actual use and motive for use. The only use of the physical premises that has been suggested in this proceeding is as accommodation. There is no suggestion and certainly no evidence that each apartment has been used or is intended to be used for anything other than the provision of accommodation, which I have determined falls within the definition of residential premises.

Conclusion as to characterisation of the first supply 50 For the reasons given above I have concluded that the supply by way of lease of each strata-titled room/apartment to MML was a supply of residential premises to be used predominantly for residential accommodation within the meaning of s 40-35 and therefore that each such supply is input taxed.

The second supply 51 The second category of supply is the sale of Hotel rooms to investors, including the sale of rooms 111, 304 and 604 by South Steyne to the second applicant, MBI. The applicants seek a declaration that each such supply was a GST-free supply of a going concern under s 38-325 of the GST Act; see [14] above. In the alternative the applicants submit that if (contrary to their submission) the third supply is input taxed, then this second supply is also input taxed. The respondent contends that these supplies are neither GST free nor input taxed but are taxable supplies. The point of dispute between the parties is whether there has been compliance with s 38-325(1)(c), that is whether South Steyne, as the supplier, and MBI, as the recipient, have agreed in writing that the supply is of a going concern. Compliance with the other requirements of the section is not in dispute.

Is the second supply GST-free? 52 The parties agree that all the relevant contracts for the sale of the apartments are in the same terms save for the identification of the land which is the subject of the sale. Mr Robertson SC, who appeared for the applicants, took me to the contract for the sale of Apartment 111 in the Hotel (Lot 54 Plan SP 76027) as a representative contract. The cover sheet of the contract provides for the parties to select among a number of reasons why the sale is not a taxable supply. There is a cross in the box next to the statement that the sale is "GST-free because the sale is the supply of a going concern under s 38-325". The respondent submits that this apparent agreement that the supply is of a going concern is negated by clause 47.6 of the special conditions of the contract. 53 Clause 47.6 sets out a number of conditions all of which are expressly contingent on the purchaser electing to participate in the Management Rights Scheme. The evidence is that all purchasers have elected to participate. Relevantly the conditions are: 47.6.1 the Property is sold subject to the Apartment Lease and the Vendor's membership of the Management Rights Scheme and the Purchaser intends that the Property will be used as part of the hotel by the Operator pursuant to the Management Rights Scheme; … 47.6.3 the parties agree that the sale of the Property comprises a supply of a going concern for the purposes of section 38-325 of the GST Act; …

47.6.6 if page 1 of the Contract says that the supply is GST-free because the sale is the supply of a going concern but the supply of the Property under the Apartment Lease is a supply of residential premises (but not commercial residential premises), and the premises are also to be used predominantly for residential accommodation (regardless of the term of occupation), then the sale of the Property is a taxable supply and the parties agree that the margin scheme applies or, if completion has already occurred, the margin scheme is taken to have applied. For the avoidance of doubt, the Vendor acknowledges that if the margin scheme applies to the sale of the Property, the price is inclusive of any GST; … [Underlining added] 54 The "Property" is defined in clause 63.1 of the special conditions as "the property described in the front page of this Contract" - in other words, Lot 54, Plan SP 76027 being Apartment 111. In the absence of special condition 47.6.6, the provision on page 1 of the contract and clause 47.6.3 would meet the requirement of s 38-325(1)(c) for an agreement in writing that the supply is of a going concern. However, special condition 47.6.6 provides that that agreement is contingent upon on the circumstances contemplated in that special condition (underlined in [54] above) not having arisen. If the contingency is met, then there is no agreement that "the sale of the Property" is a supply of a going concern, but instead there is an agreement that it is a taxable supply and that the margin scheme is taken to have applied. 55 The respondent submits that "the supply of the Property under the Apartment Lease" is the supply by South Steyne to MML, that is the first supply. The applicants deny this and submit that it is the third supply, namely the supply made by MBI to MML in purchasing the apartment/room subject to the lease to MML. If the respondent is correct then my conclusions stated at [50] above in relation to the first supply lead to the further conclusion that there has been no agreement in writing that the supply is of a going concern and therefore the second supply is not GST-free. 56 In his oral submissions, Mr Robertson submitted that special condition 47.6.6 only makes sense if it is understood as directed to protecting the purchaser, MBI, from exposure to "an increasing adjustment of 10 per cent". Increasing adjustments increase the net amount a taxpayer must pay to the Commonwealth in respect of a tax period and arise on the occurrence of an adjustment event. Section 19-10 provides: An adjustment event is any event which has the effect of: (a) cancelling a supply or acquisition; or (b) changing the consideration for a supply or acquisition; or (c) causing a supply or acquisition to become, or stop being, a taxable supply or creditable acquisition. 57 Under Division 135 of the GST Act, increasing adjustments are of particular concern to the recipient of a supply of a going concern. In explaining what Division 135 is about, s 135-1 states: The recipient of the supply of a going concern has an increasing adjustment to take into account the proportion (if any) of supplies that will be made in running the concern and that will not be taxable supplies or GST-free supplies. Later adjustments are needed if this proportion changes over time. 58 Mr Robertson submitted that the concept of a "going concern" had no application in relation to the supply by South Steyne to MML because when South Steyne bought the Hotel, the sale was treated as taxable supply in respect of which the vendor applied the margin scheme pursuant to Division 75 of the GST Act. That being so, there could be no occasion for an increasing adjustment in respect of the supply by South Steyne to MML. Therefore the only relevant field of operation for the special condition was in relation to the third supply. 59 The applicants' submissions in relation to an increasing adjustment were made in oral argument and are not dealt with in their written submissions or those of the respondent. At the hearing the respondent made no comment on these submissions. 60 There is a difficulty in construing the supply made by MBI to MML in taking the reversion subject to the lease as a "supply of the Property under the Apartment Lease". If, however, I assume that the supply by MBI meets that description then, as the "Property" is Apartment 111 (see [54] above), my conclusion in relation to the first supply means that the contingency in special condition 47.6.6 is met. It follows that the agreement of the parties is not that the sale of the Property is a supply of a going concern but rather that it is a taxable supply and "that the margin scheme applies …". If, on the other hand, the supply made by MBI to MML in taking the reversion subject to the lease cannot be described as a "supply of the Property under the Apartment Lease" because it is not a supply of residential premises, then the contingency is illusory because it could never be met. Either way, the agreement that "the sale of the Property comprises a supply of a going concern" is supplanted by the agreement that "the sale of the Property is a taxable supply". 61 Putting aside the assumption made in the previous paragraph, I am not able to interpret the reference to a "supply of the Property under the Apartment Lease" as a reference to the supply by MBI. The applicants may be correct that the purpose of the provision was to protect MBI from liability for an increasing adjustment however, that purpose did not find its way into the words of the special condition. 62 I am conscious that interpreting a written contract involves ascertaining the meaning that it would convey "to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract"; Lord Hoffmann in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896at 912 quoted with approval by the majority of the High Court (Gleeson CJ, Gummow and Hayne JJ) in Maggbury Pty Limited v Hafele Australia Pty Limited (2001) 210 CLR 181 at 188. This approach was confirmed by the High Court in a unanimous judgment in Toll (FGCT) Pty Limited v Alphapharm Pty Limited (2004) 219 CLR 165 at 179: The meaning of the terms of a contractual document … normally, requires consideration not only of the text, but also of the surrounding circumstances known to the parties, and the purpose and object of the transaction.

63 In this case I have no evidence as to the purpose of the clause but only submissions to that effect made from the bar table. I accept that Mr Robertson's submissions rely not so much on considerations extrinsic to the contract but on the special condition read in the context of the GST Act, however, in my view the plain meaning of the reference to the "supply of the Property under the Apartment Lease" is such that in the context of the contract it does not seriously admit of any meaning other than that it is a reference to the first supply; Colby Corporation Pty Ltd v Commissioner of Taxation (2008) 165 FCR 133 per Branson and Stone JJ at 143. 64 It follows from my conclusion that the supply referred to is a reference to the first supply; that the contingency in special condition 47.6.6 has been met; and that the supplies to MBI made under the contracts of sale are not GST-free.

Is the second supply input taxed? 65 As I have concluded that the third supply is input taxed it is necessary for me to consider the applicants' alternative submission that if (contrary to their primary submission) the third supply is input taxed, then the second supply is also input taxed. In making this submission the applicants rely on s 40-65 of the GST Act;see [14] above. 66 Pursuant to s 40-65 a sale of real property is input taxed to the extent that the property is "residential premises to be used predominantly for residential accommodation (regardless of the term of occupation)". As I have already found that the apartments/rooms are residential premises and are to be used predominantly for residential accommodation then, prima-facie, the sale to MBI would be input taxed. There is, however, an exception in s 40-65(2) which applies, in the case of ss (2)(a), to premises that are "commercial residential premises", and in the case of ss (2)(b), to "new residential premises other than those used for residential accommodation … before 2 December 1998". I have already concluded that the premises are not commercial residential premises and therefore ss 2(a) does not apply. It remains to consider whether the premises fall within s 40-65(2)(b). 67 The applicants accept that rooms 111, 304 and 604 sold by South Steyne to MBI are "new residential premises". However they submit that, because these rooms had been "used for residential accommodation … before 2 December 1998", the exception does not apply. The respondent submits that the prior use referred to in s 40-65(2)(b) must be read as referring to residential accommodation that is not "commercial residential accommodation"; and that the use of the rooms in the relevant period was as commercial residential accommodation. Accordingly the exception in s 40-65(2)(b) applies. 68 In view of the distinction between commercial residential premises in s 40-65(2)(a) and residential premises in ss (2)(b), I prefer the interpretation advocated by the respondent. I do not accept the applicants' submission that there is no textual support for this construction. In my view the textual support is slight but clear and, as the respondent submits, is supported by comments in the explanatory memoranda to the Amendment Act and to the Indirect Tax Legislation Amendment Bill 2000 (Cth). The latter, in paragraph 11.12, refers to amendments to subsections 40-65(2) and 40-70(2), which will restrict the operation of those subsections two new residential premises but only if those premises were used for residential accommodation before 2 December 1998. Under the new subsections, the sale of a house that has been rented or used as residential premises by the owner prior to 2 December 1998 will be input taxed.

69 As the respondent observed in written submissions, this intention "would not be served by input taxing sales of apartments where the only previous use was as part of a hotel or other commercial residential premises". This is further confirmed by example 15.4 given at paragraph 15.20 in the EM to the Amendment Act. I accept the applicants' submission that a specific factual example in an explanatory memoranda and should not be read as "an authoritative declaration of the application of the law when it does not bear any relevant relationship to a particular amendment made by the Bill in question". In this case, however, the example supports the conclusion which I have reached as to the proper in interpretation of the words of the section.

Conclusion as to characterisation of the second supply 70 For the above reasons I have concluded that the exception in s 40-65(2)(b) applies and that the supplies made by South Steyne in the sale of rooms 111, 304 and 604 to MML are neither GST-free nor input taxed.

The third supply 71 The third supply is made by MBI as a consequence of it taking title subject to the ongoing lease to MML. The applicants seek a declaration that each such supply by MBI to MML was not input taxed under division 40 of the GST Act or under a provision of another Act. 72 There is no dispute between the parties that the purchase of the reversionary interest in the apartments by MBI effected a "supply" by MBI in favour of MML. The parties disagree, however, as to the nature of the supply made by MBI. Relying on s 9-10(1) of the GST Act which provides that "[a] supply is any form of supply whatsoever" (original emphasis), the respondent submits that the supply is properly characterised as a supply "by way of lease". The applicants submit that the supply falls within s 9-10(2)(g)(iii) because it is "an entry into, or release from, an obligation… to tolerate an act or situation". 73 The nature of the supply made by the assignee of a reversionary interest who takes subject to an existing lease was considered by the Full Federal Court in Westley Nominees Pty Ltd v Coles Supermarkets Australia Pty Ltd (2006) 152 FCR 461. At first instance, Kenny J held that the supply fell within s 9-10(1) and was a "supply by way of lease"; 2005 ATC 4484 at 4506. On appeal the Full Court was satisfied that the supply was "an entry into, or release from, an obligation… to tolerate an act or situation". The Court therefore found it was not necessary to decide if there was a supply by way of lease, although it commented, at 468, that there were indications tending against that construction. In their written submissions the applicants add that "there is nothing in s 40-35 or elsewhere in the GST Act that has the effect that a supply 'by way of' lease includes a supply by way of toleration of an existing lease". 74 It must be remembered that the issue in Westley was whether the assignee of the reversion had made any supply at all, rather than the nature of that supply. For this reason it was not necessary for the Full Court to consider the nature of the supply more specifically. In this case the distinction is critical to the outcome. If the supply made by MBI is a supply "by way of lease" then it falls within s 40-35 and it is input taxed. If, however, it is a supply made "by entry into, or release from, an obligation … to tolerate an act or situation" then it is not input taxed under Division 40, or indeed, under a provision of any other Act. 75 The factors that the Full Court in Westley felt tended against the supply made by the assignee of the reversion being "by way of lease" are to be found at 466 of the Full Court's reasons: The concept of "supply" in its ordinary meaning in s 9-10(1) of the GST Act does seem to require some act of provision, furnishment, conferral or giving of some thing. The inclusion in s 9-10(2) specifically identify some of these things, without limitation to subs (1), as goods, services, advice or information, real property and any right, (paras (a) to (e) inclusive). On the other hand, the concept of "financial supply" in para (f) is defined in the A New Tax System (Goods and Services Tax) Regulations 1999 (Cth) (reg 40-5.09) to include, amongst other things, the acquisition of an interest in or under specified financial instruments and para (g) extends the concept of "supply" to include the entry into an obligation to do something, to refrain from doing something or to tolerate an act or situation. For these reasons, the ordinary meaning of "supply" is arguably extended by paras (f) and (g), if not by paras (a) to (e) inclusive.

76 At common law the relationship between the assignee of a lessor's reversionary interest and an existing tenant is based on privity of estate, by virtue of which the parties are bound to observe those covenants in the lease that touch and concern the demised property. As Kenny J pointed in Westley at first instance, the common law position is augmented by statute in the various states. It is also common for the assignee and the tenant to enter into a contract, although that need not concern us here. 77 Covenants binding the new landlord under privity of estate may not require positive action such as the covenant for quiet possession. They may (and commonly do) include covenants that impose a positive obligation. In the lease in question, for instance, clause 8.1 obliges the landlord to pay land tax and other taxes (including any car park levies) as well as some impositions by the Owners Corporation. Where there are positive covenants the Full Court's reservations as to the concept of supply in its ordinary meaning in s 9-10(1) are not pertinent. In any event, in my view, the obligation to supply (by way of lease) exclusive possession and other rights falls within the ordinary and natural meaning of "supply". In Westley at 4506, Kenny J analysed the issue in the following way: Let it be assumed that the word "supply" in s 9-10 (1) bears its ordinary and natural meaning; … The Macquarie Dictionary defines the noun "supply" in various ways, including "the act of supplying, furnishing, providing, satisfying, etc; … that which is supplied …". The same dictionary defines the verb to "supply" as "to furnish or provide (something wanting or requisite)" or to "satisfy (a need, demand, etc)". The word "supply" is therefore apt to cover the respondents' "supply" by way of lease of the exclusive possession of the demised property in accordance with the lease.

78 With great respect to the reservations expressed by the Full Court in Westley I agree with her Honour's analysis. It recognises that a supply by way of lease may be made even though the supply did not involve a grant, assignment or surrender of property. I also agree with the respondent's submission that: Her Honour's reasoningis consistent with the terms of s 9-10, which make clear that the list of supplies in sub-section 2 is not exhaustive. It is also consistent with the High Court's recent conclusion that a "supply" in relation to real property, eg by a vendor pursuant to a contract for the sale of land, encompasses a range of obligations, at least some of which may fall within sub-paragraphs other than s 9-10(2)(d) of the Act: see Commissioner of Taxation v Reliance Carpet Co Pty Limited [2008] HCA 22 at [37], [38]. Each obligation is nevertheless 'supplied' to the purchaser 'under', or pursuant to, the contract for sale: [37]. An analogous construction should apply here. As the Full Court expressly did not decide that her Honour was wrong in finding that there had been a supply under s 9-10(1) I am not bound to decide otherwise. 79 In Westley the Full Court commented that it would be odd if a supply by way of lease were to come to an end on the assignment of the reversion such that there could be no longer a liability to GST. It would similarly be odd if the input tax nature of the supply of residential premises by way of lease were to come to an end on assignment to a third party. I agree with the respondent's submission that: There is no policy justification for treating an original landlord differently from a successor landlord with respect to a continuing lease on the same terms and in respect of the same property.

Conclusion as to characterisation of the third supply 80 For the reasons given above I have concluded that the supply made by MBI to MML was a supply by way of lease. I have concluded in relation to the first supply that the apartments/rooms leased to MML by South Steyne are residential premises and are not commercial residential premises. My reasons for reaching that conclusion also apply in relation to the third supply. Moreover the second part of the exception in parentheses in s 40-35(1)(a) does not apply because the supply to MML was not to an individual. Section 195-1 defines "individual" as "a natural person". MML is not a natural person. I have therefore concluded that, pursuant to s 40-35(1), the third supply made by MBI to MML was input taxed.

The fourth supply 81 In September 2007 Ms Emily Young booked accommodation at the Hotel at the direction of her employer who is the third applicant, Morgan & Banks Investments Pty Ltd. On 17 October 2007 Ms Young checked into the Hotel and spent the night in room 403. A tax invoice issued by MHL in respect of Ms Young's accommodation shows that she made use of many of the Hotel's facilities such as room service for dinner and breakfast, car parking, mini bar snacks, and in-house movies. She checked out on 18 October and paid, by Visa card, the amount of $452.95 in accordance with the invoice provided by MHL. 82 At issue between the parties is the characterisation of this supply by MML to Ms Young for the purposes of the GST Act. Although the applicants' primary position is that the supply is not input taxed, they sought, in the alternative, a declaration that the fourth supply is input taxed, if I should determine that the first and third supplies are input taxed. 83 The respondent submits that the fourth supply is not input taxed because it falls within the second part of the exception in parentheses in s 40-35(1)(a), namely that it was "a supply of accommodation in commercial residential premises provided to an individual by the entity that owns or controls the commercial residential premises". Accordingly, the respondent submits that the supply to Ms Young is a taxable supply. 84 The applicants submit that while there was "a supply of accommodation in commercial residential premises provided to an individual", that accommodation was not provided "by the entity that owns or controls the commercial residential premises". Both parties accept that in relation to this supply the Hotel, the Sebel Complex, comprises commercial residential premises. In the applicants' submission the accommodation, which was in room 403, was provided by MML, as lessee of room 403, through its agent MHL. The applicants submitted that MML does not own or control the Hotel in its entirety since "MHL owns the Management Lot and another entity controls the restaurant". 85 The respondent submits that by virtue of various agreements giving it control over the operation of the Hotel, MHL can be said to control the Hotel and therefore is "the entity that controls the commercial residential premises". It is therefore necessary to consider the position of MHL and the control it exercises by virtue of its ownership of the Management Lot and the car park and its rights under various agreements. 86 As mentioned above at [2], from 29 September 2006, MHL has had exclusive control of the operation of the serviced apartment business pursuant to the Serviced Apartment Management Agreement with MML. This agreement conferred upon MHL the benefit of MML's rights under the lease agreement to allow MHL to carry out its duties and responsibilities. It requires that MHL carry out all duties and responsibilities that MML has under the leases of the apartments/rooms and gives it exclusive control and discretion in the operation, direction, management and supervision of the serviced apartment business. This control includes hiring and discharging employees, determining employee benefits, determining credit policies, entering into contracts in its own name or as agent of MML, and setting room tariffs and charges. In addition the Serviced Apartment Management Agreement provides that MHL is responsible for: · collecting money from apartment guests, arranging for utility, telephone and other services, purchasing operating supplies, implementing a marketing program, introducing staff training programs and policies, entering into agreements with computer reservation services and travel agents etc, commissioning all hardware and software, and using the Management Lot in connection with the serviced apartment business; · refurbishing apartments to the extent necessary; · establishing and maintaining proper books and records and providing MML with audited accounts, statement of assets and liabilities and a yearly profit and loss statement; and · effecting insurances such as worker's compensation and third party insurance. 87 MHL also has considerable control over the conduct of the restaurant leased by Red Elm and the provision of room service and the service of alcohol in the restaurant, bar, mini-bars conference facilities and hotel rooms. It obtained these rights under an agreement dated 11 May 2006 with Red Elm which, inter alia, provides: · MHL may provide input on menus for room service and breakfast in the restaurant, including the price of each item on the menu, which Red Elm must incorporate; · Red Elm cannot change the menus for room service and breakfast in the restaurant, including the price of each item on the menu, without the prior written consent of MHL; · Red Elm must, when reasonably directed by MHL, give a discount for food and beverages during promotions; · All Red Elm employees must adhere to the requirements of MHL in relation to their dress and grooming, and must satisfactorily complete MHL's staff induction course on commencing employment; and · Red Elm must supply food and beverages to clients of the conference facilities, and meet with them, as required by MHL. 88 In addition to its rights under the two agreements described above, MHL also exercises control over the Hotel by virtue of its ownership of the basement car park in the Hotel and its ownership of the Management Lot. As the respondent submitted, "[t]he tax invoice supplied by MHL to Ms Young, considered together with the terms of the Serviced Apartment Management Agreement, supports the inference that the accommodation was provided to Ms Young by MHL in its own name…". It is immaterial that MHL is not the lessee of room 403. There is no legal barrier to the provision of accommodation pursuant to a licence given by a licensor who has no proprietary interest in the property.

Conclusion as to characterisation of the fourth supply 89 In view of the above, I find that MHL has sufficient practical control of the Hotel for it to be said that the accommodation provided to Ms Young was provided by "the entity that … controls the commercial residential premises". For that reason I am satisfied that the fourth supply is not input taxed, but rather, is a taxable supply.

Orders 90 For all of the above reasons the application must be dismissed. I note that the Commissioner has agreed to pay the applicants' costs under the Commissioner's test case funding program and therefore there will be no order as to costs. I certify that the preceding ninety (90) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Stone.

Counsel for the Applicants: A Robertson SC, S Free

Counsel for the Respondent: M A Wigney SC, D F C Thomas

Solicitor for the Respondent: Australian Government Solicitor