In the case of MSAUS v FC of T the Administrative Appeals Tribunal (AAT) recently held that Division 135 of the A New Tax System Goods and Services Tax Act (GST Act) did not apply to impose an increasing adjustment (an amount of GST on an otherwise GST-free transaction) to the sale of leased residential apartments.
The relevant proceedings arose out of the purchase of two residential apartments that were subject to a lease which contemplated the use of the apartments as part of a serviced apartment business.
“For tax practitioners, the Sebel Manly Beach Hotel is the gift that keeps on giving” was how Deputy President McCabe started his reasons in this decision, the latest in a series of cases arising from the transactions that followed the purchase of the Sebel Manly Beach Hotel by South Steyne Hotel Pty Ltd.
Under Division 135 of the GST Act, a purchaser becomes liable to pay an increasing adjustment if the purchaser is “the recipient of a supply of a going concern [under section 38-325], or a supply that is GST-free under section 38-480 [which concerns farm land]”, and the purchaser “intends that some or all of the supplies made through the enterprise to which the supply relates will be supplies that are neither taxable supplies nor GST-free supplies [for example, residential rent]”.
Under section 38-325 of the GST Act, one of the requirements for a supply of a going concern is that “the supplier and the recipient have agreed in writing that the supply is of a going concern”.
Crucial to the case was the analysis of the contract of sale of the two apartments (the Contract) which included on its front-page check boxes in relation to GST issues. The parties ticked the boxes as follows:
- “GST: Taxable supply” as ‘NO’;
- “GST-free because the sale is the supply of a going concern under section 38-325” as ‘YES’; and
- “Margin scheme will be used in making the taxable supply” as ‘NO’.
The special conditions for the Contract also included the following:
47.6.6 if page 1 of the Contract says that the supply is GST-free because the sale is the supply of the 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 the 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: MSAUS T-documents at T6-95.
The Commissioner claimed that the words in the boxes ticked by the parties satisfied the written agreement requirements in section 38-325. Therefore, the sales of the two apartments were each a supply of a going concern and the lease, hire, or licence of the apartments for residential rent engaged Division 135 of the GST Act such that an ‘increasing adjustment’ arose.
However, Deputy President McCabe decided in favour of the taxpayer who argued that the words on the front page of the Contract were not to be read in isolation, but in conjunction with clause 47.6.6 (see above). Accordingly, the wording of clause 47.6.6 introduced a contingency that allowed the parties to access the margin scheme as an alternative way of meeting the GST liability.
Deputy President McCabe held:
34. […] I am satisfied the purpose and effect of that clause as drafted is tolerably clear on its face. It provides for a contingency plan that is activated if something happens that triggers a liability to pay GST. In that event, the parties agreed the margin scheme would apply. It was open to them to reach an agreement to that effect in the contract of sale, and I am satisfied clause 47.6.6 does that. I am ultimately untroubled by the absence of express words of qualification in the clause which spell out how the clause interacts with the other provisions that would, if viewed in isolation, indicate a different result. The contract must be read in its entirety and the relationship between the various terms is clear.
As an alternative, the taxpayer argued that a deed of rectification which amended the Contract to reflect the intention of the parties to the Contract put the issue of whether the margin scheme applied beyond doubt.
Deputy President McCabe stated in his reasons that given his conclusion on the contingency created by clause 47.6.6 he was not required to decide on the rectification argument. However, Deputy President McCabe stated that rather than relying on a deed of rectification that may not (as alleged by the Commissioner) bind the Commissioner or third parties it would have been preferable that the taxpayer had approached the Supreme Court for an order that formally rectified the contract.
The decision illustrates the importance of having property lawyers working with tax lawyers to ensure that the contract of sale accords with both property and taxation laws. This will help to minimise risks of disputes in the future – both commercial and with revenue authorities.
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