FEDERAL COURT OF AUSTRALIA Westley Nominees Pty Ltd v Coles Supermarkets Australia Pty Ltd [2006] FCAFC 115 TAXES & DUTIES – Goods and Services Tax – transitional legislation – existing agreements – lease – where landlord sells reversion – whether incoming landlord makes a supply to existing tenant – where tenant obliged under lease to pay 'rent' and other amounts variously described for enjoyment of premises – whether other amounts part of consideration for the supply – whether separate supplies – where market rent review available only in respect of rent so-called – whether opportunity to conduct market rent review constituted opportunity to conduct general review of consideration for the supply – whether a 'review opportunity' for the purposes of transitional provision – whether supply was GST-free. A New Tax System (Goods and Services Tax) Act 1999 (Cth) ss 9-5, 9-10, 9-20, 156-22, 195-1 A New Tax System (Goods and Services Tax Transition) Act 1999 (Cth) ss 6, 12, 13 A New Tax System (Goods and Services Tax) Regulations 1999 (Cth) Reg 40-5.09 ACP Publishing Ltd v Commissioner of Taxation (2005) 142 FCR 533 approved British Airports Authority v Customs and Excise Commissioners [1977] STC 36 referred to British Airways plc v Customs and Excise Commissioners [1990] STC 643 referred to Case M58 (1990) 12 NZTC 2,333 referred to Cellsteel Ltd v Alton House Holdings Ltd (No. 2) [1987] 1 WLR 291 referred to CIC Insurance Ltd v Bankstown Football Club Ltd (1997) 187 CLR 384 cited Commissioner of Stamp Duties v Commonwealth Funds Management Ltd (1995) 38 NSWLR 173 referred to Commissioner of Stamp Duties v J V (Crows Nest) Pty Ltd (1986) 7 NSWLR 529 applied Commissioner of State Revenue v Price Brent Services Pty Ltd [1995] 2 VR 582 referred to Commissioner of State Revenue (Vic) v Royal & Sun Alliance Insurance Australia Ltd (2003) ATC 4998 referred to Customs and Excise Commissioners v British Telecommunications plc [1999] STC 758 referred to DB Rreef Funds Management Ltd v Commissioner of Taxation (2005) 218 ALR 144 approved Kimberley-Clark Ltd v Customs and Excise Commissioners [2004] STC 473 referred to Manchester, Sheffield and Lincolnshire Railway Co v Anderson (1898) 2 Ch 394 referred to Hallstroms Pty Ltd v Federal Commissioner of Taxation [1946] 72 CLR 634 referred to Sterling Guardian Pty Ltd v Commissioner of Taxation (2006) 149 FCR 255 cited WESTLEY NOMINEES PTY LIMITED and PAUL JOEL SPIRA v COLES SUPERMARKETS AUSTRALIA PTY LTD and COMMISSIONER OF TAXATION VID 719 OF 2005 RYAN, HEEREY AND EDMONDS JJ 10 JULY 2006 MELBOURNE IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY VID 719 OF 2005 ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA BETWEEN: WESTLEY NOMINEES PTY LTD First Appellant PAUL JOEL SPIRA Second Appellant AND: COLES SUPERMARKETS AUSTRALIA PTY LTD First Respondent COMMISSIONER OF TAXATION Second Respondent JUDGES: RYAN, HEEREY AND EDMONDS JJ DATE OF ORDER: 10 JULY 2006 WHERE MADE: MELBOURNE THE COURT ORDERS THAT: 1. Pursuant to O 6 r 8 of the Federal Court Rules, the Commissioner of Taxation be joined as second respondent to the proceeding. 2. The appeal be allowed. 3. The orders of Kenny J of 24 June 2005 be set aside and in lieu thereof it be ordered that the first respondent's application for declaratory and other relief be dismissed. 4. The first respondent pay the appellants' costs of the appeal and of the proceedings below, including any reserved costs but not including their costs of the motion on notice dated 20 April 2005. 5. There be no order as to costs of the second respondent, Commissioner of Taxation. 6. Liberty be reserved to any party to apply on not less than 48 hours notice in writing to the other parties. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY VID 719 OF 2005 ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA BETWEEN: WESTLEY NOMINEES PTY LTD First Appellant PAUL JOEL SPIRA Second Appellant AND: COLES SUPERMARKETS AUSTRALIA PTY LTD First Respondent COMMISSIONER OF TAXATION Second Respondent JUDGES: RYAN, HEEREY AND EDMONDS JJ DATE: 10 JULY 2006 PLACE: MELBOURNE REASONS FOR JUDGMENT tHE COURT: Introduction 1 Coles Supermarkets Australia Pty Ltd ('Coles') leases a supermarket at Greenslopes near Brisbane. The lease was originally granted by Lake Eerie Pty Ltd to Coles Myer Ltd ('CML'). Lake Eerie sold the freehold to the present appellants. Shortly afterwards CML assigned its lease to Coles. 2 The first question is whether the appellants' acquisition of the property subject to the existing lease constituted a 'supply' within the meaning of s 9-10 of the A New Tax System (Goods and Services Tax) Act 1999 (Cth) ('the GST Act'). The learned primary judge (Kenny J) answered that question in the affirmative: Coles Supermarkets Pty Ltd v Westley Nominees Pty Ltd [2005] FCA 839. 3 The second question concerns s 13 of the A New Tax System (Goods and Services Tax Transition) Act 1999 (Cth) ('the GST Transition Act'). The section's purpose is to relieve suppliers from Goods and Services Tax ('GST') liability where they cannot pass on the GST because the price for the supply was fixed under a contract made before the introduction of GST was announced. A supply will be GST-free if it is made before a 'review opportunity'. 4 In the present case the question is whether a review opportunity arose on 4 March 2004 when the lease provided for a rent review. Under the lease Coles had to pay a 'base amount rent', an 'annual percentage rental' and also operating expenses, after hours charges and promotion fund contributions. Only the base amount rent (53.51 per cent of the total) was subject to review. Did this mean that there was an opportunity under the lease for a 'general review, renegotiation or alteration of the consideration' within the meaning of s 13(5)(b)? The Commissioner of Taxation's Application to be joined as a party or intervene in the Appeal 5 By notice of motion heard immediately before the commencement of the hearing of the appeal, the Commissioner of Taxation ('the Commissioner') sought to be added as a second respondent to the appeal or, in the alternative, sought leave to intervene in the appeal. The Court, on balance, was of the view that the Commissioner should be added as a party to the appeal and indicated that formal orders to effect this would appear as part of the Court's orders disposing of the appeal. The First Issue: Did the Appellants make a 'supply' to Coles? 6 This issue was raised by the appellants in written submissions below, which were referred to at [48] of the learned primary judge's reasons. It seems that the issue was also the subject of oral argument before her Honour although her Honour observed (at [111]): 'In oral argument, counsel for the [appellants] advanced little by way of argument to support the [appellants'] written submissions on this point. As it happened, counsel for [Coles] said even less about the issue. In these circumstances, I do not propose to discuss the [appellants'] " no supply" argument at any length.' 7 Subject to that caveat, her Honour concluded at [114] of the reasons below that, even though the appellants did not make a 'grant, assignment or surrender of real property' within s 9-10(2)(d) of the GST Act, they made a 'supply' within s 9-10(1) of that Act; namely, a '… "supply" by way of lease of the exclusive possession of the demised property in accordance with the lease'. The Submissions on Appeal 8 On the hearing of the appeal, this issue was at the forefront of the appellants' submissions. The essence of the submission was that, while her Honour was correct in concluding that the appellants did not make a 'grant, assignment or surrender of real property' within s 9-10(2)(d) of the GST Act, she had erred in holding that there had otherwise been a 'supply' within s 9-10(1) namely, a '… "supply" by way of lease of the exclusive possession of the demised property in accordance with the lease'. 9 In support of this submission, the appellants referred to the decision of the Court of Appeal in Cellsteel Ltd v Alton House Holdings Ltd (No. 2) [1987] 1 WLR 291. In that case, leases had been granted by a company called Calflane Ltd to tenants over parts of a property called Cavendish House. The leases also granted rights of way to the tenants over certain areas of the property. Calflane Ltd sold and conveyed the freehold to a company called Alton House Holdings Ltd, which then granted a lease to Mobil of part of the premises which included that part over which the original tenants had rights of way. Mobil contended that the exercise by the tenants of their lawful right of way was in breach of Alton House Ltd's covenant for quiet enjoyment which was in substantially the same terms as in the present lease: 'The landlord hereby covenants with the tenant that … the tenant shall peaceably hold the demised premises for the term hereby granted without any interruption by the landlord or any person lawfully claiming through under or in trust for the landlord.' 10 Alton House Ltd successfully resisted Mobil's claim by contending that the original tenants did not claim 'through or under the landlord [Alton House Ltd]'. Notwithstanding that Alton House Ltd had purchased the reversion of each of the leases and the tenants could enforce the covenant of Calflane Ltd against Alton House Ltd, the Court of Appeal held that they did not claim under Alton House Ltd. Fox LJ, who delivered the judgment of the Court of Appeal, said (at 294): 'The next question is: did the tenants claim that right "under" Alton House? In my judgment they did not. In asserting and establishing the right, the tenants did not need to refer to Alton House, or any act or disposition of Alton House, at all. They derived their right from Calflane, and it would be from and through Calflane alone that they would deduce the title which gave them the right to claim the injunctions. Alton House formed no part of that title, and it never conferred upon the tenants any rights in respect of the premises at all. The rights were created by virtue of a title paramount to Alton House which, at all times, had effect in priority to Alton House's title and was superior to it. In those circumstances, I do not think it would be a proper use of English to say that the tenants of the flats and garages claimed "under" Alton House. Their relevant rights were wholly independent of anything ever done by Alton House.' 11 The appellants further submitted that there was no 'supply' by them to Coles by virtue of s 9-10(2)(g). That paragraph provides that supply includes – '(g) an entry into, or release from, an obligation: (i) to do anything; or (ii) to refrain from an act; or (iii) to tolerate an act or situation;' 12 In this regard, it was submitted that the appellants did not enter into an obligation to do anything, to refrain from an act or to tolerate an act or situation. The appellants purchased the reversion, the freehold subject to the lease, and it is no more correct to say that the appellants, in doing so, entered into an obligation of any of the kinds described in s 9–10(2)(g) than it is to say that they purchased a right to receive rent under the lease. The right of Coles to enjoy and enforce against the appellants the benefit of the covenants by Lake Eerie originally conferred on CML arises by operation of law and not by any act of the appellants by way of entering into an obligation. In support of this submission we were referred to what was said by Chitty LJ in Manchester, Sheffield and Lincolnshire Railway Co v Anderson (1898) 2 Ch 394 at 402 and by Fullagar J in Comptroller of Stamps (Vic) v Rylaw Pty Ltd 81 ATC 4,411 at 4,415 (rhc), in particular, his Honour's reference to what had been said by Molesworth J in Ex parte Finlay (1884) 10 VLR (Eq.) 68 at 76. 13 In response, Coles submitted that the definition of 'supply' in subss 9-10(1) and (2) is adequate to encompass the obligation, assumed by a landlord upon acquiring a reversionary estate, to continue to provide exclusive possession to a lessee, notwithstanding that the original grant has been conferred by the landlord's predecessor in title. According to its submission, it is well established as a matter of property law that the obligation to permit quiet enjoyment of the demised property runs with the land and burdens any assignee of the reversion. The obligation runs because it relates to the land and by reason of the privity of estate that exits between lessor and lessee: Manchester, Sheffield and Lincolnshire Railway Co v Anderson at 402-3 per Chitty LJ. Thus, it was submitted, the lessee's continued entitlement in a legal sense to possession of the land is as against the new owner who acquires subject to that obligation and who derives the benefit of the entitlement to rent which passes, in this case, pursuant to s 117 of the Property Law Act 1974 (Qld). 14 Coles submitted that there was a 'supply' within subs 9-10(1) as found by her Honour below; alternatively, there was a 'supply' within par (g) of subs 9-10(2). 15 The Commissioner made similar submissions to Coles but arguably went further in contending that a supply can be 'a legal consequence', not requiring a conscious or deliberate act on the part of the supplier. In this sense, one might have a supply which arises by operation of law. Reasoning 16 The concept of 'supply' in its ordinary meaning in subs 9-10(1) of the GST Act does seem to require some act of provision, furnishment, conferral or giving of some thing. The inclusions in subs 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, (pars (a) – (e) inclusive). On the other hand, the concept of 'financial supply' in par (f) is defined in the GST Regulations 1999 (40-5.09) to include, amongst other things, the acquisition of an interest in or under specified financial instruments and par (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 pars (f) and (g), if not by pars (a) – (e) inclusive. 17 Reference was made to s 156-22 of the GST Act which provides that, for the purposes of Division 156, a supply or acquisition by way of lease, hire or similar arrangement is to be treated as a supply or acquisition that is made on a progressive or periodic basis, for the period of the lease, hire or arrangement. Such supplies and acquisitions are treated as separate supplies or acquisitions but only for the purposes of the attribution rules in Division 156 – the attribution of when GST is payable and when an entitlement to an input tax credit arises. There is no reason to read s 156-22 as not applying equally to a lease of real property and a bailment of personalty and, in the case of real property, as not being confined to a 'supply' within s 9-10(2)(d), but as including a 'supply' by way of lease, hire or similar arrangement otherwise than by way of grant, assignment or surrender. 18 Reference was also made to s 12(3) of the GST Transition Act which, while it is confined to a supply (not an acquisition) by way of lease, hire or similar arrangement, provides that, for the purposes of s 12 of that Act, such a supply is taken to be a supply for the period of the lease, hire or arrangement. Section 12 applies specifically if a supply is made under an agreement or enactment that provides that the thing supplied is to be supplied for a period or progressively over a period that begins before 1 July 2000 and ends on or after 1 July 2000. In this context, Senior Counsel for the appellants pointed to s 6(3) of the GST Transition Act which provides that, for the purposes of that Act, a supply or acquisition of real property is made when the property is made available to the recipient. It was suggested that s 6(3) of the GST Transition Act determined the time of a supply of real property for the purposes of that Act and that s 12(3) thereof was, arguably, only applicable to a supply by way of lease, hire or similar arrangement of personal property. Both Senior Counsel for Coles and Senior Counsel for the Commissioner disputed this construction and we uphold their contention. Section 12(3) is dealing with a particular type of supply – by way of lease, hire or similar arrangement – not with the subject matter of the supply – and only operates as a deeming provision for the purposes of s 12. Section 6(3), on the other hand, is dealing with the time of a supply or acquisition of real property for the purposes of the GST Transition Act. 19 Notwithstanding that there is no reference to s 12 in the note annexed to s 6(3), as there is for ss 6(4) and 6(5) of the GST Transition Act, we are of the view that s 12(3) does apply to a supply of real property by way of lease, hire or similar arrangement for the purposes of s 12 of the GST Transition Act, and that s 6(3) otherwise determines the time of supplies or acquisitions of real property for the purposes of that Act. For the foregoing reasons, it seems to us that, as with s 156-22 of the GST Act, there is no reason to read s 12(3) of the GST Transition Act as not applying equally to a lease of real property and to a bailment of personalty; and, in the case of real property, as not being confined to a 'supply' within s 9‑10(2)(d), but as including a 'supply' by way of lease, hire or similar arrangement otherwise than by way of grant, assignment or surrender. 20 It was put to Senior Counsel for the appellants that it would be an odd result if a 'supply' by way of lease of real property were to come to an end when the owner of the property and grantor of the lease sold the reversion to a third party purchaser so that, while the third party purchaser of the reversion and the lessee would remain bound in terms of the lease and entitled to enjoy the respective benefits therefrom, there would no longer be a 'supply' upon which a liability to GST could be founded. Surely, that could not have been the intention of Parliament. Senior Counsel's response was that it is not an odd result. First, it is entirely revenue neutral; no GST is payable, but then nobody gets an input tax credit. Second, this is new legislation and gaps like this are to be expected; if Parliament intends that the purchaser of a reversion is to be regarded as continuing to make the supply which its predecessor in title contracted to make, then it would be easy enough to enact a deeming provision. As indicated below, we take the view that the existing legislation discloses such an intention. 21 With respect, the revenue neutrality argument does not neutralise the oddness of the result for which Senior Counsel for the appellants contended. At one moment GST would be payable in respect of what is an undoubted taxable supply and, at the next instant, GST would not be payable because the lessee is no longer paying rent to the grantor of the lease, but to the grantor's successor in title, the purchaser of the reversion. True, the lessee will not be entitled to an input tax credit, but that is consistent with the operation of the taxing regime if the rent is not consideration for a supply. The appellants' argument leads to a curious result because it entails that the lease of the real property to the lessee ceases to be a 'supply', notwithstanding that the lease is still on foot and the lessee is paying rent, albeit to the purchaser of the reversion, in accordance with the lease. One could understand that result where the lessee purchases the reversion and there is a merger: the lease being absorbed into the reversion and destroyed. But that is not the case here. 22 While the matter is not entirely free from doubt, we have concluded that when the appellants purchased the reversion they assumed the obligation of Lake Eerie to honour the lease according to its terms and in that sense entered into an obligation to tolerate an act or situation and in consequence, made a 'supply' by virtue of s 9‑10(2)(g). The fact that the obligation arises by operation of law does not, in our view, impede this conclusion; after all, the reference to 'obligation' in s 9-10(2)(g) must be a legal obligation, although not necessarily one sourced in contract. 23 In the circumstances, it is unnecessary for us to determine whether there is a '… "supply" by way of lease of the exclusive possession of the demised property in accordance with the lease' as her Honour below concluded in reliance on the ordinary meaning of the word 'supply' in s 9-10(1). However, the indications discussed at [16] above tend to point away from that construction. The Second Issue: Did a 'Review Opportunity' for the purposes of s 13 of the GST Transition Act arise in March 2004? The Conclusions and Findings Below 24 The learned primary judge concluded at [101] that a review opportunity within the meaning of s 13(2) of the GST Transition Act arose on 4 March 2004 under the terms of the lease. In her Honour's words (at [101]): 'This is because on that date Clause C permitted the base annual rent payable under the lease to be reviewed to reflect the fair market rental for the lease of the property.' 25 In arriving at this conclusion her Honour made a number of underlying findings, some of fact, some of mixed fact and law. 26 First, her Honour found at [13] that in the twelve months prior to 4 March 2004 Coles had paid the following amounts (subject to minor adjustments) to the appellants under the lease: Amount paid Percentage of total payments Item Base amount rent $720,207.72 53.51% Annual percentage rental $294,958.80 21.92% Operating expenses $258,996.08 * 19.24% After-hours charges $ 64,622.87 ** 4.80% Promotion fund contribution $ 7,076.40 0.53% * The correct figure was $256,025 although her Honour found that nothing turned on this discrepancy. ** It was accepted that Coles had in fact paid $108,167.68 for after-hours charges. 27 Second, her Honour made certain findings in relation to the terms of the lease. Clauses 4 and 5 of the lease respectively dealt with 'rent' and 'operating expenses of the Centre'. Clause 4 required Coles to pay the 'base annual rent' calculated in accordance with the formula in the First Appendix and cl 5 required Coles to pay its proportion of the operating expenses of the Centre. These included taxes imposed on or in respect of the Centre, the rates and charges of any public, municipal or government body, insurance premiums, utility charges, the cost of repairs and maintenance, expenses associated with the operation of the parking areas, costs of the air-conditioning of the Common Area and the cost of maintaining services provided by the lessor for the lessees, occupiers or visitors. 28 The First Appendix dealt specifically with rent. Clause A provided that the annual rent payable by the lessee consisted of two components. They were: 1. The base annual rent; and 2. the annual percentage rental. Clause B was not relevant. Clause C stated: 'The base annual rent for the remaining years of the term shall be reviewed as at the commencement of the ninth, fourteenth and nineteenth years of the term to the greater of two amounts namely: — (a) an amount equal to one‑fifth of the total sum of the base annual rent and the annual percentage rental payable during the period of five years ending on the day last preceding the review date in question; or (a) the then fair market rental for the demised premises calculated on a "sitting tenant" basis for the balance of the term with the options for renewed leases hereinbefore contained having regard to: — (i) the rental being obtained at the relevant review date for premises of a similar size and quality in similar geographical locations; (ii) the period of the balance of the term; (iii) the terms of the Lease for the balance of the term; (iv) the fittings and fixtures in the demised premises the property of the Lessor; (v) the services facilities amenities and other benefits … available on the land or in the Centre or in the buildings for use by the Lessee or its customers, invitees, servants, agents, licensees or concessionaires or which may assist or enhance in any way the Lessee's business or the demised premises; (vi) such other matters (if any) as to the Lessor or the Lessee may seem relevant. The outgoings and other expenses likely to be incurred by the Lessor in respect of the land and the Centre during the balance of the term and which are not recoverable by the Lessor from the Lessee are not to be taken into account.' 29 Clause E of the First Appendix made provision for annual percentage rental during years 9 to 23 and stipulated: 'The annual percentage rental during the years 9 to 23 inclusive of the term is 2% of that sum by which in each of such years the Lessee's turnover exceeds an amount determined by the following formula: — RY x T3 BR3 Where: RY is the base annual rental for the year in question; T3 is the Lessee's turnover during the year commencing on the 4th day of March, 1998; and BR3 is the base annual rent paid by the Lessee to the Lessor for the year commencing on the 4th day of March, 1988.' 30 Third, her Honour found that the intention of the parties to the lease was to provide for a review of the primary element of the annual rent payable by Coles as at specified anniversaries of the lease. Upon such review, the base annual rent was to be either the product of the calculation in cl C(a) or fair market rental in cl C(b), whichever was the greater. Clause A made it plain that the base annual rent is separate and distinct from the annual percentage rental. The review in cl C is to attain a new figure for base annual rent, and not annual percentage rental. Accordingly, the fair market rental in cl C(b) is to be calculated without importing annual percentage rental into the calculation. For the purposes of cl A, in order to arrive at a figure for annual rent, the annual percentage rental is to be calculated in accordance with cl E and the product of this calculation added to the figure for base annual rent. Having regard to cl A, the requirement – that regard be had to the terms of the lease for the balance of the term in determining fair market rental – did not include cl E relating to annual percentage rental. 31 Leaving aside the question of the lessee's contribution to operating expenses, her Honour found that the fact that cl C(b) made no provision for the review of annual percentage rental, did not negate the general character of the review provided for in cl C(b). Her Honour said (at [79]): 'In the present context, a general review of the consideration for the supply is, at the least, a review of the rent payable under the lease. A review to market of the rent payable will be general if it entails reconsideration of most of the rent, including its fundamental or primary component or components, even though it does not involve the reconsideration of every element of the consideration …' 32 Next, her Honour found that the use of the expression 'base annual rent' indicates that, though not the whole of the rent, this rent is the primary or fundamental component of the whole rent. She found as well that the use of the expression 'annual percentage rental' also indicates the essential character of this rent; that is, that it is the incremental addition to the base annual rent adjusted annually by reference to turnover. In this regard she accepted the submission of counsel for Coles that the fact that the annual percentage rental is not expressly reviewed does not prevent there being a general review of rent when annual percentage rental is adjusted annually by reference to 2 per cent of turnover. 33 On this point, her Honour found that if 'the consideration in money … for the supply' is properly limited to the annual rental, for which provision is made in cl A, then, as at 4 March 2004, a review opportunity, within s 13(2) and (5)(b) of the GST Transition Act arose. According to her Honour, this was because, on that date, cl C(b) of the lease afforded an occasion for the base annual rent to be reviewed to market, thus providing an opportunity to make an allowance for the GST. 34 Finally, her Honour found that, because rent and the operating expenses of the Centre are dealt with in separate clauses of the lease (cl 4 and cl 5 respectively), because Coles' covenant to pay a share of the Centre's outgoings is not expressed to be referable to the exclusive use of the demised property, being referable rather to the Centre as a whole and because the parties have not treated the outgoings as part of the 'true rent', cf., Commissioner of State Revenue v Price Brent Services Pty Ltd [1995] 2 VR 582, the consideration for the lease is the rent reserved; and the lessee's contribution to outgoings is for the provision of such ancillary and incidental benefits and services as arise from being part of the Centre as a whole. If this analysis is correct, then the lessee's contribution to outgoings did not constitute part of the consideration for the supply, unless the statutory definition of 'consideration' made it so. Her Honour acknowledged that the statutory definition of 'consideration' in s 195-1 of the GST Act, which is made applicable to the GST Transition Act, is general and expansive and capable of describing both an immediate and remote relationship between a supply and a money payment by the recipient of the supply. However, she considered, that feature does not alter the conclusion that the 'consideration … for the supply' that is to be the subject of a general review opportunity does not include Coles' contribution to outgoings, nor the after-hours operations charge nor any contribution to the promotion fund. Her Honour's process of reasoning involved asking the question: In the statutory context presently under consideration, what do the words 'in connection with' (in the definition of 'consideration') signify? Her Honour answered this question by saying that there is nothing in the context to support the proposition that they signify a relationship between anything other than that which the lease specifically identifies as a supply and what the lease identifies as the consideration for the supply. Her Honour went on (at [94]): 'Section 13 of the GST Transition Act provides the relevant statutory context in this case. By virtue of s 13(1), s 13 only applies where a written agreement specifically identifies the supply and identifies the consideration for the supply. The review opportunity, the subject of s 13(5)(b), is an opportunity for a general review of this consideration. The terms of the lease identify the rent reserved as the consideration for supply, which is specifically identified, namely, the exclusive possession for a term of the demised property. As we have seen, the rent reserved is the annual rental as stated in clause A; and not the lessee's contribution to the outgoings of the Centre, the after-hours operations charge and the contribution to the promotions fund. Accordingly, these payments are not part of the consideration for present purposes, notwithstanding the expansive definition of 'consideration' in s 195‑1 of the GST Act. Put another way, whatever may be the broad effect of the statutory definition, this yields to the intention evident in s 13 of the GST Transition Act.' The Submissions on Appeal 35 The appellants submitted that her Honour had erred in confining the consideration for the supply being the exclusive possession for a term of the demised property, so as to exclude Coles' contribution to the outgoings of the Centre. Senior Counsel for Coles submitted that, in a GST context, courts have been reluctant to apportion a supply into various components when, in truth, they are part of one commercial transaction. Here the relevant transaction was the lease of premises being part of a shopping centre complex. Where one can identify a supply as incidental to a principal supply, courts have generally treated the transaction as giving rise to one supply. Reference was made to Customs and Excise Commissioners v British Telecommunications plc [1999] STC 758; British Airports Authority v Customs and Excise Commissioners [1977] STC 36; British Airways plc v Customs and Excise Commissioners [1990] STC 643; and Kimberley-Clark Ltd v Customs and Excise Commissioners [2004] STC 473 where English courts have asked whether there is a single supply or multiple supplies and have answered that question by reference to economic or commercial reality – i.e. by considering whether the transaction by reference to those criteria involves one single transaction or separate transactions. In Senior Counsel's submission, the issue is not whether the covenant to pay a share of outgoings is to pay rent; the issue is whether the covenant to pay a share of outgoings is consideration 'in connection with' the lease. The clear answer to that, it is submitted, is that it is, as it is paid to secure the lessee's better enjoyment of the demised premises. The demise is subject to compliance with all of the lessee's covenants, including the covenant to pay a share of the operating expenses. 36 It follows, so it was submitted, that the consideration in money in respect of the relevant supply is made up of: · Base annual rent – cll 4(a) and (b) and the First Appendix. · Annual percentage rental – cll 4(a) and (b) and the First Appendix. · Lessee's proportion of operating expenses of the Centre – cl 5. · After-hours charges and promotion fund contribution – cl 6(k), cl 13(g) and Rule 13. 37 The appellants submitted that they have had no opportunity to alter the consideration to pass on GST and that the learned primary judge should have rejected Coles' submission that the appellants were able 'to make allowance for GST in resetting the price for the supply'. First, there is no opportunity under the lease to conduct a general review of the contribution to outgoings and Coles did not contend to the contrary. Second, it is also clear that there was no opportunity for the supplier to conduct a general review of the annual percentage rental. This is calculated pursuant to a fixed formula in the lease, with no opportunity for the appellants to conduct anything in the nature of a review. Coles merely has the obligation to pay an amount calculated pursuant to a formula. Her Honour accepted, at [79], that there was no opportunity under the lease to conduct a review of the annual percentage rental. But at [80] she said that, based on expert evidence, the annual percentage rental 'is in substance equivalent to at least a partial adjustment to market'. It is submitted that there was no such evidence. In fact, it is said Coles' evidence showed that the annual percentage rental went down in 2004 notwithstanding that market rents would not have declined. Moreover, the calculation of annual percentage rental could no more constitute an opportunity under the agreement for the supplier to conduct a general review of the consideration than a clause increasing the rent by a fixed proportion each year. 38 It was pointed out on behalf of the appellants that the annual percentage rental in the relevant year is 2 per cent of the sum by which Coles' turnover exceeds an amount determined by the specified formula, namely, $21,713,876. In the year ended 3 March 2004 the annual percentage rental represented 20.3 per cent of the total consideration (including outgoings etc.) and 27.8 per cent of the annual rent reserved. Neither could be regarded as de minimis or insignificant. The assertion that the 2 per cent was in some way significant because supermarkets are currently prepared to pay 2 per cent to 2.5 per cent of turnover by way of rent, was said to be misconceived. The 2 per cent only applied to part of the turnover and, moreover, when the lease was negotiated, the rent was 3.2 per cent of turnover. Moreover, Mr Willington agreed that 'in the market now there are tenants paying well in excess of 3 per cent …'. 39 As the formula for the calculation of the annual percentage rental fell to be applied according to its own terms and did not give anyone the opportunity to conduct any review, it followed that there was no opportunity to conduct a review of that part of the consideration consisting of the contribution to outgoings etc. or the annual percentage rental. 40 Senior Counsel for the appellants disputed the contention of the Commissioner that a general review of the consideration is a review of most (being over 50 per cent) of the consideration. The word 'general' qualifies the nature of the review, not just the proportion of the consideration subject to review. Subject to any possible application of the de minimis principle, the consideration means the whole of the consideration. This follows from the words of the provision and the scheme of legislation that provides that, if there is a review opportunity, GST is payable on the whole of the consideration. 41 Senior Counsel for Coles submitted that her Honour correctly held that a review opportunity had arisen on 4 March 2004 because, with effect from that date, the appellants were able to conduct a review of the primary amounts payable by Coles pursuant to the terms of the lease. The existence of a review opportunity, he submitted, is not dependent upon it being taken up in any way and nor is it dependent upon whether any GST is actually capable of being passed on. All that is necessary is that the supplier have the power to conduct a review of the consideration of sufficient width to come within the description in s 13(5)(b) of the GST Transition Act. 42 Senior Counsel for Coles submitted that the review described in s 13(5)(b) is not as wide as a review of 'all' the consideration, the 'total' of the consideration or the 'whole' of the consideration. Such a requirement would not be consistent with the balance struck between competing objectives. 43 He further submitted that, as her Honour concluded, an opportunity for a general review had arisen in this case because, on 4 March 2004, the provisions of cl C of the First Appendix to the lease permitted the base annual rent payable under the lease to be reviewed to reflect 'fair market rental' for the supply of the premises. Her Honour's conclusion that there had been an opportunity for a general review because the relevant 'consideration' was the base annual rent was correct as a matter of construction of the lease: cl A of the First Appendix to the lease provides that the rent payable consists of two separate components (base rent and annual percentage rental), but it is the base annual rent which is the primary consideration payable for the supply of the premises. It was this amount which the appellants were entitled to have reviewed to 'fair market rental'. Unlike the lease which the Victorian Court of Appeal had considered in Price Brent, the present lease did not treat the obligation to make ancillary payments as being part of the rent reserved. 44 Senior Counsel for Coles submitted that if, however, a broader view of the 'consideration' had been taken, her Honour's conclusion that there was a review opportunity would still have been correct. The annual percentage rental was subject to annual adjustment by reference to 2 per cent of turnover, which in substance was equivalent to at least a partial adjustment to market. If the 'formula' is applied on the occasion of a review opportunity, the change in annual percentage rental since the occasion of the last review opportunity is taken into account in applying the formula, with the result that the turnover adjustment is periodically 'rolled in' to the base rent. This creates a mechanism to import into the review clause an accepted industry benchmark of expected adjustments to market rent. 45 It was further submitted that the review would also have been general if the other amounts which Coles was required to pay to the appellants had been included in the 'consideration'. It was submitted that the appellants' argument seeks to segregate from the review those components that may appear to be fixed and thereby misunderstands the comprehensive nature of the market rent review contemplated by this lease, and many other commercial leases. The market review opportunity agreed to does not cease to be general merely because some components of the total amount payable by a tenant have been agreed to in advance or have been fixed by reference to a formula. The construction urged by the appellants depends upon an artificial view of the inter-relationship between the individual components and is contrary to the valuation process applied in determining the market base rent. Specifically, the market review process involves the determination of a market-driven gross amount from which outgoings and other components are deducted. The balance remaining is the market base rent which enables allowances to be made for GST. Reasoning 46 Section 13 of the GST Transition Act 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.' Purpose of Section 13 47 It is a fundamental premise of the GST Act that a supplier is entitled, and, indeed, expected, to pass on to the recipient of the supply the burden of the GST imposed on the supplier by including an amount by way of reimbursement for the GST. The references to the Explanatory Memorandum by Sackville J in DB Rreef Funds Management Ltd v Commissioner of Taxation (2005) 218 ALR 144 at [2], recognise this fundamental premise. 48 However, it may not be possible for a supplier to pass on the GST where the supply has been made under a contract entered into before the introduction of GST was announced. Section 13 of the GST Transition Act was enacted to provide protection to suppliers in these circumstances by making the supply GST-free, at least for a supply made before 1 July 2005. 49 The purpose of s 13 is to avoid the unfairness which would result if the supplier, under a contract of the kind specified in s 13(1), were made liable for GST in circumstances where the supplier had not been able to take GST into account in arriving at the consideration payable for the supply. As Hill J observed in ACP Publishing Ltd v Commissioner of Taxation (2005) 142 FCR 533 at [6]: 'An obvious unfairness could clearly arise where contracts had been entered into before GST was even in contemplation where those contracts were to be implemented after the legislation had been enacted. The unfairness lies in the fact that the parties to such contracts would not have taken GST into account in determining the consideration that was to be paid. An obvious example is a long term lease of commercial premises entered into before the GST legislation where the rental was fixed. If GST were subsequently to be imposed upon the lessor the impact would be to reduce the return to the lessor to the extent of the 10% GST imposed. Section 13 of the Transition Act was enacted to alleviate such problems.' 50 Such a purpose is also evident from the context of s 13 and the extraneous materials referred to by Sackville J in DB Rreef, supra, at [100] to [108]. The concept of a 'review opportunity' 51 The definition of 'review opportunity' in s 13(5) deals with three alternative situations. The first, found in par (a), is where the supplier has an opportunity (either unilaterally or with the agreement of another relevant party or parties) to change the consideration for the supply because of the imposition of GST. 52 The second and third situations (found in pars (b) and (c)) involve something less advantageous to the supplier than the first – an opportunity for the supplier (either unilaterally or with the agreement of another relevant party or parties) to conduct a general review, re-negotiation or alteration of the consideration for the supply. Paragraph (b) applies where that opportunity arises on or after 1 July 2000 and par (c) applies where an opportunity has arisen before that date. The two paragraphs are otherwise identical except for the positive requirement in par (c) that the general review, re-negotiation or alteration of the consideration must take account of the imposition of the GST. 53 An explanation for the distinction between pars (b) and (c) is that, as par (c) concerns an opportunity having arisen before the GST came into force, it would be unfair to deny a supplier the benefit of GST-free treatment under s 13 unless the future imposition of the GST had been expressly taken into account. In contrast, par (b) deals with an opportunity arising after the imposition of the GST. It is appropriate in that situation for there to be no positive requirement that the potential imposition of GST be actually taken into account, because a supplier would normally be expected to take it into account in conducting a general review, re-negotiation or alteration of the consideration under the agreement. 54 We do not think that the difference in the wording of pars (b) and (c) indicates that par (b) was intended to apply where the relevant 'review, renegotiation or alteration' of the consideration does not allow the supplier to take GST into account. It seems to us that it would be an odd result if par (b) could apply in circumstances where there was a relevant 'review, renegotiation or alteration' which could not take GST into account, given that the purpose of s 13 is to prevent the unfairness of that very situation. These are elements of the context of s 13 which need to be taken into account, in the first instance, in the construction of par (b) of s 13(5): see CIC Insurance Ltd v Bankstown Football Club Ltd (1997) 187 CLR 384 at 408. 55 The proposition that par (b) must allow the supplier to take GST into account in any relevant 'review, renegotiation or alteration' of the consideration is not inconsistent with the proposition that a market rent review conducted on precisely the same basis as the original rent determination may be a review opportunity within par (b) even if the result of that review is that the rent goes down because market rents have fallen in the meantime. However, that is not the present case. 56 As the primary judge noted at [72] of her reasons, it was common ground that the appellants did not have an opportunity to change the consideration because of the imposition of the GST. Nor did they have an opportunity to conduct, before 1 July 2000, a general review, re-negotiation or alteration of the consideration that took account of the imposition of the GST. It is for this reason that par (b) of s 13(5) is critical to the resolution of this case. 57 The concept of a 'general review' for the purpose of par (b) of s 13(5) of the GST Transition Act requires a complete or almost universal consideration of the same subject: DB Rreef, supra at [98] per Sackville J. The words 'the consideration' refer to the whole of the consideration for the supply, not to a mere part of that consideration. This is consistent with the structure of the GST Act (in particular, the fact that GST, if payable, is payable under s 9‑5 of the Act on the entire consideration for the supply) and the purpose of s 13 of the GST Transition Act. 58 The identification of the (whole of the) consideration is inevitably bound up with the identification of the supply, in particular, whether there has been more than one supply and, if so, the allocation of the (whole of the) consideration amongst those various supplies. Whilst she did not say as much in express terms, her Honour's finding, at [88] of her reasons, that the consideration for the lease is the rent reserved and Coles' contribution to outgoings is for the provision of such ancillary and incidental benefits and services as arise from being part of the Centre as a whole, is tantamount to finding that there were two supplies and that Coles' contribution to outgoings did not constitute part of the consideration for the supply that is the lease. With respect, we cannot agree. 59 Although GST is effectively a tax on final private consumption in Australia, it is a tax on business transactions which constitute a 'taxable supply': Sterling Guardian Pty Ltd v Commissioner of Taxation (2006) 149 FCR 255 at [15]. A supply is not a 'taxable supply' unless, amongst other things, the supply is made in the course of furtherance of an enterprise that is carried on: see ss 9-5(b) and 9-20 of the GST Act. This brings to mind the oft-quoted passage of Sir Owen Dixon in dissent in Hallstroms Pty Ltd v Federal Commissioner of Taxation (1946)72 CLR 634 at 648 where his Honour said, in a totally different context: 'What is an outgoing of capital and what is an outgoing on account of revenue depends on what the expenditure is calculated to effect from a practical and business point of view, rather than upon the juristic classification of the legal rights, if any, secured, employed or exhausted in the process.' That observation seems to us to be equally applicable in determining whether expenditure secures an ancillary and incidental supply separate and discrete from the main supply or whether it forms part of the consideration for a single supply. Such an approach points in the present case to the expenditure being part of the consideration for a single supply which is consistent with the approach taken in the English cases referred to at [35] supra. 60 Such a conclusion also accords with that reached in a number of stamp duty cases: see Commissioner of Stamp Duties v J V (Crows Nest) Pty Ltd (1986) 7 NSWLR 529 at 539 per McHugh JA; Commissioner of Stamp Duties v Commonwealth Funds Management Ltd (1995) 38 NSWLR 173 at 176 – 177 per Kirby P; Commissioner of State Revenue (Vic) v Royal & Sun Alliance Insurance Australia Ltd (2003) ATC 4998 at [27], [28] and [56]. In the first-mentioned case, McHugh JA said: 'In Yanchep Sun City Pty Ltd v Commissioner of State Taxation (WA) (1984) 15 ATR 1165; 84 ATC 4761, Olney J applied the statements made in United Scientific Holdings Ltd v Burnley Borough Council as to the meaning of '"rent". His Honour held that for the purposes of the West Australian stamp duties legislation a covenant by a lessee to pay all rates and taxes charged upon the land was not rent. Olney J said (at 1171; 4767) that it was not enough: "… to look merely for a contractual liability on the part of the lessee to pay money to or on behalf of the lessor. To be rent the payment must be one which is essentially a payment for the right to use the demised premises." The illustrations which Olney J gave in the course of his judgment together with his actual decision indicate that he thought that, if a payment by the lessee was directed to indemnifying a liability of the lessor, it was not a payment for the right to use property. The distinction which his Honour appears to make does not seem satisfactory. For it seems to call for a different result depending on whether the lessor calculates a single lump sum payment to compensate him for the cost of letting and maintaining his property or whether he segregates his various overheads from the nett return which the letting of property gives. His Honour's approach is also, I think, inconsistent with the meaning of "rent" as it is defined in the modern cases. That definition is concerned with whether the payment – whatever its purpose – is part of the consideration for the right to use the premises. It is immaterial that the payment may reimburse the lessor in respect of one of his obligations if the payment is part of the consideration for the use of the property. In most, if not all, cases a payment by a lessee of rates and taxes owing by the lessor is made as part of the consideration for the use of the premises and for no other purpose.' 61 With respect to the conclusions reached by the learned primary judge at [81], [88], [91] and [94], all of these are predicated on the basis that the consideration in money for the supply, being the assumption by the appellants of Lake Eerie's obligations under the lease, are confined to the base annual rent and thereby excludes both the annual percentage rental and Coles' contribution to its proportion of the outgoings of the Centre, after-hours charges and to the promotion fund. For the reasons already explained, we cannot agree that these latter items should be excluded from the consideration in money for that supply. That is exemplified and confirmed by the terms of cl 11(a) of the lease which provides: 'The Lessor FURTHER COVENANTS with the Lessee that:- (a) The Lessee paying the rent hereby reserved and duly and punctually observing and performing the covenants obligations and provisions in this lease on the part of the Lessee to be observed and performed shall and may peaceably possess and enjoy the demised premises for the term hereby granted, without any interruption or disturbance from the Lessor or any other person or persons lawfully claiming by from or under the Lessor.' (Emphasis added) 62 It is on this premise, that we have to determine whether a 'review opportunity' for the purposes of s 13 of the GST Transition Act had arisen in March 2004. 63 Her Honour accepted (at [79]) that there is no opportunity under the lease to conduct a review of the annual percentage rental. Moreover, there is no opportunity under the lease to conduct a general review of the contribution to outgoings. Coles did not contend to the contrary. The same comments no doubt apply to Coles' contribution to after-hours trading costs and its contribution to promotional expenses. 64 The learned primary judge held (at [80]) that the 'base annual rent' is the primary or fundamental component of the rent having regard to the aggregate of what was called 'rent' – the sum of the 'base annual rent' and the 'annual percentage rental'. So understood, the conclusion is unexceptionable. In the year to 4 March 2004 the base annual rent represented 70.94 per cent of that sum: 720,208 ÷ (720,208 + 294,959) x 100 1 65 But as a proportion of the whole of the consideration for the supply that is the appellants' honouring of the obligations of Lake Eerie under the lease, the 'base annual rent' represents only 51.94 per cent of that consideration: 720,208 ÷ (720,208 + 294,959 + 256,025 + 108,168 + 7,076) x 100 1 66 Whether a general review of the (whole of the) consideration for the supply requires an opportunity to review the whole of that consideration may be doubted. For example, if all the elements of the consideration could be reviewed other than Coles' contribution to the promotion fund, then it would be open to conclude that the review was, nevertheless, a general review being a review of nearly all of the consideration: see Case M58 (1990) 12 NZTC 2,333 at 2,338. However, where more than 48 per cent of the (whole of the) consideration is not open to review, it cannot be said that there has been an opportunity for a general review of the consideration for the supply. It follows that, contrary to her Honour's conclusion, in our view, no review opportunity within the meaning of s 13(2) of the GST Transition Act had arisen on 4 March 2004 under the terms of the lease. 67 The appeal must be allowed. Coles should pay the costs of the appellants both on the appeal and before her Honour below. There should be no order as to the Commissioner's costs. In case the orders which we have formulated are not appropriate to dispose fully of the proceedings between the parties, we shall reserve liberty to apply. I certify that the preceding sixty-seven (67) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Court. Associate: Dated: 10 July 2006 Counsel for the Appellants: Mr J de Wijn QC Mr M Sifris Solicitor for the Appellants: Rockman & Rockman Counsel for the First Respondent: Mr G T Pagone QC Mr A Broadfoot Solicitor for the First Respondent: Allens Arthur Robinson Counsel for the Second Respondent: Mr T P Murphy SC Mr C Sievers Solicitor for the Second Respondent: Australian Government Solicitor Date of Hearing: 10 November 2005 Date of Judgment: 10 July 2006