FEDERAL COURT OF AUSTRALIA South Steyne Hotel Pty Ltd v Commissioner of Taxation [2009] FCAFC 155 TAXATION – Goods and Services Tax – grant of leases of apartments in hotel – whether such supply is input taxed – whether apartments are residential premises within the meaning of s 195-1 of the A New Tax System (Goods and Services Tax) Act 1999 (Cth) – whether apartments are commercial residential premises within the meaning of s 195-1 – subsequent continuation of leases when apartments were sold – whether such continuation was a supply – whether continuation of leases was a supply by way of lease – whether supply is input taxed TAXATION – Goods and Services Tax – supply of accommodation in apartments – whether supply is income taxed – whether supply of premises by was provided by "the entity that owns or controls the commercial residential premises" for the purposes of s 40-35(1) of the A New Tax System (Goods and Services Tax) Act 1999 (Cth) – supply made by exclusive agent of operator and lessee of apartments pursuant to a management agreement – whether terms of management agreement were such that exclusive agent could be said to "control" the operation of the serviced apartment business – whether accommodation was provided by exclusive agent as principal rather than as agent of lessor TAXATION – Goods and Services Tax – sale of apartments – whether terms of sale contract meant that there was a written agreement that the sale was a sale of a going concern as per s 38-325(1)(c) of the A New Tax System (Goods and Services Tax) Act 1999 (Cth) – whether supply was GST-free A New Tax System (Goods and Services Tax) Act 1999 (Cth) Div 9, ss 29-5, 38-325, 40-35, 40-65, 40-70, 40-75, 75-1, 75-5, 156-5, 156-22, Div 195 Tax Laws Amendment (2006 Measures No. 3) Act 2006 (Cth) Sch 15 Conveyancing Act 1919 (NSW)ss 117, 118 Real Property Act 1900 (NSW) s 40(3) Carminco Gold and Resources Ltd v Findlay & Co Stockbrokers (Underwriters) Pty Ltd (2007) 243 ALR 472 Denman College v Commissioners of Customs and Excise [1998]V & DR 399 International Harvester Co of Australia Pty Ltd v Carrigan's Hazeldene Pastoral Co (1958) 100 CLR 644 Lilyvale Hotel Pty Ltd v Commissioner of Taxation [2009] FCAFC 21 Marana Holdings Pty Ltd v Commissioner of Taxation (2004) 141 FCR 299 Owen v Elliott (Inspector of Taxes) [1990] 1 Ch 786 Urdd Gobaith Cymru v Commissioner of Customs and Excise [1997] V & DR 273 Westley Nominees Pty Ltd v Coles Supermarkets Australia Pty Ltd 2005 ATC 4484 Westley Nominees Pty Ltd v Coles Supermarkets Australia Pty Ltd (2006) 152 FCR 461 SOUTH STEYNE HOTEL PTY LTD & ORS v COMMISSIONER OF TAXATION NSD 97 of 2009 FINN, EMMETT AND EDMONDS JJ 20 NOVEMBER 2009 SYDNEY IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 97 of 2009 ON APPEAL FROM THE FEDERAL COURT BETWEEN: SOUTH STEYNE HOTEL PTY LTD First Appellant MBI PROPERTIES PTY LTD Second Appellant MORGAN & BANKS INVESTMENTS PTY LTD Third Appellant AND: COMMISSIONER OF TAXATION Respondent JUDGES: FINN, EMMETT AND EDMONDS JJ DATE OF ORDER: 20 NOVEMBER 2009 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. The order made on 16 January 2009 be set aside and in lieu thereof the following orders be made: THE COURT DECLARES THAT: 1.1 The sale by the South Steyne Hotel Pty Limtied to MBI Properties Pty Limited of each of apartments 111, 304 and 604 in the Sebel Hotel was GST-free under s 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (Cth). THE COURT ORDERS THAT: 1.2 The proceeding be otherwise dismissed. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. The text of entered orders can be located using eSearch on the Court's website. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY general division NSD 97 of 2009 ON APPEAL FROM THE FEDERAL COURT BETWEEN: SOUTH STEYNE HOTEL PTY LTD First Appellant MBI PROPERTIES PTY LTD Second Appellant MORGAN & BANKS INVESTMENTS PTY LTD Third Appellant AND: COMMISSIONER OF TAXATION Respondent JUDGES: FINN, EMMETT AND EDMONDS JJ DATE: 20 NOVEMBER 2009 PLACE: SYDNEY REASONS FOR JUDGMENT FINN J 1 I have had the advantage of reading the reasons of Emmett J and of Edmonds J in draft. I agree with the reasons and conclusions of Emmett J and with the orders he proposes. Given that I disagree in part both with Edmonds J and with the primary judge, it is appropriate that I make the following three comments. 2 First, the sales of three apartments to MBI Properties subject to their respective leases did not constitute a new or further supply. The covenants of the initial leases remained but the benefit of the respective tenants' covenants and the burden of the landlord's covenant "ran" with the reversion by virtue of real property legislation: see Conveyancing Act 1919 (NSW)ss 117, 118; Real Property Act 1900 (NSW) s 40(3); and not by virtue of a distinct supply agreement or arrangement: see generally Butt, Land Law [15159]-[15175] (5th ed, 2006). 3 Secondly, the sale of apartments to Properties as a going concern. For the reasons given by Emmett J, cl 47.6.6 of the Contract of Sale was inconsistent in its effects both with the "Tax information" provided on page 1 of the Contract (which indicated that the sale was "GST-free because the sale is the supply of a going concern under section 38-325" of the A New Tax System (Goods and Services Tax) Act 1999 (Cth)) and with the provisions in cl 47.6.3 (which were to like effect). This clearly is a case where cl 47.6.6 destroys the effect of the statement on page 1 and of cl 47.6.3. It should be rejected as repugnant: on "internal inconsistency" see generally, Lewison, The Interpretation of Contracts, 9-08 (4th ed, 2007). 4 Thirdly, the supply of residential accommodation to Ms Young. The relationship of Mirvac Management and Mirvac Hotels under the Serviced Apartment Management Agreement was unquestionably that of principal and agent, but it was an agreement which gave Mirvac Hotels exclusive control of the serviced apartment business. As the primary judge concluded, Mirvac Hotels also exercised control over the Hotel by virtue of its ownership of the "Management Lot (which included the reception area, offices and car parking spaces) and had "considerable control over the conduct of the restaurant" which was leased by Red Elm. While Mirvac Hotels did not "own" the commercial residential premises that were the Hotel, it clearly controlled them for s 40-35 purposes and it was the "entity" which supplied accommodation in the premises. It may have been Mirvac Management's agent, but in supplying accommodation to Ms Young it contracted as a principal: cf Carminco Gold and Resources Ltd v Findlay & Co Stockbrokers (Underwriters) Pty Ltd (2007) 243 ALR 472; and it could make that supply because it controlled the premises. The exception in s 40-35 (1)(a) was satisfied. 5 I agree with the orders proposed by Emmett J. I certify that the preceding five (5) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Finn. Associate: Dated: 20 November 2009 IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY NSD 97 of 2009 general division ON APPEAL FROM THE FEDERAL COURT BETWEEN: SOUTH STEYNE HOTEL PTY LIMITED First Appellant MBI PROPERTIES PTY LIMITED Second Appellant MORGAN & BANKS INVESTMENTS PTY LTD Third Appellant AND: COMMISSIONER OF TAXATION Respondent JUDGES: FINN, EMMETT & EDMONDS JJ DATE: 20 NOVEMBER 2009 PLACE: SYDNEY REASONS FOR JUDGMENT EMMETT J: INTRODUCTION 6 This appeal concerns the effect of provisions of the A New Tax System (Goods and Services Tax) Act 1999 (Cth) (the GST Act) in connection with the Sebel Manly Beach Hotel (the Sebel Hotel). The appellants commenced a proceeding in the Court in which they claimed declarations as to the characterisation under the GST Act of certain supplies made in relation to apartments in the Sebel Hotel. A judge of the Court declined to make the declarations claimed by the appellants and dismissed the proceeding. By notice of appeal dated 6 February 2009, the appellants appealed from the order of the primary judge. The respondent, the Commissioner of Taxation (the Commissioner), has agreed to bear the appellants' costs of the proceeding and the appeal in any event, under the Commissioner's Test Case Funding Program. 7 The factual circumstances that give rise to the questions in issue, about which there is no dispute, can be stated briefly as follows: · On 8 December 2000, the first appellant ("South Steyne"), purchased the Sebel Hotel; · On 10 August 2006, each of the 83 individual apartments in the Sebel Hotel, including apartments 111, 304 and 604, together with the management lot, consisting of the reception area, offices and car parking spaces, became separate lots of a strata plan (the Hotel Strata Plan); · On 29 September 2006, South Steyne: (i) transferred the management lot to Mirvac Hotels Pty Ltd (Hotels); and (ii) granted a separate lease to Mirvac Management Pty Ltd (Management) in respect of each of the 83 apartment lots in the Hotel Strata Plan; under each lease, Management was obliged to operate a scheme whereby each apartment was, together with all other apartments, to be operated as part of a serviced apartment business; · From 29 September 2006 at latest, Hotels had exclusive control of the operation of the serviced apartment business pursuant to an agreement with Management dated 11 January 2006 (the Management Agreement), which conferred upon Hotels the benefit of Management's rights under the leases; · Between 29 September 2006 and 31 October 2007, South Steyne sold apartments 111, 304 and 604 to the second appellant, MBI Properties Pty Limited (Properties); each apartment was sold subject to the applicable lease that had been granted to Management and each contract for sale permitted Properties to participate in a scheme that mirrored the scheme provided for under the leases; Properties elected to participate in that scheme; · On the night of 17-18 October 2007, Ms Emily Young, an employee of the third appellant, Morgan & Banks Investments Pty Ltd (Investments), stayed in apartment 403 and made use of various services available to guests of the Sebel Hotel. THE RELEVANT PROVISIONS OF THE GST ACT 8 Under s 7-1(2) of the GST Act, goods and services tax (GST) is payable on taxable supplies. Under s 9-5, a person makes a taxable supply if, relevantly, the person makes a supply for consideration and the supply is made in the course or furtherance of an enterprise that the person carries on. However, the supply is not a taxable supply to the extent that it is GST-free or input taxed. 9 Section 9-30(1) provides that a supply is GST-free if it is GST-free under Division 38 and s 9-30(2) provides that a supply is input taxed if it is input taxed under Division 40. Section 9-30(3) provides that, to the extent that a supply would be both GST and input taxed, the supply is GST-free and not input taxed, unless the provision under which it is input taxed requires the supplier to have chosen for its supplies of that kind to be input taxed. If such a provision requires the supplier to have so chosen, then the supply is input taxed and not GST-free. 10 Subdivision 38-J of Division 38 deals with supplies of going concerns. Section 38-325(1), which is in Subdivision 38-J, relevantly provides that the supply of a going concern is GST-free if the supplier and the recipient have agreed in writing that the supply is of a going concern. A supply of a going concern is a supply under an arrangement under which: · the supplier supplies to the recipient all of the things that are necessary for the continued operation of an enterprise, and · the supplier carries on, or will carry on, the enterprise until the day of the supply. 11 Subdivision 40-B of Division 40 deals with residential rent. Section 40-35(1), which is in Subdivision 40-B, provides that a supply of premises that is by way of lease is input taxed if, relevantly, 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. However, under s 40-35(2), 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. 12 Subdivision 40-C of Division 40 deals with residential premises. Section 40-65, which is in Subdivision 40-C, provides that a sale of real property is input taxed, but only to the extent that the property is a residential premises to be used predominantly for residential accommodation, regardless of the term of occupation. However, the sale is not input taxed to the extent that the residential premises are: · commercial residential premises; or · new residential premises other than those used for residential accommodation before 2 December 1998. 13 Under s 40-70, which is also in Subdivision 40-C, a supply is input taxed if: · the supply is of real property but only to the extent that the property is residential premises to be used predominantly for residential accommodation, and · the supply is by way of long term lease. However, the supply is not input taxed to the extent that the residential premises are: · commercial residential premises, or · new residential premises other than those used for residential accommodation before 2 December 1998. THE ISSUES IN THE APPEAL 14 The appellants claimed declarations as follows: · A declaration that the granting of the leases of apartments 111, 304 and 604 by South Steyne to Management was not input taxed under any provision of the GST Act. · A declaration that the continuation by Properties of the leases in favour of Management, following the sale of the apartments to Properties by South Steyne, was not input taxed under any provision of the GST Act. · A declaration that the provision of accommodation to Ms Young as a guest in the Sebel Hotel was not input taxed under any provision of the GST Act. · Alternatively to the previous declaration, if the granting of the lease of an apartment by South Steyne to Management was input taxed and the continuation of the lease by Properties to Management was input taxed, a declaration that the provision of accommodation to Ms Young as a guest in the Sebel Hotel was input taxed under Division 40 of the GST Act. · A declaration that the sale by South Steyne to Properties of apartments 111, 304 and 604 in the Sebel Hotel was GST free under s 38-325 of the GST Act. · Alternatively to the previous declaration, if the continuation of the leases by Properties to Management in respect of apartments in the Sebel Hotel was input taxed, a declaration that the sale by South Steyne to Properties was input taxed under Division 40 of the GST Act. 15 The proceeding was conducted at first instance and has been conducted on appeal on the basis that there are in issue four different categories of supply under the GST Act as follows: · The granting by South Steyne to Management of leases in respect of apartments, 111, 304 and 604 in the Sebel Hotel (the Grant Category). · The continuation by Properties of the leases to Management in respect of apartments 111, 304 and 604(the Continuation Category). · The provision of accommodation to Ms Young in apartment 403 on 17-18 October 2007 (the Accommodation Category). · The sale of apartments 111, 304 and 604 by South Steyne to Properties, subject to the leases previously granted to Management (the Sale Category). The Sale Category was referred to as the second category in the course of argument of the appeal and was also referred to in that way by the primary judge, GRANT OF LEASES BY SOUTH STEYNE TO MANAGEMENT 16 If an apartment in the Sebel Hotel is not residential premises as defined in the Dictionary in s 195-1 of the GST Act, the supply is taxable. If the apartment is residential premises but is commercial residential premises as defined in the Dictionary in s 195-1 of the GST Act, the supply is also taxable. If the apartment is residential premises but is not commercial residential premises, then the supply is input taxed. Thus, the categorisation of the Grant Category depends upon the definitions of residential premises and commercial residential premises as defined in the Dictionary in s 195-1 of the GST Act. 17 The primary judge concluded that, for the purposes of the GST Act, the apartments in the Sebel Hotel are residential premises to be used predominantly for residential accommodation and are not commercial residential premises. As a consequence, her Honour held that their supply by way of lease attracted the operation of s 40-35 such that the supply was input taxed. 18 Relevantly, residential premises means land or a building that is: · occupied as a residence, · occupied for residential accommodation, · intended to be occupied and is capable of being occupied as a residence, or · intended to be occupied and is capable of being occupied for residential accommodation. In each case, the term of the occupation or intended occupation is to be disregarded. 19 The definition of residential premises was amended following the decision of the Full Court in Marana Holdings Pty Ltd v Commissioner of Taxation (2004) 141 FCR 299 (Marana Holdings Case). When originally enacted, the term residential premises was defined as meaning: Land or a building occupied or intended to be occupied as a residence… The definition was amended, with effect from 1 July 2000, to provide that residential premises meant: Land or a building that: (a) is occupied as a residence; or (b) is intended to be occupied and is capable of being occupied, as a residence. … 20 Following the Marana Holdings Case, the definition was amended again, to provide, relevantly, that 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)… [Emphasis added] Thus, two new elements were added to the definition following Marana's Case. The first element was the reference to "residential accommodation" in two places. The second was the direction to disregard the term of any occupation or intended occupation. 21 The amendment is curious but, even following the amendment, the definition requires, relevantly for present purposes, that the land or building be occupied for residential accommodation or be intended to be occupied for residential accommodation. The term of occupation is to be disregarded. However, the requirement as to the purpose of the occupation must still be satisfied. Thus, there must still be occupation as a residence or an intention to occupy as a residence. Similarly, there must be occupation for residential accommodation or an intention to occupy for residential accommodation. 22 Whether or not the apartments are occupied as a residence, they are occupied for residential accommodation, particularly when one is to disregard the term of the occupation or intended occupation. It is therefore necessary to consider whether the apartments are commercial residential premises. 23 The term commercial residential premises is defined, relevantly, as including: (a) a hotel, motel, inn, hostel or boarding house; or … (f) anything similar to residential premises described in paragraphs (a) to (e). The definition thus assumes that a hotel, motel, inn, hostel or boarding house may be residential premises. Clearly enough, a single apartment is not a hotel, motel, inn, hostel or boarding house. The question is whether an apartment in the Sebel Hotel is similar to a hotel, motel, inn, hostel or boarding house. 24 There is nothing in the GST Act or the policy underlining the GST Act that suggests that the characterisation of an individual supply can be approached by treating it as if it were the aggregate of that supply and other supplies. It is not possible, as the appellants contend, to treat the supply of an individual apartment as aggregated with the supply of all of the other apartments. Even if the individual leases of the 83 apartments were granted pursuant to a single agreement, the apartments by themselves do not amount to or constitute a hotel; nor do they amount to or constitute a motel, inn, hostel or boarding house. 25 It may be that each apartment is part of commercial residential premises consisting of the Sebel Hotel. That, however, of itself, does not render an individual apartment similar to a hotel. 26 A hotel, motel, inn, hostel or boarding house consists of more than the rooms or apartments that are occupied by guests. It must also of necessity include common areas such as reception areas, dining areas, car parks and the like, such as were the subject of the management lot. The supply that consisted only of the rooms or apartments or accommodation units in a hotel complex is not, without those other areas, the supply of commercial residential premises. The management lot is an essential part of the Sebel Hotel. 27 An individual apartment is not similar to a hotel or motel. It does not resemble or have a likeness to a hotel or motel. 28 Paragraph (f) of the definition of commercial residential premises, in conjunction with paragraph (a), may cover a serviced apartment complex or other establishment that provides accommodation on a multi occupancy basis to guests. However, the individual apartments supplied by South Steyne to Management are very different from a hotel or motel. The term hotel or motel would not be used, as a mater of ordinary English, where a single apartment, room or other space is supplied. 29 The fact that the use and occupation by guests of an apartment in the Sebel Hotel may be similar to the use and occupation by guests of a room in a hotel or motel does not make an individual apartment similar to a hotel or motel. It might be appropriate to describe an individual apartment as being similar to a part of a hotel, namely a hotel room. It is not an ordinary use of English to describe a single or individual apartment as being similar to a hotel or motel. 30 The primary judge made no error in the conclusion that she reached. It follows that the supply of each apartment was input taxed. CONTINUATION OF THE LEASES 31 This question concerning the Continuation Category involves the construction of s 40-35(1) of the GST Act. If the continuation by Properties of leases granted to Management by South Steyne is not a supply of premises by way of lease, the supply is taxable. If it is a supply by way of lease and the apartment is not residential premises, the supply is taxable. If the supply is by way of lease and the apartment is residential premises and the apartment is commercial residential premises, the supply is taxable. If the supply is by way of lease and the apartment is residential premises and the apartment is not commercial residential premises, the supply is input taxed. 32 There is a real question as to whether the Continuation Category involves any supply at all. Properties acquired from South Steyne the legal estate in respect of apartments in the Sebel Hotel, being the reversion after the leases in favour of Management. It is common ground that there was a supply on the grant of the leases. The better view is that there was no further supply, merely by reason of the continuation of the leases after the sale of the reversion. Rather, the situation is provided for by Division 156. 33 Division 156 deals with supplies and acquisitions made on a progressive or periodic basis. Under Division 156, supplies and acquisitions made for a period or on a progressive basis are treated as separate supplies or acquisitions for some purposes, in particular the attribution rules. Under s 156-5, the GST payable on a taxable supply that is made for a period or on a progressive basis and for consideration that is to be provided on a progressive or periodic basis, is attributable, in accordance with s 29-5, as if each progressive or periodic component of the supply were a separate supply. Section 156-22 provides that a supply or acquisition by way of lease is to be treated as a supply or acquisition that is made on a progressive or periodic basis for the period of the lease. Section 29-5 provides that the GST payable on a taxable supply is attributable to the tax period in which any of the considerations received for the supply, or if, before any of the consideration is received, an invoice is issued relating to the supply, the tax period in which the invoice is issued. 34 Thus, there is no supply by Properties to Management. Rather, there was a supply by South Steyne to which the attribution rules apply. In any event, the primary judge made no error in declining to make the declaration claimed in the proceeding in respect of the Continuation Category. ACCOMMODATION OF MS YOUNG 35 If the Grant Category of supply is taxable, it would follow that the provision of accommodation to Ms Young is taxable. However, the conclusion reached above is that the Grant Category is input taxed. In those circumstances, if the provision of accommodation to Ms Young is a supply of accommodation in commercial residential premises, provided to an individual by the entity that owns or controls the commercial residential premises, the supply would be taxable. If it is not such a supply, it would be input taxed. That question turns on s 40-35(1), which relevantly provides that a supply of premises that is by way of hire or licence is input taxed if the supply is of residential premises (other than a supply of accommodation in commercial residential premises) provided to an individual by the entity that owns or controls the commercial residential premises. 36 The Commissioner contends that the supply was a supply of accommodation in commercial residential premises provided to Ms Young by Hotels as principal in its own name, rather than as agent for Management. The Commissioner says that Hotels exercised such practical control of the Sebel Hotel that it was the entity that relevantly controlled the commercial residential premises that the Sebel Hotel constitutes. That contention depends upon the effect of the Management Agreement. 37 The Management Agreement recites that Management is the operator of a proposed management investment scheme to be known as "the Sebel Manly Beach", that Management intends to become the lessee of apartments in the Sebel Hotel and that Management wishes to engage Hotels to operate the business of operating as serviced apartments all lots in the Hotel Strata Plan. The pivotal provision of the Management Agreement is clause 3.1, whereby Management appointed Hotels as its exclusive agent to manage and operate the serviced apartment business and Hotels accepted that appointment and agreed to manage and operate the serviced apartment business. Clause 3.6 provides for the payment of a fee consisting of a proportion of all of the income of Management from the occupation of the scheme apartments. 38 By clause 4.1 of the Management Agreement, Hotels agreed to carry out all duties and responsibilities that Management has under the apartment leases and Management agreed to allow Hotels to have the benefit of any right of Management under those leases to allow Hotels to carry out those duties and responsibilities. By clause 4.2, Hotels agreed to use its expertise to operate the serviced apartment business and was given exclusive control and discretion in the operation, direction, management and supervision of the serviced apartment business. That control and discretion was specifically to include: · hiring and discharge of all employees, · entering into contracts in its own name, or as agent of Management, · setting room tariffs and charges. 39 Under clause 4.3, Hotels is obliged to use reasonable endeavours to collect monies due from apartment guests, including instituting legal proceedings to collect any amounts due. Clause 5.1 required Management to open a bank account into which all cash comprising apartment revenue is to be deposited. Hotels acknowledged that all funds from time to time in that account are held on trust for members of the management scheme. However, Hotels was to be entitled to deposit other moneys into that account if it considered that doing so was consistent with operating the serviced apartment business in conjunction with other businesses and activities operated by Hotels in connection with the Sebel Hotel. 40 At the time of Ms Young's stay in the Sebel Hotel, Hotels was the owner of the management lot, which consisted of the reception area, offices and car parking spaces of the Sebel Hotel. The management lot is clearly an integral part of the operation of the serviced apartment business being carried on in the Sebel Hotel. In addition, Hotels exercised control over the conduct of the restaurant that forms part of the Sebel Hotel and the provision of room service and the service of alcohol in the restaurant, bar and mini bar facility within the apartments. Hotels exercised that control under an agreement of 11 May 2006 by which Hotels was entitled to provide input on menus for room service and breakfast in the restaurant. 41 The tax invoice given to Ms Young for her accommodation was in the name of Hotels. That is consistent with the provision of clause 4.2 of the Management Agreement giving Hotels exclusive control and discretionary operation of the serviced apartment business, including entering into contracts in its own name. 42 Management, of course, was the lessee of apartment 403 on the night of 17-18 October 2007. Nevertheless, the name on the tax invoice supplied by Hotels to Ms Young, when taken together with the provisions of the Management Agreement and the agreement of 11 May 2006, leads to the conclusion that the accommodation provided to Ms Young was provided by Hotels as principal and not as agent of Management. That is the conclusion reached by the primary judge. There was no error in her Honour's conclusion. SALE OF APARTMENTS TO PROPERTIES 43 The only question in relation to the Sale Category is whether the supplier, South Steyne, and the recipient, Properties, have agreed in writing that the supply is of a going concern. That depends upon the effect of clause 47.6.6 of the form of Contract for Sale between South Steyne and Properties in relation to apartments in the Sebel Hotel. The forms of Contract for Sale entered into in relation to each apartment were relevantly the same. 44 The Contract for Sale contained a provision on page 1 that was relevantly in the following terms: This sale is not a taxable supply because… the sale is… GST-free because the sale is the supply of a going concern under section 38-325. Clause 47.6.3 of the Contract for Sale provided as follows: 47.6.3 The parties agree that the sale of the Property comprises a supply of a going concern for the purposes of s 38-325 of the GST Act. Those two provisions meet the requirement of s 38-325(1)(c) for an agreement in writing that the supply constituted by the sale is a supply of a going concern. It is common ground that, under the Contracts for Sale of apartments by South Steyne to Properties, South Steyne was to supply to Properties all of the things that are necessary for the continued operation of the enterprise of a serviced apartment business and that South Steyne was to carry on that enterprise until completion of the contract. 45 However, clause 47.6.6 of the Contract for Sale provided as follows: If page 1 of the Contract says that the supply is GST-free because the sale is the supply of the [sic] 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; … 46 Division 75 of the GST Act allows a taxpayer to use a margin scheme to bring within the GST system taxable supplies of freehold interests in land, of stratum units and of long term leases. Under s 75-5(1), the margin scheme applies in working out the amount of GST on a taxable supply of real property that a person makes by selling a freehold interest in land, by selling a stratum unit or by granting or selling a long term lease, but only if the person and the recipient of the supply have agreed in writing that the margin scheme is to apply. Clause 47.6.6 appears to be the result of an attempt by its author to enliven s 75-5(1). 47 The wording of s 47.6.6 creates a tension with the provision on page 1 and clause 47.6.3 of the Contract for Sale. That is to say, those two provisions have the effect that any supply under the Contract for Sale is GST-free. Clause 47.6.6, however, appears to be based on the assumption that, for some reason, the supply is not GST-free but is a taxable supply and that s 75-5(1) is intended to be invoked. The margin scheme, by definition, applies only where there is a taxable supply. 48 It is difficult to understand what the parties intended by saying that, if page 1 says that the supply is GST-free, the margin scheme is to apply, when the margin scheme does not apply to a GST-free supply. The Commissioner says, therefore, that the effect of clause 47.6.6 is to over-ride the purported agreement in writing pursuant to s 38-325 to be found on page 1 and in clause 46.6.3 of the Contract for Sale. 49 It appears somewhat unlikely that the intention of the parties was to over-ride the express provisions of page 1 and clause 47.6.3. The author of clause 47.6.6 may have worked under a misapprehension, that, even if the parties agreed in writing that a supply is of a going concern, the supply may nevertheless be a taxable supply in the circumstances where subdivision 40-C applies. The language of clause 47.6.6 is clearly reminiscent of the language of s 40-65. Thus, the author appears to have assumed that, if s 40-65 applies and the sale is not input taxed, it will be a taxable supply, notwithstanding the agreement pursuant to s 38-325 that the supply is of a going concern such that the supply is GST-free. The parties cannot, of course, by agreement make a supply a taxable supply, which is the literal purport of clause 47.6.6. 50 I do not consider that the garbled language of Clause 47.6.6 overrides the clear statements contained on page 1 and in clause 47.6.3 of the Contract for Sale. It follows that the supply consisting of the sale to Properties was GST-free under s 38-325. The primary judge concluded that the Sale Category was not GST-free. I consider that her Honour erred in that respect. CONCLUSION 51 It follows from the conclusions set out above that the appeal should be upheld in part. The order of the primary judge dismissing the proceeding should be set aside. In lieu of that order there should be a declaration that the sale by South Steyne to Properties of apartments in the Sebel Hotel was GST-free under s 38-325 of the GST Act. The proceeding should be otherwise dismissed. There should be no order as to the costs of the appeal. I certify that the preceding forty-six (46) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Emmett. Associate: Dated: 20 November 2009 IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 97 of 2009 ON APPEAL FROM THE FEDERAL COURT BETWEEN: SOUTH STEYNE HOTEL PTY LTD First Appellant MBI PROPERTIES PTY LTD Second Appellant MORGAN & BANKS INVESTMENTS PTY LTD Third Appellant AND: COMMISSIONER OF TAXATION Respondent JUDGES: FINN, EMMETT AND EDMONDS JJ DATE: 20 NOVEMBER 2009 PLACE: SYDNEY REASONS FOR JUDGMENT EDMONDS J: 52 This is an appeal from a judge of this Court dismissing the appellants' application for declaratory relief on the status or character of four categories of supply of apartments in the hotel complex at 8 – 13 South Steyne (known as the 'Ocean Tower') and 45 – 49 Ashburner Street, Manly, New South Wales (known as the 'Harbour Tower') (collectively 'the Hotel') under A New Tax System (Goods and Services Tax) Act 1999 (Cth) ('the GST Act'). The declaratory relief sought was that three categories (referred to in the reasons of the primary judge as the first, third and fourth supplies) are not input taxed under Div 40 of the GST Act or under a provision of another Act or, in the alternative, that if the first and third supplies are input taxed, the fourth supply is also input taxed; and that the remaining category (referred to in the reasons of the primary judge as the second supply) is GST-free under s 38-325 of the GST Act or, in the alternative, that if the third supply is input taxed, the second supply is also input taxed. 53 The relevant facts are contained in an amended statement of claim filed 23 November 2007; many of these facts are admitted in the respondent's defence filed 19 December 2007, although some are not admitted and others are denied. They are summarised in [2] – [8] of the reasons of the primary judge. THE FACTS 54 The Hotel, which was constructed in or about 1988, is comprised of 83 apartments, a beachfront restaurant, a bar, two swimming pools, outdoor spa, and other public areas as well as meeting and conference rooms and related facilities. The Hotel has been operated as an hotel offering short-term accommodation, averaging two to three nights stay per guest, since it was constructed. 55 On or about 8 December 2000, the first appellant ('South Steyne') purchased the Hotel. 56 On 10 August 2006, each apartment in the Hotel was individually strata-titled. 57 On or about 29 September 2006, South Steyne: 1. Sold the 'Management Lot', which included the reception area, offices and car parking spaces, to Mirvac Hotels Pty Ltd ('MHL'); and 2. leased each of the 83 apartments to Mirvac Management Pty Ltd ('MML') under 83 separate lease agreements. Each lease obliged MML to operate a scheme whereby the apartment was, together with the other apartments, operated as part of a serviced apartment business. 58 Between 29 September 2006 and 31 October 2007, South Steyne sold 15 apartments to various investors, including apartments 111, 304 and 604 to the second appellant ('MBI'). Each apartment was sold subject to the applicable lease to MML. Each contract for sale permitted the purchaser to participate in a 'Management Rights Scheme', which mirrored the scheme provided for under the lease agreements. Each purchaser elected to participate in the scheme. 59 On 17 – 18 October 2007, Ms Emily Young, an employee of the third appellant ('Morgan & Banks'), stayed at apartment 403 and made use of various services available to guests of the Hotel. 60 Pursuant to an agreement ('Serviced Apartment Management Agreement') dated 11 January 2006 between MML and MHL, MML appointed MHL as its exclusive agent to manage and operate the serviced apartment business for an initial term of 10 years in accordance with the terms and conditions of the agreement. This MHL did from the Management Lot. 61 From May 2006, the Hotel restaurant was leased and operated by Red Elm Pty Ltd which, under a Services Agreement with MHL dated 11 May 2006, was to provide restaurant services including room service to guests in the Hotel. Red Elm was also required to maintain a liquor licence for the service of alcohol in the restaurant and for room service, as well as the bar, mini-bars, conference facilities and hotel rooms. 62 Pursuant to a Conference Facilities Agreement between South Steyne and MML dated 11 May 2006, use of the conference facilities was available to any member of the public through MML as licensee of the conference facilities. 63 The management of the Hotel provided house-keeping facilities, valet parking, complimentary morning newspapers, valet dry cleaning, safety deposit box storage and laundry services. Some of the apartments had laundry facilities (contained within a cupboard) and kitchen facilities. The majority of apartments did not have either laundry or kitchen facilities. 64 Each apartment had basic facilities of the kind normally found in an hotel room, including tea and coffee-making facilities, bar fridge, linen, ironing board and iron and bathroom supplies such as soaps, shampoo and conditioner. With limited variations, each apartment was decorated in a uniform way. 65 Car parking, located in the basement levels of the Ocean Tower and the Harbour Tower, was available to guests upon the payment of an additional fee. 66 At all material times, the applicable zoning of the Hotel permitted 'tourist, short-term accommodation' and prohibited use of the Hotel for the purpose of a residential flat building. 67 In an affidavit affirmed by a director of each of the appellants, apartments 111, 304 and 604 were described as indicative of the range of accommodation contained in the Hotel. 68 Apartment 111 is the smallest and has a combined bed/sitting area, a bathroom and small terrace. The bed/sitting room contains a king size bed, bedside and coffee tables, a sofa bed, armchair, desk, drawers and a television and entertainment unit. The bathroom has a toilet, hand basin and shower. The room has no kitchen but there is an alcove containing a mini-bar refrigerator and kettle. 69 Apartment 604 is the largest of the three. It has two bedrooms, a combined living and dining area, a large outdoor area, a bathroom and kitchen. The dining/living area has a table with four chairs, a sofa, armchairs, coffee tables, desk, lamp and entertainment unit. There is a kitchen with a refrigerator, hotplates, microwave, kettle and various cooking appliances and implements. Apartment 304 is similar to apartment 604 except it has only one bedroom and the kitchen facilities are more limited. It also has a washing machine, clothes dryer and laundry tub in a laundry cupboard in the bathroom. THE ISSUES AND THE RESPECTIVE POSITIONS OF THE PARTIES 70 As indicated in [1] above, the ultimate issues in this proceeding are the character or status of four categories of supply of apartments in the Hotel under the GST Act. First Category of Supply: the supply by way of lease from South Steyne to MML of each of 83 apartments: see [6(2)] above. 71 The appellants' position is that these supplies are taxable supplies; the Commissioner's position is that these supplies are input taxed pursuant to s 40-35 of the GST Act. 72 Resolution of this issue depends upon whether each apartment is 'residential premises' and, if so, whether each apartment is 'commercial residential premises', for the purposes of the GST Act. There is no longer any issue, either under this category of supply or under the third category of supply, that if the Court finds that there was a supply of residential premises, the primary judge erred in finding that the relevant apartments were to be used predominantly for residential accommodation for the purposes of s 40-35(2)(a) of the GST Act: see grounds 1c and 3d of the notice of appeal. Second Category of Supply: the supply by sale of apartments by South Steyne to investors, including the sale of apartments 111, 304 and 604 by South Steyne to MBI: see [7] above. 73 The appellants' primary position is that these supplies are GST-free pursuant to s 38-325 of the GST Act. Alternatively, they submitted that if the supplies in the third category of supply are input taxed, then this category of supply is also input taxed. The Commissioner's position is that the supplies in this category are neither GST-free nor input taxed; in other words, that they are taxable supplies. 74 Resolution of this issue depends upon whether the condition in para (c) of s 38-325(1) of the GST Act is satisfied, it being common ground that the conditions in paras (a) and (b) are satisfied; that, in turn, depends upon the proper construction of special condition 47.6.6 of the contract for sale of the relevant apartments by South Steyne to MBI. If the Court finds that this category of supply is not GST-free in reliance on s 38-325, then resolution of this issue, in the context of the appellants' alternative position, depends upon whether the relevant apartments are 'residential premises' and, if so, whether they are 'commercial residential premises' or 'new residential premises' and, if the latter, whether they were 'used for residential accommodation … before 2 December 1998': see s 40-65 of the GST Act. The Third Category of Supply: the leases of apartments 111, 304 and 604 by MBI to MML in consequence of the former's purchase of the reversion from South Steyne: see [7] above. 75 Before the primary judge and on the hearing of the appeal there was, as the primary judge observed at [72] of her Honour's reasons, '… 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[d], however, as to the nature of the supply made by MBI'. In relation to that latter issue, the appellants' position was that it was not a supply 'by way of lease' so as to attract the operation of s 40-35; it was only a supply by virtue of s 9-10(2)(g)(iii) of the GST Act: Westley Nominees Pty Ltd v Coles Supermarkets Australia Pty Ltd (2006) 152 FCR 461 at [16] – [23]. The Commissioner's position was that, like the first category of supply, it was a supply by way of lease and, by operation of s 40-35, the supply was input taxed. For this he relied on what Kenny J said at first instance in Coles Supermarkets Australia Pty Ltd v Westley Nominees Pty Ltd 2005 ATC 4484 at 4506. 76 I have come to the view that when MBI purchased the reversionary interest in the three apartments there was no new supply by MBI to MML but merely a continuation of the first category of supply and there is no dispute that that supply was 'by way of lease'. The basis for this view is sourced in the proposition that when MBI purchased its reversionary interest in the three apartments, MML's lease did not come to an end and a new lease commence. Its lease, originally granted by South Steyne, continued uninterrupted by the change in the owner of the reversionary interest. In other words, there is no third category of supply, merely a continuation of the first category of supply. The attribution provisions of Div 156, specifically s 156-5 and 156-22, the latter dealing with supplies or acquisitions by way of lease, prevent any unintended imbalance as between successive reversionary owners over the term of the lease. 77 On this view, it is unnecessary to determine the character or status of the third category of supply because there is none. On the other hand, there is no error in the primary judge's refusal to make the declaration sought in respect of what was called 'the third supply'. Fourth Category of Supply: the supply of accommodation in apartment 403 to Ms Young who checked in on 17 October and checked out on 18 October 2007: see [8] above. 78 The appellants' primary position is that the supply is not input taxed but, as noted in [1] above, in the alternative, they seek a declaration that if the first and third categories of supply are input taxed, so is the fourth category. The Commissioner's position in that the fourth category of supply is not input taxed because it falls within the second part of the parenthetical exception 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'. The appellants accept that there was a supply of accommodation in commercial residential premises provided to one individual, but submitted that accommodation was not provided 'by the entity that owns or controls the commercial residential premises'. It lies at the heart of the appellants' submission that the accommodation provided to Ms Young was provided by MML, as lessee of apartment 403, through its agent MHL and that MML does not own or control the Hotel in its entirety. It lies at the heart of the Commissioner's submission that, by virtue of various agreements giving it control over the operation of the Hotel, MHL can be said to control the Hotel and that it provided the accommodation to Ms Young in its own right and not as agent for MML. ANALYSIS First Category of Supply Relevant Legislation 79 The relevant provisions of the GST Act in relation to the first category of supply are s 40-35 and the definitions of 'residential premises' and 'commercial residential premises' in the Dictionary to the GST Act (s 195-1). Section 40-35 and the definition of 'residential premises' were amended following the decision of a Full Court of this Court in Marana Holdings Pty Ltd v Commissioner of Taxation (2004) 141 FCR 299. The amendments to the GST Act following this decision ('the Marana Amendments') were inserted by the Tax Laws Amendment (2006 Measures No. 3) Act 2006 (Cth) ('the Amendment Act') and took retrospective effect from 1 July 2000. The Marana Amendments are underlined. 80 Section 40-35 provides: 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. 81 The Dictionary to the GST Act (s 195-1) contains the following definitions of 'commercial residential premises' and 'residential premises': 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). 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. The Primary Judge 82 The primary judge analysed the decision in Marana, both at first instance (Beaumont J) and in the Full Court, reviewed the Marana Amendments in the context of that decision by reference to the explanatory memorandum for the Amendment Act and by reference to dictionary definitions of the words 'reside' and 'residence'. Her Honour's process of reasoning on the issue of whether the apartments were 'residential premises' could be paraphrased as follows: (1) The definition of 'residential premises' now requires the term of the occupation or intended occupation to be disregarded: [31]. (2) That leaves as necessary only the element of shelter and basic living facilities such as are provided by a bedroom and bathroom: [31]. (3) A major difficulty with the appellants' submission that for occupation to be 'residential' it must be 'established' or 'settled' accommodation, would be distinguishing between established or settled accommodation and transient or temporary occupation without taking into account the duration: [32]. (4) The appellants' further submission that 'the character of the Hotel Rooms is necessarily for transient, temporary and not settled or established occupation' seemed to her Honour to be impermissibly focusing on duration without specifically referring to it: [32]. (5) The appellants' submission that use of the 'Hotel Rooms' as a 'residence' would be contrary to the planning provisions of the Hotel – that it 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 Council – does not take account of the fact that, by providing that the term of occupation or intended occupation is to be disregarded, the amendments 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 meets the, now special, meaning of 'residential premises' in the GST Act even without regard to the inclusion of 'residential accommodation': [33] – [34]. (6) The fact that the definition now expressly includes 'residential accommodation' puts the matter beyond doubt. In the English decisions referred to in Marana – 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 – the term 'residential accommodation' was given the wider meaning rejected in Marana. Those cases considered premises similar to those under consideration here: [35]. 83 As the primary judge observed at [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). Her Honour's process of reasoning on this issue was along the following lines: 1. Although the lease to MML of all 83 apartments in the Hotel might be seen as falling within para (a) of the definition – 'a hotel, motel, inn, hostel or boarding house' – particularly as the lease contemplates that the apartment will be used as part of the serviced apartment business operated by MML and 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, the fact remains that each apartment was the subject of a separate supply made under an individual lease agreement. That fact led her Honour to conclude that the lease is not the supply of a 'hotel, motel, inn, hostel or boarding house': [40] – [44]. 2. In relation to whether it is a supply of 'anything similar' to a hotel, motel, inn, hostel or boarding house and therefore commercial residential premises under para (f) of the statutory definition, her Honour considered the dictionary definition of those words and noted that their commonality was in providing for multiple occupancies. In her Honour's words: 'The terms are not used where only one apartment, room or other space is provided': [44]. 3. Each lease is a separate supply of only one accommodation space and while the link with the other apartments and the commercial necessity for other apartments to be included in the business are contemplated in the lease, they are not mandated: [45]. 4. Just as it can be said that an individual apartment is clearly not a hotel, nor 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 apartment similar to a hotel: [46]. Conclusion on the First Category of Supply 84 It followed from the reasoning processes in [31] and [32] above that the primary judge concluded that, for the purposes of the GST Act, the apartments in the Hotel were 'residential premises' to be used predominantly for residential accommodation and not 'commercial residential premises' and that, in consequence, their supply 'by way of lease' attracted the operation of s 40-35 and such supplies were input taxed. 85 I agree with her Honour's conclusion, generally for the reasons she has given. I hesitate to go as far as her Honour and conclude that the apartments are 'residential premises', 'even without regard to the inclusion of "residential accommodation"' [34]. In my view, whether accommodation is 'settled' or 'established' involves elements which go beyond mere duration of occupation. Nevertheless, I totally agree with her Honour that the inclusion of 'residential accommodation' puts the matter beyond doubt: [35]. 86 In my view, there is no error in the primary judge's characterisation of the first category of supply. Second Category of Supply Relevant Legislation 87 The relevant provisions of the GST Act in relation to the second category of supply are: 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). … 40-65 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. … The Primary Judge 88 It is common ground that the provisions of s 38-325(1)(a) and (b) are satisfied and that the only issue in respect of the appellants' primary position that the second category of supply is a supply of a going concern is whether the supplier (South Steyne) and the recipient (MBI in the case of apartments 111, 304 and 604) have agreed in writing that the supply is of a going concern. 89 It is also common ground that all the relevant contracts for the sale of the apartments are in the same terms save for the identification of the property the subject of the sale. The primary judge was taken to the contract for the sale of apartment 111 as a representative contract and the Court was also referred to this contract on the hearing of the appeal. The tax information section on the cover sheet of the contract is marked with a cross in the box as follows: This sale is not a taxable supply because … the sale is: x GST-free because the sale is the supply of a going concern under section 38-325. 90 The primary judge concluded, correctly in my view, that this provision, together with clause 47.6.3 of the contract – 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' would meet the requirement of s 38-325(1)(c) for an agreement in writing that the supply is of a going concern. 91 However, the Commissioner submitted before the primary judge, and on the hearing of the appeal, that this apparent agreement is negated because, in the circumstances of the case, the contingency in cl 47.6.6 is triggered. Clause 47.6.6 reads: 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 … 92 The primary judge spent some time in her reasons considering whether the phrase in cl 47.6.6 '… the supply of the Property under the Apartment Lease …' was a reference to the first category of supply, the supply by way of lease from South Steyne to MML, or to the third category of supply, the supply by MBI to MML in consequence of the former's purchase of the reversion from South Steyne. On the view I take, there is no third category of supply; only a continuation of the first category of supply (see [25] above). That being the case, the words in cl 47.6.6, '… 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 …', are satisfied by reason of the conclusion on the character of the first category of supply (see [33] – [35] above). 93 The provisions of cl 47.6.6 go on to provide that, in those circumstances, the sale of the Property is a taxable supply to which the margin scheme applies. Whether or not the supply is a taxable supply will depend on the provisions of the GST Act, in particular s 40-65, but certainly there would seem to be no longer any agreement in writing to satisfy the requirement of para (c) of s 38-325(1). For that reason, I agree with the primary judge that the supplies to MBI made under the contracts for sale are not GST-free. 94 Because the primary judge had found that the third category of supply was input taxed, her Honour went on to consider the appellants' alternative position on the second category of supply, namely, that it is also input taxed. 95 Her Honour's process of reasoning took the following course: (1) Prima facie, the sale to MBI would be input taxed because of her Honour's anterior findings that the apartments are 'residential premises' and are to be used predominantly for residential accommodation: see [33] above: s 40-65(1): [66]. (2) The exception in s 40-65(2)(a) – the sale is not input taxed to the extent that the residential premises are 'commercial residential premises' – is not applicable because of her Honour's concurrent anterior finding that the premises are not 'commercial residential premises': see [33] above: s 40-65(2)(a): [66]. (3) As to the exception in s 40-65(2)(b), her Honour observed that it was common ground (and it still is) that apartments 111, 304 and 604 sold by South Steyne to MBI are 'new residential premises'. Her Honour also noted the appellants' submission, a submission made again on the appeal, that because these apartments had been 'used for residential accommodation … before 2 December 1998', the exception does not apply; and the Commissioner's submission, again repeated on the appeal, 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 apartments in the relevant period was as commercial residential accommodation; accordingly, the exception in s 40-65(2)(b) applies: [67]. (4) The primary judge concluded, by reference to what her Honour referred to as 'slight but clear' textual support, but principally by reference to extrinsic material in the form of explanatory memoranda and examples given in such memoranda, that the Commissioner's position was to be preferred. Her Honour therefore concluded ([68] – [70]) that the exception in s 40-65(2)(b) applies and that not only were the supplies made by South Steyne to MBI by the sale of apartments 111, 304 and 604 not GST-free, nor were they input taxed; they were taxable supplies. Analysis and Conclusion on the Second Category of Supply 96 Unfortunately, the primary judge did not identify the 'slight but clear' textual support for her preference for the position contended for by the Commissioner over that contended for by the appellants, however, in my view, it is to be found in the following analysis. 97 Residential premises are new residential premises if they satisfy one of three requirements in s 40-75(1): (1) If they 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 (2) if they have been created through substantial renovations of a building; or (3) if they have been built, or contain a building that has been built, to replace demolished premises on the same land. The second and third requirements are not presently relevant. 98 The first requirement makes it clear that the fact that premises have previously been sold as commercial residential premises will not preclude them from being new residential premises. And, indeed, as noted in [44(3)] above, it is common ground that apartments 101, 304 and 604 are 'new residential premises'. 99 A supply of premises that is by way of lease, hire or licence, being a supply of accommodation in commercial residential premises provided to an individual by the entity that owns or controls the commercial residential premises is not input taxed: s 40-35(1)(a). 100 The policy underlying the 'carve out' to the s 40-65(2)(b) exception that the sale of new residential premises are not input taxed, namely, those used for residential accommodation before 2 December 1998, is to be found in a use which, if the subject of a current supply, would be input taxed. As indicated in [48] above, a supply of premises by way of lease, hire or licence, being a supply of accommodation in commercial residential premises in the circumstances there contemplated would not be input taxed. On the other hand, a supply of premises by way of lease, hire or licence, being a supply of residential premises (other than a supply of commercial residential premises) would be input taxed. 101 In my view, s 40-65(2) should be construed in a manner which manifests this policy and so construed, the carve out does not extend to a use prior to 2 December 1998 which would not now be an input taxed supply. Such a construction would exclude apartments 101, 304 and 604 from the carve out to the s 40-65(2)(b) exception and, because the apartments are 'new residential premises', their supply by their sale from South Steyne to MBI is not input taxed; they are taxable supplies. 102 In the result, I have reached the same conclusion as the primary judge by reference to a process of reasoning which relies on a legislative policy perceived from the statutory context, rather than in reliance on extrinsic materials although, as her Honour correctly observed, where these materials support such a conclusion, they reinforce that conclusion as the preferred construction. Fourth Category of Supply 103 As noted at [27] above, the appellants' primary position is that the supply by MML to Ms Young is not input taxed although they sought, in the alternative, a declaration that the fourth category of supply is input taxed if the first and third categories of supply are input taxed. On the view I take, there is no third category of supply, but I did find that the first category of supply was input taxed. 104 The respective positions of the parties in respect of this category of supply are also set out at [27] above. Relevant Legislation 105 The relevant provision in relation to this category of supply is the second parenthetical exception in s 40-35(1)(a) namely, that a supply of premises that is by way of lease, hire or licence will not be input taxed, even if it is a supply of residential premises, if it is: '[A] supply of accommodation in commercial residential premises provided to an individual by the entity that owns or controls the commercial residential premises.' 106 Certain other provisions of the GST Act are also relevant to the determination of this fourth category of supply. 107 Section 29-70 deals with tax invoices. It provides: (1) A tax invoice for a *taxable supply: (a) must be issued by the supplier, unless it is a *recipient created tax invoice (in which case it must be issued by the *recipient); and (b) must set out the *ABN of the entity that issues it; and (c) must set out the *price for the supply; and (d) must contain such other information as the regulations specify; and (e) must be in the *approved form. However, the Commissioner may treat as a tax invoice a particular document that is not a tax invoice. (2) The supplier of a *taxable supply must, within 28 days after the *recipient of the supply requests it, give to the recipient a *tax invoice for the supply, unless it is a *recipient created tax invoice. (3) A recipient created tax invoice is a *tax invoice belonging to a class of tax invoices that the Commissioner has determined in writing may be issued by the *recipient of a *taxable supply. 108 Section 153-15 deals with tax invoices for taxable supplies through agents. It provides: (1) If you make a *taxable supply through an agent, an obligation to issue a *tax invoice relating to the supply: (a) arises whether the *recipient makes a request for a tax invoice to you or the agent; and (b) is complied with if either you or the agent gives the recipient a tax invoice within 28 days after the request. (2) However, you and the agent must not both issue separate *tax invoices relating to the supply. Note: If Subdivision 153-B is to apply to the supply, only your agent can issue the tax invoice: see subsection 153-55(3). (3) This section has effect despite section 29-70 (which is about tax invoices). 109 Significantly, s 153-15 overrides s 29-70: see s 153-15(3). 110 There was no suggestion that subdiv 153-B of the GST Act applied to the supply to Ms Young; there was no evidence of any arrangement between MML and MHL in writing which satisfied the requirements of s 153-50. The Primary Judge 111 On the issue of which entity 'controls the commercial residential premises', which both parties accept the Hotel comprised, the primary judge found, at [86], that, from 29 September 2006, MHL 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 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. 112 The primary judge also found, at [87], that it had 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. 113 Finally, on the issue of control, the primary judge found, at [88], that 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. 114 On the issue of which of MHL or MML, and in what capacity, made the supply, the primary judge, at [88], accepted the submission of the Commissioner that '[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; and 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. 115 By that process of reasoning the primary judge concluded that MHL had 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 the primary judge was satisfied that the fourth category of supply is not input taxed; but rather, is a taxable supply. Analysis and Conclusion on the Fourth Category of Supply 116 The primary judge's finding that MHL controls the Hotel and therefore is 'the entity that controls the commercial residential premises' was made by reference to the matters referred to in [60] to [62] above. 117 What constitutes control of premises is not the subject of any statutory assistance although the Explanatory Memorandum to the Bill which became Act No. 80 of 2006, which substituted the present parenthetical exception to s 40-35(1) for the previous one, provides at 15.11: The reference to an entity that 'controls' commercial residential premises include an entity that leases the premises from the owner or owners and supplies the accommodation to guests in its own right. It does not refer to control of the entity itself by way of shareholdings, directorships or the like. Nor does it refer to an agent that lets out premises on behalf of the owner of the premises. For example, a supply made by the owner of an individual strata titled unit in a hotel complex, who lets the unit to a guest through an agent, remains input taxed. [Schedule 15, item 1, paragraph 40-35(1)(a)] 118 If all the matters referred to in [60] to [62] above relied on by the primary judge for her finding that MHL is 'the entity that controls the commercial residential premises' were matters which MHL executed in its own right then, in my view, her Honour's finding was undoubtedly open and I would be disinclined to disturb it. However, for the reasons set out below, MHL executed the control and operation of the serviced apartment business not in its own right but as agent for MML, as lessee of the apartments, pursuant to the Serviced Apartment Management Agreement. For that reason, the acts of 'supply of accommodation' were not MHL's acts, but the acts of MML. On the other hand, the Commissioner never contended, correctly in my view, that MML is 'the entity that controls the commercial residential premises'. 119 Contrary and with respect to the primary judge's acceptance of the Commissioner's submission that '… the accommodation was provided to Ms Young by MHL in its own name …', whether it is provided in MHL's name or in MML's name is irrelevant although, if it was provided in MML's name, one might more readily draw the conclusion that MHL is acting as MML's agent. But the real issue is whether the accommodation is being supplied by MHL in its own right or whether it is being supplied by MHL as agent for MML. If the former, then MHL is the supplier and the supply is a taxable supply; if the latter, MML is the supplier and the supply is input taxed. 120 The primary judge's reliance on the submission of the Commissioner as to the fact that the tax invoice was given by MHL to Ms Young is apt to lead one into error on the capacity in which MHL was acting; where a person makes a supply through an agent outside a subdiv 153-B arrangement, the tax invoice can be given by either the principal or the agent: see s 153-15. 121 One is still left with the issue of whether MHL is acting as principal or as agent for MHL. In my view, resolution of the issue is quite clear. When one has regard to the terms of the Serviced Apartment Management Agreement, the fact that there was no evidence to suggest that the parties regulated their relationship and their respective activities under that relationship otherwise than in accordance with the terms of that agreement and the fact that MML was the lessee of apartment 403, MHL having no proprietary interest in the apartment, I am of the view that the accommodation supplied to Ms Young in apartment 403 is supplied by MHL as the agent of MML and that MML is the supplier of the accommodation. 122 I will deal with each of these matters in turn. The terms of the Serviced Apartment Agreement 123 By agreement dated 30 November 2007 between MHL and MML it is provided: Background Mirvac Management is the Responsible Entity of The Sebel, Manly Beach Managed Investment Scheme (the Scheme). Mirvac Management has appointed Mirvac Hotels as its agent to manage and operate the serviced apartment business associated with the Scheme. Operative Attached is an unexecuted Serviced Apartment Management Agreement between Mirvac Hotels and Mirvac Management prepared by Corrs Chambers Westgarth Lawyers and dated 11 January 2006 (the Agreement). The parties acknowledge and agree that: 1. the Agreement reflects the terms and conditions upon which the parties have acted in relation to the serviced apartment business associated with the Scheme from 11 January 2006; and 2. they are and will continue to be bound by the terms and conditions contained in the Agreement as if it had been properly executed on 11 January 2006. 124 Relevantly, the unexecuted instrument dated 11 January 2006 provides: 3.1Appointment and acceptance MML appoints Mirvac Hotels as its exclusive agent to manage and operate the Serviced Apartment Business during the Term. Mirvac Hotels accepts this appointment and must manage and operate the Serviced Apartment Business in accordance with the terms and conditions of this Agreement. … 3.6 Management fee MML will pay Mirvac Hotels from the Operating Account within 5 Business Days of the end of each month 56% of Pooled Apartment Revenue. 4 … 4.1 Responsibilities under apartment leases (a) Subject to any Force Majeure Events and this Agreement, Mirvac Hotels must carry out all duties and responsibilities that MML has under the Apartment Leases for the Scheme. (b) MML must allow Mirvac Hotels to have the benefit of any right of MML under the Apartment Leases for the Scheme to allow Mirvac Hotels to carry out the duties and responsibilities. … 4.4 Maximise revenue and profit (a) Mirvac Hotels must manage and operate the Serviced Apartment Business in accordance with this Agreement so that the Serviced Apartment Business operates in a proper and businesslike manner and that so far as reasonably practicable the Serviced Apartment Business is operated to maximise revenue and profit. (b) Within 30 days after each Operating Year, Mirvac Hotels must provide to MML an accountant's statement of review in respect of the revenue received by Mirvac Hotels during the Operating Year. 4.5 Costs (a) Mirvac Hotels is responsible to pay and will indemnify and reimburse MML the costs and expenses which relate to or are incurred in respect of both: (i) the operation of the Serviced Apartment Business; and (ii) the Management Lot or one or more of the Non-Scheme Businesses; (b) Within 30 days after each Operating Year, Mirvac Hotels must provide to MML an accountant's statement of review in respect of the cost and expenses referred to in clause 4.5(a) incurred by Mirvac Hotels during the Operating Year. 5 … 5.1 Operating account (a) For the purpose of the operation of the Serviced Apartment Business, MML must open or cause to be opened an account ("Operating Account") with a bank into which all cash comprising Pooled Apartment Revenue must be deposited. (b) Mirvac Hotels acknowledges that all funds from time to time in the Operating Account are held on trust for the members of the Scheme. (c) Mirvac Hotels may deposit other moneys into the Operating Account if Mirvac Hotels considers that doing so is consistent with operating the Serviced Apartment Business in conjunction with the other businesses and activities operated by Mirvac Hotels in connection with the Building in a cost effective way and, by making any such deposits, Mirvac Hotels acknowledges that such moneys will be held subject to the trust referred to in clause 5.1(b). … 7.1 Maintenance of books and records Mirvac Hotels must establish and maintain proper and adequate books and records (the "Books and Records") for the Serviced Apartment Business at the Management Lot or any other agreed place reflecting the results of the operation of the Serviced Apartment Business and recording all other information relevant or necessary for the purposes of this Agreement or which MML may reasonably require Mirvac Hotels to record. 7.2 Manner of keeping accounts The Books and Records must be established and kept in all material respects in accordance with Mirvac Hotels' existing system of accounts which MML acknowledges is similar to but not identical to the Uniform System. 7.3 Inspection of books by MML The Books and Records must be available to MML and its authorised representatives at all reasonable times for examination, audit, inspection and transcription. 7.4 Year-end report Within 60 days after the end of each Operating Year, Mirvac Hotels must cause MML to receive a profit and loss statement for the Operating Year. 7.5 Audited accounts Audited accounts will be made available to MML as soon as they are received by Mirvac Hotels. 7.6 Statement of assets & liabilities From time to time, as MML may reasonably request (up to a maximum of 4 times in any Operating Year), and in any event at the end of the Operating Year, Mirvac Hotels must cause to be prepared and provided to MML a statement of the assets and liabilities of the Serviced Apartment Business, which are within the control of Mirvac Hotels. … 10.1 Conduct on termination On termination of this Agreement: (a) Mirvac Hotels must transfer to MML all books and records concerning the Serviced Apartment Business which may then be in the custody or control of Mirvac Hotels; … Not an Agent in Name Only 125 Having regard to these terms, there can be no doubt that in carrying out the management and operation of the Serviced Apartment Business, MHL is doing so as the agent of MML. The relationship so established is truly one of principal and agent; the term 'agent' is not used as mere nomenclature for some other relationship as in International Harvester Co of Australia Pty Ltd v Carrigan's Hazeldene Pastoral Co (1958) 100 CLR 644. See too Lilyvale Hotel Pty Ltd v Commissioner of Taxation (2009) 175 FCR 491. The Apartment Leases 126 By cl 1.1 of the Serviced Apartment Management Agreement the term 'Serviced Apartment Business' has the same meaning as it does in the Apartment Leases and this is defined in cl 19.1 to mean – [T]he business of operating the Scheme Apartments as serviced apartments (as an unregistered managed investment scheme), including: (a) advertising and promotion; (b) offering the Scheme Apartments for occupation as serviced apartments; (c) entering into agreements with travel agents, tourist agencies, booking agencies and others; (d) entering or termination any agreement or arrangement for occupation or use or the Scheme Apartments; (e) collecting fees and other moneys payable for occupation and use of the Scheme Apartments; (f) instituting proceedings for recovery of possession of the Scheme Apartments or any fees or money payable for occupation or use of the Scheme Apartments; (g) operating the Car Parks; (Emphasis added) 127 In other words, the business carried on by MHL as agent for MML specifically encompasses offering the Scheme Apartments for occupation as serviced apartments. 128 The agency relationship is also reflected in the provisions of cll 5.1 and 3.6 of the Serviced Apartment Management Agreement, namely, that all cash comprising Pooled Apartment Revenue is to be banked to the credit of MML's Operating Account; MHL's acknowledgement that all funds from time to time in the Operating Account are held on trust for the members of the Scheme; and that MHL is obliged to pay MML nothing more than a monthly management fee of 56% of Pooled Apartment Revenue. 129 In his written submissions, the Commissioner placed reliance on those provisions of the Serviced Apartment Management Agreement (in particular cl 4.1(b) that MHL had the benefit of any of MML's rights under the Apartment Leases) to contend that 'whilst MHL may have been appointed MML's agent to manage and operate the Serviced Apartment Business, it does not follow that it provided the licence to Ms Young as agent of MML'. In my view, it is legitimate to ask, why not? There cannot be any suggestion that provisions such as cl 4.1(b) of the Serviced Apartment Management Agreement operated as an assignment of such rights to MHL and yet that seems to be what is effectively being contended. Such provisions are not assignments of rights; they are purely facultative to enable MHL to carry out its duties and obligations as the agent of MML. 130 In my view, the supply of accommodation to Ms Young was made by MML through the instrumentality of MHL as its agent and as there was no contention by the Commissioner that MML controlled the Hotel, accepted as being commercial residential premises, the second parenthetical exception to s 40-35(1)(a) had no operation. 131 The fourth category of supply is therefore input taxed. 132 I would declare that the fourth category of supply – the supply of accommodation in apartment 403 to Ms Young who checked in on 17 October and checked out on 18 October 2008 – is input taxed. Otherwise I would order that the appeal be dismissed. There should be no order as to costs as the Court was informed that the Commissioner had agreed to pay the applicant's costs under the Commissioner's test case funding program. I certify that the preceding eighty-one (81) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Edmonds. Associate: Dated: 20 November 2009 Counsel for the First and Second Appellants: Mr A Robertson SC with Mr S Free Solicitor for the First and Second Appellants: Balazs Lazasnas & Welch LLP Counsel for the Respondent: Mr M Wigney SC Solicitor for the Respondent: Australian Government Solicitor Date of Hearing: 3 and 4 August 2009 Date of Judgment: 20 November 2009