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MSAUS Pty Ltd as the Trustee for the Melissa Trust and Commissioner of Taxation (Taxation) [ 2017] AATA 1408  (31 August 2017)

Last Updated: 8 September 2017

MSAUS Pty Ltd as the Trustee for the Melissa Trust and Commissioner of Taxation (Taxation)  [2017] AATA 1408  (31 August 2017)

Division: TAXATION & COMMERCIAL DIVISION

File Number(s): 2012/1228; 2012/1265

Re: MSAUS Pty Ltd as the Trustee for the Melissa Trust

FIRST APPLICANT

And Nettleamber Pty Ltd as the Trustee for the Manly Property Trust

SECOND APPLICANT

And Commissioner of Taxation

RESPONDENT

DECISION

Tribunal: Deputy President Bernard J McCabe

Date: 31 August 2017

Place: Sydney

  1. The reviewable decisions, being the objection decisions in relation to proceedings number 2012/1228 and 2012/1265 dated 31 January 2012, are set aside.
  2. In substitution, the Tribunal decides that the objections dated 25 July 2011 be allowed in full so as to reflect the Tribunal’s findings that:

...........................[sgd].............................................

Deputy President Bernard J McCabe

CATCHWORDS

TAXATION – Goods and Services Tax – sale of an apartment subject to a lease – whether sale was a GST-free supply of a going concern – interpretation of contractual terms – written agreement that the sale was a supply of a going concern – conditional agreement to apply margin scheme where transaction constitutes a taxable supply – agreement made on or before the making of the supply – consideration of the effect of a Deed of Rectification – decision set aside and substituted

LEGISLATION

A New Tax System (Goods and Services Tax) Act 1999, s 38-325; Div 75 – s 75-5(1A)(a); Div 135 – s 135-5(2)

CASES

Baird v BCE Holdings Pty Ltd (1996) 40 NSWLR 374

Commissioner of Stamp Duties (NSW) v Carlenka Pty Ltd (1995) 41 NSWLR 329

Commissioner of Taxation v MBI Properties Pty Ltd [2014] HCA 49

Davis v Federal Commissioner of Taxation; Sirise Pty Ltd v Federal Commissioner of Taxation [2000] FCA 44; (2000) 44 ATR 140

South Steyne Hotel Pty Ltd v Federal Commissioner of Taxation [2009] FCAFC 155; (2009) 180 FCR 409

The Hotel Apartment Purchaser and Commissioner of Taxation [2013] AATA 567

SECONDARY MATERIALS

Goods and Services Tax Ruling GSTR 2006/8 - Goods and services tax: the margin scheme for supplies of real property acquired on or after 1 July 2000

REASONS FOR DECISION


Deputy President Bernard J McCabe


31 August 2017

INTRODUCTION

  1. For tax practitioners, the Sebel Manly Beach Hotel is the gift that keeps on giving. The sale of a small number of apartments in the complex has generated a steady stream of litigation over the application of the Goods and Services Tax (GST). The earlier stages of the litigation culminated in the High Court’s decision in Commissioner of Taxation v MBI Properties Pty Ltd [2014] HCA 49 (MBI Properties). In that case, the High Court expounded on the GST consequences of a taxpayer acquiring a residential apartment that was burdened by an input taxed lease.
  2. It turns out tax lawyers and the Tribunal – and perhaps the courts – are not done with the Sebel Manly Beach Hotel. These proceedings arise out of the purchase of two apartments that were subject to leases which contemplated the apartments being used as part of a serviced apartment business. The purchases occurred in 2006 and 2007, long before the conclusion of the earlier litigation. Each of the contracts of sale described the purchases as a GST-free supply of a going concern. That is significant because Div 135 of the A New Tax System (Goods and Services Tax) Act 1999 (the GST Act) potentially applies to the recipient of a ‘supply of a going concern’ as defined in s 38-325. If Div 135 applies, the purchaser becomes liable to pay an increasing adjustment calculated in accordance with s 135-5(2). The Commissioner of Taxation decided in 2011 that Div 135 applied to the transactions and issued assessments requiring each taxpayer to pay GST equal to 10% of the purchase price of the apartment.
  3. The taxpayers objected to the assessments. They dispute each sale was a GST-free supply of a going concern. If they are right, there is no increasing adjustment pursuant to Div 135. They say the margin scheme set out in Div 75 applied notwithstanding the statements in the contract. If the margin scheme applies, the GST liability would be calculated in a different way and the (lower amount of) GST would be paid by the vendor.
  4. The taxpayers say there is nothing remarkable about a contractual agreement of this kind. They say parties to such a contract can agree amongst themselves how the burden of the GST is allocated. In particular, they argue they are entitled to agree on the conditional application of the margin scheme – that is, in the event the supply of property is taxable they can agree the GST payable will be calculated under the margin scheme. The taxpayers say the contract, when read as a whole, makes it sufficiently clear the parties were in agreement that the margin scheme would apply in certain circumstances notwithstanding a number of express statements in the document. They rely in particular on a clause in the special conditions of each contract which – they say – clearly had that end in mind and which effectively qualifies the express statements cited by the Commissioner.
  5. The taxpayers acknowledge there are difficulties with the interpretation of the clause in the special conditions of each contact but they argue that those clauses must be read in light of:
  6. The taxpayers are effectively re-agitating questions dealt with by the Full Federal Court in South Steyne Hotel Pty Ltd v Federal Commissioner of Taxation [2009] FCAFC 155; (2009) 180 FCR 409 (South Steyne Hotel) and by the Tribunal in The Hotel Apartment Purchaser and Commissioner of Taxation [2013] AATA 567 (The Hotel Apartment Purchaser) in relation to other purchasers in the same complex. The contractual provisions in those cases were effectively identical to the contractual provisions under consideration here. The analyses in those cases are at odds with the position advanced by the taxpayers in this case. I was told the earlier decisions are not determinative of the outcome here because the High Court’s decision in MBI Properties changes the game, or because these taxpayers have addressed gaps that were identified in the arguments in the earlier cases.
  7. The taxpayers go on to argue that if I am against them on the interpretation of the clause in the special conditions, the issue is put beyond doubt by the deeds of rectification which effectively rewrite the contracts. The deeds of rectification are supported by parol evidence provided by individuals involved in each transaction.
  8. In one of the cases, there is also a question over whether it is too late for the Commissioner to recover GST that might otherwise be payable.
  9. The taxpayers are unrelated although their applications were heard together. The facts in each case are substantially similar although there are some differences that I will describe. The outcome in each case is the same.

BACKGROUND TO THE ACQUISITION OF THE APARTMENTS

  1. South Steyne Hotel Pty Ltd (South Steyne) acquired a complex in December 2000 that became the Sebel Manly Beach Hotel. On 10 August 2006, South Steyne ‘strata-titled’ the complex so that each of the 83 hotel-apartment rooms and the management lot (which included common areas) became separate lots in the strata plan. South Steyne then granted leases over each of the 83 hotel-apartments to Mirvac Management Pty Ltd (Mirvac Management). Each of the identical leases contemplated Mirvac Management managing all of the leased properties as part of a serviced apartment business. The leases referred to this arrangement as a Management Rights Scheme (the Rights Scheme).
  2. The operation of the Rights Scheme was described in a product disclosure statement (PDS) dated 16 March 2006: MSAUS T-documents at T7-120ff. The promoter of the Rights Scheme proposed paying apartment owners a fixed rate of return for a period of up to two years. Thereafter, the owners would receive a return out of revenue generated by the apartment business. The PDS states Mirvac Management appointed Mirvac Hotels Pty Ltd (Mirvac Hotels) as its agent for the purpose of operating the serviced apartment business. Both Mirvac Management and Mirvac Hotels were wholly-owned subsidiaries of Mirvac Ltd.
  3. The PDS also noted there was some uncertainty over the GST implications for investors. It foreshadowed the risk that owners might be liable to pay an increasing adjustment equal to 10% of the purchase price depending on how the law was interpreted in the future, or if it was changed: MSAUS T-documents at T7-135 and T7-139. Both taxpayers said they were conscious of that risk and sought to address it in their respective contracts by including a clause in the special conditions that provided a hedge against any adverse outcomes.
  4. Individual apartments were offered for sale by South Steyne to investors subject (in each case) to the leases to Mirvac Management incorporating the Rights Scheme. I will deal with each transaction separately below.

The MSAUS purchase

  1. It is convenient to deal firstly with the purchase of an apartment by MSAUS Pty Ltd as trustee for the Melissa Trust. The contract was entered into on 30 April 2007. It settled on 12 June 2007. The sale price was $899,000.
  2. The starting point of the analysis is the contract of sale. The relevant portions of the contract are extracted in the statement of Mr Scott McGill, the taxpayer’s accountant: Statement of David Scott McGill dated 14 July 2015, Annexure A at pp 115-138. The cover page of the contract includes a series of boxes that must be checked in relation to taxation issues. The heading “Tax information” includes a statement in parenthesis that “the parties promise this is correct as far as each party is aware”. Underneath the heading, against the statement “GST: Taxable supply”, the parties have checked the ‘No’ box. They have also checked:
  3. The Commissioner says those provisions in the contract dispose of the matter: the transaction involves the supply of a going concern that is GST-free because it satisfies the requirements in s 38-325. Subsection 38-325(1) includes a requirement that: “the supplier and the recipient have agreed in writing that the supply is of a going concern” [Emphasis added]. The Commissioner says the portions of the contract quoted above clearly record such an agreement.
  4. MSAUS says the words on the front page of the contract cannot be read in isolation. There are other provisions in the contract which are relevant, it argues. I was referred in particular to clauses 47.6.3 and 47.6.6 in the special conditions. Clause 47.6.3 repeats and records the parties’ agreement “...that the sale of the Property comprises a supply of a going concern for the purposes of section 38-325 of the GST Act”: MSAUS T-documents at T6-95. That clause tends to reinforce the Commissioner’s argument, but MSAUS says clause 47.6.6 changes things. That clause reads:
47.6.6 if page 1 of the Contract says that the supply is GST-free because the sale is the supply of the going concern but the supply of the Property under the Apartment Lease is a supply of residential premises (but not commercial residential premises), and the premises are also to be used predominantly for residential accommodation (regardless of the term of the occupation), then the sale of the Property is a taxable supply and the parties agree that the margin scheme applies or, if completion has already occurred, the margin scheme is taken to have applied. For the avoidance of doubt, the Vendor acknowledges that if the margin scheme applies to the sale of the Property, the price is inclusive of any GST: MSAUS T-documents at T6-95.
  1. I was told the key to understanding clause 47.6.6 lies in the confusion that existed at the time over the operation of the GST in relation to transactions of this kind. The confusion was articulated in the PDS issued in early 2006 in connection with the Rights Scheme. An excerpt of the PDS is reproduced in the MSAUS T-documents at T7-120ff. The excerpt includes a discussion at clause 4.6 of the GST implications of a purchase. That discussion noted the law was in a state of flux at the time. Clause 4.6 pointed out the liability of an apartment owner to pay GST on the letting depended on whether the premises that were being let out were residential premises or commercial residential premises. It explained the letting of residential premises was an input taxed supply and the occupant was not required to pay GST whereas the letting of commercial residential premises was a taxable supply and GST was charged to the occupant. The PDS suggested the owner could be liable to pay an increasing adjustment if the apartment was acquired as a going concern and the owner used the apartment to supply residential premises – whereas the increasing adjustment would not apply if the owner were supplying commercial residential premises.
  2. MSAUS says the fact the issue was flagged in the PDS suggested the parties had turned their minds to the potential for different GST outcomes that needed to be anticipated and reconciled through an appropriately drafted clause in the contract. Mr John Holt, a director of MSAUS involved in negotiations over the purchase, gave evidence to that effect in his statement: Statement of John Wellesley Holt dated 14 July 2015 at [10]. Mr Holt says he realised there was uncertainty over the GST implications but understood from his lawyers that clause 47.6.6 was designed to address any eventuality. He explained (at [10.2]):
I do not fully understand the GST technicalities however I did clearly understand that in the event there was a GST problem, it would be the Vendor’s liability and not the Trust’s.
  1. The parties were aware there was uncertainty over the GST issues but they say the objective in the contract was clear: the parties did not want an increasing adjustment and wished to preserve the option of participating in the margin scheme if subsequent events suggested the election in clause 47.6.3 would result in Div 135 applying. In effect, clause 47.6.6 enabled the parties to change their minds about the declaration they had made elsewhere in the contract. The agreement was in that sense conditional or contingent. Indeed, Mr Wayne Smith, the solicitor for MSAUS, used the language of contingency in his statement. He explained (Statement of Wayne Barrie Smith dated 14 July 2015 at [10]):
10. ...at all relevant times it was my understanding that the purpose of clause 47.6.6 of the Contract was:
10.1. if the contingency in clause 47.6.6 was met, that contingency being the supply by the Purchaser to the Operator under the Apartment Lease is a supply of residential premises (but not commercial residential premises), to negate the provisions of clause 47.6.3 with respect to the supply of the Property being a going concern;
10.2. generally, that no money would be payable by the Purchaser (to the Vendor or the Commissioner of Taxation, or otherwise) in addition to the stated purchase price of $899,000.00 as a consequence of the purchase of the Property;
10.3. to ensure that the Vendor would bear all GST in respect of the supply of the Property, albeit calculated under the margin scheme; and
10.4. specifically, to ensure that there would be no increasing adjustment under Division 135 of the GST Act of the kind referred to in the fifth paragraph of clause 4.6 of the Disclosure Statement.
  1. Mr Smith agreed in cross-examination that the wording of clause 47.6.6 was clumsy because it made the clause appear inconsistent with clause 47.6.3.
  2. Mr Scott McGill, the accountant for MSAUS, confirmed in his statement that Mr Smith had used the language of contingency when the transaction was being discussed in 2007: Statement of David Scott McGill dated 14 July 2015. Mr McGill recalled Mr Smith explaining what would happen if the trust was found to be making only input taxed supplies. Mr Smith replied with words to the following effect:
That contingency is dealt with in the GST clauses which are relevantly clause 43 and clauses 47.6.3 to 47.6.7. Specifically clause 47.6.6 provides that the sale is not a GST-free going concern, but is taxable under the margin scheme if that contingency is met: Statement of David Scott McGill dated 14 July 2015 at [5].
  1. Mr McGill’s statement also includes a letter from Mr Graham Brand, the sole director of South Steyne, to Mr McGill on 28 May 2012. In that letter, Mr Brand explained:
[South Steyne] had developed and strata’d the hotel with a view to selling the rooms in the hotel for investment purposes. The rooms were to be sold as a going concern under the GST Act. There was some doubt as to the GST nature of the supplies made by the purchasers of the hotel rooms and a significant adjustment could possibly arise to purchasers if those supplies were held to be input taxed. Accordingly clause 47.6.6 was included in the contract of sale to operate in the event the supplies made by the purchasers would be input taxed: Statement of David Scott McGill dated 14 July 2015, Annexure B at p 141.
  1. Mr Brand conceded during cross-examination that South Steyne accounted for the supplies on the basis they were GST-free supplies of a going concern, just as the contract provided in clause 47.7.3.[1] South Steyne did not proceed on the basis that the margin scheme applied. He agreed that if the supply of each apartment by South Steyne was taxable, the vendor would have accounted for the transaction differently. Of course, the vendor’s conduct is not surprising given the outcome of the South Steyne Hotel litigation in the Full Court (see below).
  2. MSAUS says the evidence, taken as a whole, suggests the written statements on page 1 of the contract and in clause 47.6.3 should not be read in isolation. It argues the wording of clause 47.6.6 qualifies the other provisions by introducing a contingency that permits the vendor and purchaser to access the margin scheme as an alternative way of meeting the GST liability if the supply was found to be taxable.
  3. There is a problem with the evidence provided by the solicitors, accountants and others involved in the transaction, of course. The parol evidence rule makes clear evidence of pre-contractual negotiations should not be used to inform the interpretation of the meaning of the contract. When parties reduce a contract to writing, the terms of the contract are taken to be the embodiment of what the parties intend. That evidence was tendered in support of the taxpayer’s second argument about a Deed of Rectification. The rectification argument was offered in the event I was not persuaded the words of the contract had the effect contended for by the taxpayer.
  4. In those circumstances, I will set to one side the evidence about intention that has been supplied by the taxpayer. I will only need to deal with that evidence if I need to consider the effect of the Deed of Rectification. I will focus at first instance on the interpretation of the contract as it was originally drafted.

The interpretation of the MSAUS contract as originally drafted

  1. The Commissioner says the words on the front page of the contract and repeated in clause 47.6.3 clearly satisfy the requirement in s 38-325(1)(c) that “the supplier and the recipient have agreed in writing that the supply is of a going concern”. The Commissioner denies clause 47.6.6 has the effect contended for by the taxpayer. The Commissioner relies on the decision of the Full Federal Court in South Steyne Hotel. In that case, the Full Court considered identical provisions in a contract involving another purchaser in the same hotel complex. Emmett and Finn JJ concluded there was an agreement (effectively a complete agreement) in writing within the meaning of s 38-325. The plurality was not persuaded clause 47.6.6 effectively qualified the other provisions of the contract. Emmett J explained (at [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.
  1. Finn J said clause 47.6.6 destroyed the effect of the earlier statements and was therefore repugnant as a result of internal inconsistency: at [3].
  2. Edmonds J reached a different view. His Honour appeared to accept (at [92]) clause 47.6.6 had work to do.
  3. The Full Court’s decision in South Steyne Hotel was not appealed, and it has never been expressly overruled in relation to the point directly at issue in these proceedings. I also note the plurality’s reasoning on this question was subsequently adopted by the Tribunal in The Hotel Apartment Purchaser at [52]-[58] per DP Frost. Yet MSAUS says I am not obliged to follow the reasoning in South Steyne Hotel in light of the High Court’s conclusion in MBI Properties. I agree.
  4. The High Court’s decision was made after the decisions in South Steyne Hotel and The Hotel Apartment Purchaser. MSAUS argues the reasoning in MBI Properties suggests the plurality in South Steyne Hotel was interpreting the contract subject to a misunderstanding of the nature of the supplies to be made by the purchaser of the property to the lessee. In South Steyne Hotel, the plurality held there was no further taxable or input taxed supplies by the purchaser to the lessee; given that starting point, it is not surprising the plurality would conclude clause 47.6.6 was a confusing anomaly. In MBI Properties, the High Court held (at [36]-[37]) that the purchaser of the apartment subject to a lease made a further supply under the terms of the lease to the lessee.
  5. The supply to Mirvac Management was input-taxed on that approach. That being so, in the absence of an appropriately drafted contingency clause, there was bound to be an increasing adjustment which – almost certainly – neither the vendor or the purchaser would have wanted. The High Court’s decision in MBI Properties provided a belated explanation of the risk that MSAUS sought to avoid by agreeing to a clause not unlike clause 47.6.6.
  6. There were shortcomings in the drafting of clause 47.6.6, to be sure. That much was acknowledged in these proceedings by Mr Smith, the solicitor. In fairness, the lawyers were trying to draft a clause that anticipated the risk of events that did not take final shape until the High Court made its decision in MBI Properties. Yet I am satisfied the purpose and effect of that clause as drafted is tolerably clear on its face. It provides for a contingency plan that is activated if something happens that triggers a liability to pay GST. In that event, the parties agreed the margin scheme would apply. It was open to them to reach an agreement to that effect in the contract of sale, and I am satisfied clause 47.6.6 does that. I am ultimately untroubled by the absence of express words of qualification in the clause which spell out how the clause interacts with the other provisions that would, if viewed in isolation, indicate a different result. The contract must be read in its entirety and the relationship between the various terms is clear.
  7. I accept the conditional agreement in clause 47.6.6 to apply the margin scheme was an agreement made on or before the making of the supply in accordance with s 75-5(1A)(a). The fact the contingency was not activated until a later event is beside the point: the clause embodying this aspect of the agreement was in place ‘on or before the making of the supply’ in accordance with the requirements of s 75-5(1A)(a).[2]
  8. The reasoning of the High Court in MBI Properties makes the purpose of clause 47.6.6 apparent in hindsight. In reaching that conclusion, I am not retrospectively supplying a gloss on the contract that suggests the clause meant something that was not intended at the time. On the contrary: the High Court’s reasoning sheds light on what the parties were talking about in the contract because they plainly anticipated at some level what the High Court ultimately decided. Clause 47.6.6, for all the (understandable) awkwardness of its drafting, turns out to be the product of prescient lawyering.

The rectification argument

  1. I do not need to decide the rectification argument given my conclusion with respect to the wording of the contract as originally drafted. But I would venture the following observations.
  2. The parties produced a Deed of Rectification dated 20 July 2016. I note that date was more than a year after the decision of the High Court in MBI Properties. It is executed by Mr Brand on behalf of South Steyne and Mr Holt on behalf of MSAUS. A copy of the deed is reproduced in the statement of Mr McGill: Supplementary Statement of David Scott McGill dated 8 August 2016, Annexure A.
  3. In the deed, the parties agree the contract of sale should be rectified as follows:

47.6.6 The agreement in clause 47.6.3 above is subject to the supply of the Property by the Purchaser to the lessee under the Apartment Lease following completion not being an input taxed supply of residential premises. If however the supply of the Property under the Apartment Lease by the Purchaser (as Lessor) to the Operator (as Lessee) is an input taxed supply of residential premises, such that a liability would arise for the Purchaser under Division 135 of the GST Act then the sale of the Property by the Vendor to the Purchaser comprises a taxable supply under the GST Act, and the parties agree that such supply is a supply under Division 75 of the GST Act in respect of which the margin scheme applies and that the price is inclusive of GST.

  1. I have already referred to the evidence provided by a number of individuals associated with the transaction. I have no reason to doubt the evidence of Mr Smith, Mr McGill and Mr Brand which confirms the parties were genuinely concerned at the time of contract about the risk of an increasing adjustment given the uncertain state of the law. It is understandable why they would want to avoid that outcome: it makes commercial sense, as the taxpayers have argued. I also accept the clauses as redrafted in the Deed clearly articulate their intention. Subject to what follows, I also accept the amended clauses would be effective to engage the margin scheme if they were found to be incorporated into the agreement.
  2. I should say at once it would have been preferable if the taxpayer had approached the Supreme Court for an order that formally rectified the contract rather than relying on a Deed of Rectification. If the court was persuaded to rectify the contract in the terms set out in the Deed of Rectification, much of the current uncertainty could have been avoided. I accept the amended terms would take effect as if they were part of the contract when it was executed, and they would bind third parties. (Third parties who might be affected by the rectification, like the Commissioner, would have been given notice of the court proceedings and provided with an opportunity to make submissions to the court.)
  3. The court would need to be convinced the contract was flawed in the sense that its terms failed to accurately and fully reflect the intentions of the parties. To that end, the court would consider evidence like that tendered in these proceedings. The court would need to be satisfied the terms as written do not accurately give effect to the intentions of the parties: see, for example, Davis v Federal Commissioner of Taxation; Sirise Pty Ltd v Federal Commissioner of Taxation [2000] FCA 44; (2000) 44 ATR 140 (Davis) at [55]-[57] per Hill J. Rectification would not be appropriate merely because the terms as written were not effective to achieve desired taxation consequences. I accept there is no certainty the court would have ordered rectification, especially if the Commissioner opposed that outcome: cf Baird v BCE Holdings Pty Ltd (1996) 40 NSWLR 374 at 384 per Young J; see also Commissioner of Stamp Duties (NSW) v Carlenka Pty Ltd (1995) 41 NSWLR 329 at 345 per Sheller JA. The lengthy delay before the parties acted might also count against them. Rectification is a discretionary remedy, after all.
  4. The taxpayer did not pursue that course. The taxpayer chose instead to execute a Deed of Rectification. The Commissioner argued there were a number of difficulties with this approach. In particular, he argued the rectified contract may not bind third parties (including the Commissioner) where the rectification was achieved by deed.
  5. Even if the contractual terms as rectified by the Deed did not bind a third party, there is an interesting question as to whether it would still be possible for the parties to say they met the requirements of s 75-5(1A)(b) given the contract as rectified is said to have taken effect from the point the contract was made: see Davis at [57] where Hill J pointed out a validly rectified agreement “would merely record that agreement as it always was.” Happily, I do not need to resolve these difficult questions given my earlier conclusion.

Conclusion with respect to the MSAUS contract

  1. I am satisfied the High Court’s decision in MBI Properties has cleared up the misunderstanding that obscured the true meaning and effect of clause 47.6.6. I am satisfied that the proper interpretation of the contract compels a different view to that taken by the Commissioner on objection. That means the objection decision in relation to MSAUS should be set aside. I decide in substitution that (a) Div 135 does not operate to impose an increasing adjustment and (b) the margin scheme should apply instead.

The Nettleamber purchase

  1. I turn now to the purchase of an apartment by Nettleamber Pty Ltd as trustee for the Manly Property Trust. Nettleamber entered into a contract to purchase an apartment in the complex from South Steyne on 18 April 2006. The contract settled on 19 October 2006. The sale price was $1,015,000.
  2. A copy of the contract is reproduced in the statement of Ms Anna Brennan dated 14 July 2015. Ms Brennan is a director of Nettleamber.
  3. The front page of the contract includes the same express statements made in the MSAUS contract I have already discussed. To reiterate, the parties have checked:
  4. The clauses in the special conditions of the Nettleamber contract dealing with the GST were numbered differently to those in the MSAUS contract. Clause 47.5.3 (the equivalent of clause 47.6.3 in the MSAUS contract) read:
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 unless the Vendor by issuing a written notice no later than 28 days before the Completion Date, informs the Purchaser that the sale is not a supply of a going concern: Statement of Anna Robyn Brennan dated 14 July 2017, Annexure A at p 30.
  1. The wording of clause 47.5.6 in the Nettleamber contract is different to the wording of clause 47.6.6 of the MSAUS contract. The provision in the Nettleamber contract reads:
If page 1 of the contract says that the supply is GST-free because the sale is the supply of the going concern but the Vendor gives a written notice to the Purchaser under clause 47.5.3 or there is a change in the GST Act which the Vendor determines has the effect of impacting the GST payable on the sale of the Property or related transactions, 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: Statement of Anna Robyn Brennan dated 14 July 2017, Annexure A at p 30.
  1. Notwithstanding the difference in wording between the two contracts, Nettleamber says the effect of clause 47.5.6 was the same as the similar provision in the MSUAS contract – that is, the clause made tolerably clear that the parties had agreed the margin scheme should apply if it turned out the sale was a taxable supply.
  2. Ms Brennan gave evidence about her understanding of the contract in her statement and at the hearing. She said she was not directly involved in the negotiations to purchase the property; her late husband had carriage of the negotiations. But Ms Brennan recounted her understanding of her late husband’s thinking as he was deliberating on the decision to make the purchase. She pointed out Mr Brennan was aware of the contents of the PDS. An excerpt of the PDS is reproduced in her statement at pp 236-238. The excerpt includes a discussion of the GST implications of a purchase. That discussion noted the law was in a state of flux at the time. Clause 4.6 of the PDS pointed out the liability of an apartment owner to pay GST on the letting depended on whether the premises that were being let out were residential premises or commercial residential premises. The PDS also suggested the owner could be liable to pay an increasing adjustment if the apartment was acquired as a going concern and the owner used the apartment to supply residential premises – whereas the increasing adjustment would not apply if the owner were supplying commercial residential premises. Interestingly, the excerpt of the PDS reproduced in the Nettleamber T-documents (at T10-83) and Ms Brennan’s statement include a hand-written notation: “Probably applies here”. The expression commercial residential premises is underlined, as if to suggest the person who made the note – presumably the late Mr Brennan – thought that is what the company was acquiring and subsequently supplying. Ms Brennan’s statement also annexes a copy of a page from her late husband’s diary. It is possible to discern scribbled notes which suggest Mr Brennan was indeed concerned over the uncertainty with respect to the GST implications of the purchase.
  3. Mr Scott McGill’s statement dated 14 July 2015 annexes a letter dated 13 July 2015 from Mr Graham Brand, the sole director of South Steyne. The letter is addressed to Mr McGill. Mr McGill had asked for clarification of what was meant by clauses 47.5.3 to 47.5.7. Mr Brand explained in the letter that it was always intended that purchasers would not be subject to an increasing adjustment under Div 135. He went on to say the government had announced in 2006 that it might expand the definition of ‘residential premises’ in the GST legislation which could mean the supplies under the lease would become input taxed. If that occurred, the owners of the apartments might become liable to an increasing adjustment. He said clauses 47.5.3 to 47.5.7 were included so the purchaser could access the margin scheme as an alternative if there was a danger of an increasing adjustment. At the conclusion of the letter, Mr Brand explained:
For the avoidance of doubt the vendor determined that a change in the GST Act which had the effect of impacting the GST payable on the sale of the property or related transactions as referred to in clause 47.5.6 of the contract of sale occurred upon the issue of the High Court decision in Commissioner of Taxation v MBI Properties Pty Ltd....which was handed down on 3 December 2014: Statement of David Scott McGill dated 14 July 2015, Annexure C at p 280.
  1. While parol evidence is admissible for some purposes – most obviously in relation to the Deed of Rectification – I cannot rely on that evidence for the purpose of reading and interpreting the contract. That document contains the entirety of the agreement between the parties and (in the absence of valid rectification) must be read without reference to evidence given by the parties as to pre-contractual negotiations.

The interpretation of the Nettleamber contract as originally drafted

  1. The Commissioner acknowledges the wording of the Nettleamber contract – including the wording of clause 47.5.6 – was similar to the wording considered by the Full Court in the South Steyne Hotel case. I accept that is so. I am satisfied nothing turns on the differences in wording between clause 47.5.6 in the Nettleamber contract and clause 47.6.6 in the MSAUS contract (which was the same as the wording in the contract considered in the South Steyne Hotel case). I am satisfied the effect of both clauses was the same. Notwithstanding the reasoning in South Steyne Hotel, I am satisfied the words of the Nettleamber contract when read as a whole suggest the parties anticipated the possibility of an increasing adjustment and agreed that, in the event the supply was taxable, the margin scheme would apply. I adopt the same reasoning for that conclusion which I explained in relation to the MSAUS contract.
  2. Given my conclusion with respect to the interpretation of the contract as originally drafted, I do not need to address the other arguments developed by Nettleamber.

Conclusion with respect to the Nettleamber contract

  1. The objection decision under review must be set aside. I decide in substitution that (a) Div 135 does not operate to impose an increasing adjustment and (b) the margin scheme should apply instead.
I certify that the preceding 57 (fifty-seven) paragraphs are a true copy of the reasons for the decision herein of Deputy President Bernard J McCabe.

.............................[sgd]...........................................
Associate

Dated: 31 August 2017

Date of hearing:
20 September 2016
Counsel for the Applicants:
J Hmelnitsky SC
Representatives for the Applicants:
Pitcher Partners Sydney
Counsel for the Respondent:
G O’Mahoney
K Josifoski
Solicitors for the Respondent:
Australian Taxation Office, Review & Dispute Resolution

[1] The equivalent provision in the contract of sale to Nettleamber Pty Ltd was clause 47.5.3.

[2] The Commissioner acknowledges that taxpayers can have an agreement to apply the margin scheme on a conditional basis. He states at paragraphs [27] of the Goods and Services Tax Ruling GSTR 2006/8 - Goods and services tax: the margin scheme for supplies of real property acquired on or after 1 July 2000 as follows:

Commonly, contracts specify that there is no GST payable on a supply, but that if the supply is taxable then the GST payable will be calculated under the margin scheme. In these circumstances, the Commissioner accepts that the requirements in paragraph 75-5(1A)(a) have been satisfied.

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URL: http://www.austlii.edu.au/au/cases/cth/AATA/2017/1408.html