This article is from the Australian Property Journal archive
A recent decision of the Full Federal Court has important ramifications over GST-free treatments for providers and recipients of mixed supplies, which may prompt some tax payers, particularly major landlords to consider whether they have overpaid GST, according to lawyers Gadens and Minter Ellison.
Earlier this month, the Full Federal Court handed down a decision overturning the judgment of Kenny J in Westley Nominees Pty Ltd v Coles Supermarkets Australia Pty Ltd, where Coles Supermarkets Australia Pty Ltd (Tenant) leased supermarket premises from Westley Nominees Pty Ltd (Landlord).
Under the lease, Coles paid a ‘base amount rent’, an ‘annual percentage rental’ plus operating expenses, ‘after hours’ charges and ‘promotion fund’ contributions. The lease provided for a rent review on 4 March 2004. However, only the base amount rent (which comprised only 53.51% of the total rent) was able to be reviewed.
The primary issue was whether the 4 March 2004 review triggered a ‘review opportunity’, which would stop GST-free treatment applying to the rent.
According to Minter Ellison Lawyers partner Rhys Guild, this required consideration of whether the rent review constituted a ‘general review, renegotiation or alteration of the consideration’.
Gadens Lawyer’s special counsel Cameron Steele said the primary judge Kenny J, found in favour of the tenant, Coles Supermarkets, and held that a ‘review opportunity’ arose in March 2004.
“This meant the landlord was prevented from invoking the new transitional rules for long-term non-reviewable contracts, which would have otherwise allowed the landlord to gross-up the rent to take into account GST payable after 1 July 2005,” he added.
Steele said the original decision was interesting in two respects. First, it disregarded the ATO’s public opinion on what constituted ‘consideration’ for the landlord’s supply under a lease. Secondly, it gave tenants greater scope to challenge the landlord’s entitlement to gross-up the rent under special transitional rules that commenced on 1 July 2005.
“The Full Court rejected the primary judge’s finding that the consideration for the lease was merely the rent and did not include the tenant’s contributions to outgoings,” Steele said.
“Kenny J had considered that the contribution to outgoings was for the provision of ‘such ancillary and incidental benefits and services as arise from being part of the Centre as a whole.’ The Full Court disagreed.
“This is because the Full Court (in a joint judgment by Ryan, Heerey and Edmonds JJ) approved the line of English cases dealing with mixed or composite supplies under the UK Value Added Tax system. Those cases answered the question whether there is a single supply or multiple supplies by reference to economic or commercial reality. This gains significance when classifying mixed supplies, such as, packaging, gifts or services supplied with GST-free food, health, education, banking products, residential premises, etc.” Steele concluded.
Guild said the Full Federal Court held that the concept of a ‘general review’ requires a ‘complete or almost universal’ consideration of the same subject rather than a review of part of the consideration.
“The Court concluded that the inability to increase amounts recovered for outgoings meant there had not been a general review, so that a ‘review opportunity’ had not arisen. However, a general review does not require an opportunity to review the entire consideration so that, for example, if the review covered all of the payments except the contribution to the promotional fund, a general review may have arisen,” he added.
So what does this mean for taxpayers?
Guild said the Full Federal Court’s conclusion means that GST-free treatment could apply to a broader range of supplies than suggested by the ATO in its public rulings and some taxpayers (including major landlords) may have unnecessarily returned GST on supplies made under pre-GST agreements.
“As a result, some taxpayers may be entitled to claim a refund for the overpaid GST from the ATO. However, from a practical perspective, there are a number of factors which may restrict or limit taxpayers’ ability to claim a refund for the overpaid GST. Specifically:
· Under the Taxation Administration Act 1953, in certain circumstances the Commissioner has a discretion to not repay overpaid GST unless the supplier has already refunded that GST to the recipient.
· If parties have entered into a new agreement, which allows GST to be charged, GST-free treatment will have already been lost from that point, and
· Statutory time limitations apply to the claiming of GST refunds. Specifically, under the Taxation Administration Act 1953 the statutory limitation may restrict taxpayers to claiming GST refunds for the previous four years, which would be further restricted by the fact that GST-free transitional relief expired on 30 June 2005.
“Finally, some suppliers who believed they were not able to access the ‘arbitration’ mechanism provided in the GST Transition Act (because those provisions only applied to GST-free supplies) may now be able to force recipients to pay GST on supplies made after 1 July 2005,” Guild said.
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Payment description
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Percentage of total amount payable under the lease
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Base annual rent
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51.94%
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Annual percentage rent
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21.27%
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Contribution to outgoings
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26.79
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Source: Gadens Laywers
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By Nelson Yap
