In our February 2009 Fiscal Watch we referred to a decision of the Federal Court in relation to whether certain supplies in relation to serviced apartments were input taxed, GST free supplies or taxable supplies. This case has now been largely upheld by the Full Federal Court.
The case illustrates the importance in carefully structuring a transaction to ensure that you get the GST result that you want if this is possible. An incorrect structuring may give you a result that is not intended.
The issues concerned the applicability of GST to four types of supply with respect to a strata titled serviced apartment scheme that was part of a hotel complex.
First, there were separate leases of individual strata titled apartments to the management company of the serviced apartment scheme. Although these apartments were subsequently used by the management company to provide hotel accommodation (which would be a supply of commercial residential premises, and therefore a taxable supply), nevertheless it was held both at first instance and on appeal that each of these leases constituted a supply of residential premises which was an input taxed supply and not a supply of commercial residential premises. The fact that the premises were used as a hotel complex was not relevant in characterising the nature of the supply nor was it appropriate to characterise each individual supply by aggregating the supply and other supplies.
Each lease to the management company was a supply of an apartment which is residential premises. An apartment cannot be a hotel and hence the supply of each lease was not a supply of commercial residential premises. Further, the fact that the complex, taken as a whole, is a hotel or is “similar” to a hotel does not make an individual room/ apartment similar to a hotel.
Secondly, there was a sale of an individual apartment subject to the lease to the management company. It was held at first instance that this was not a supply of a going concern and therefore not GST free. This was not because of any provision of the GST Act but was because of the effect of a particular clause in the contract. This clause had the effect that if the supply of the property under the apartment lease was a supply of residential premises (but not commercial residential premises), and the premises were also to be used predominantly for residential accommodation (regardless of the term of occupation), then the sale of the property would be a taxable supply to which the margin scheme applied and the supply of a going concern provisions did not apply. Because this circumstance occurred, there was no supply of a going concern. The supply was a supply of new residential premises and therefore there was a taxable supply. However, on appeal the Full Court held that it was a supply of a going concern. The Full Court interpreted the particular clause in the contract differently from the judge at first instance holding that the parties must have intended to agree that it was a supply of a going concern.
Nevertheless this illustrates how important it is that contracts for sales of property be carefully constructed and that habitual reliance on precedents without careful consideration of the effect of possibly conflicting provisions ought to be avoided. Different judges came to different conclusions as to the construction of the clauses in the contract.
Thirdly, there was an issue as to whether the continuation of leases to the management company on acquisition of the leased strata apartment constituted a supply and if so whether it was an input taxed supply. At first instance it was held that this constituted a supply under the continuing lease by each purchaser of a strata apartment to the management company which was a supply of residential premises and therefore input taxed. However, on appeal it was held that there was no supply at all. While there was a supply on the grant of the leases, there was no further supply merely by reason of the continuation of the leases after the sale of the reversionary interest in the apartment to a purchaser.
Fourthly, there was a supply of the accommodation services to a hotel guest. This was held both at first instance and on appeal by the majority of the Full Court to be a supply of commercial residential premises which was a taxable supply.