Where there is a supply of residential premises by way of lease, it is now clear that there are two supplies taking place and not a single supply. There will be a supply upon the grant of the lease by the lessor and a second supply by the lessor observing and continuing to observe the express or implied covenant of quiet enjoyment under the lease.

This will therefore have consequences where a purchaser acquires residential property subject to a lease as a supply of a going concern.

The facts in a recent case were that the taxpayer acquired three apartments in a hotel complex each of which was subject to a lease to a hotel operator as a supply of a going concern.

The taxpayer was therefore a recipient of a supply of a going concern.

The apartments were residential premises. Therefore a supply of those apartments by way of lease was an input taxed supply.

Under the GST law you are required to make an increasing adjustment if you are the recipient of a supply of a going concern and you intend that some or all of the supplies made through the enterprise to which the supply relates will be supplies that are neither taxable supplies nor GST- free supplies.

If the supply of the apartments by way of lease occurred at the time of the grant of the lease, then the taxpayer would not have had an increasing adjustment. The Full Federal Court held that there was a single supply being at the time of the grant of the lease. Therefore there was no increasing adjustment.

The High Court rejected the Full Federal Court’s decision.

The High Court held that a transaction which involves a supplier entering into and performing an executory contract will in general involve the supplier making at least two supplies. Firstly there will be a supply which occurs at the time of entering into the contract, in the form of both the creation of a contractual right to performance and the corresponding entering into of a contractual obligation to perform. Secondly there will be a supply which occurs at the time of contractual performance, even if contractual performance involves nothing more than the supplier observing a contractual obligation to refrain from taking some action or to tolerate some situation during a contractually defined period.

Therefore with the supply of residential premises by way of lease there will in general be a supply which occurs at the time of entering into the lease and at least one further supply which occurs progressively throughout the term of the lease.

This second supply will occur by means of the lessor observing and continuing to observe the express or implied covenant of quiet enjoyment under the lease.

Therefore in this case, there was an input taxed supply of residential premises by way of lease which occurred at the time of the grant of each apartment lease and then a further input taxed supply of residential premises by way of lease which occurred by means of the original lessor observing its express obligation under the lease to provide to the tenant with use and occupation of the leased premises.

Upon acquisition of the leased apartments, the taxpayer assumed the express obligation under the lease to provide the tenant with use and occupation of the leased premises by operation of law. The result therefore was that the taxpayer became obliged to continue to make the same further input taxed supply of residential premises by way of lease to the tenant throughout the remaining term of the lease.

Therefore the taxpayer was required to make an increasing adjustment because of the second supply of the input taxed supply of residential premises by way of lease which occurred following its acquisition of the apartments.