A recent decision of the Full Federal Court provides a reminder to draft contracts carefully to avoid any unintended consequences.
In South Steyne Hotel P/L v Commissioner of Taxation, the sale of a strata-titled apartment was found to be a GST-free supply of a going concern, despite an inconsistent clause within the sale contract.
- purchased the Sebel Manly Beach Hotel and converted it to a strata-titled serviced apartment complex;
- contracted an operator to manage the complex; and
- separately leased each of the apartments to a further management company.
Each lease obliged the management company to operate a scheme whereby all apartments were operated as part of the serviced apartment business.
Subsequently, South Steyne sold a number of the apartments to investors, subject to the continuing leases to the management company.
Decision – GST-free sale of a going concern
Page 1 and clause 47.6.3 of each contract stated that the sale of the apartments would be a GST-free supply of a going concern. However, these provisions were inconsistent with a further clause within the contract, providing for application of the margin scheme.
There was agreement between the ATO and South Steyne that the company had:
- supplied all things necessary for the continued operation of the serviced apartment business; and
- carried on the business until completion.
However, the Commissioner argued that, as a result of the inconsistent drafting, the parties had not agreed that the sale was a supply of a going concern – negating the application of the exemption and making the sale a taxable supply.
Although the Commissioner was successful at first instance, the Full Federal Court decided that it was unlikely that the parties had intended to over-ride their purported agreement (in clauses 1 and 47.6.3) that the sale would be subject to the going-concern exemption from GST.
In a Decision Impact Statement issued by the ATO, the Commissioner has indicated that he will not seek leave to appeal the decision of the Court on this issue.