Brady King: First ever GST margin scheme "valuation" case
On 18 February 2008, the Federal Court of Australia released the decision of Brady King Pty Ltd v Commissioner of Taxation [2008] FCA 81 relating to a taxpayer’s entitlement to adopt the “valuation method” under the margin scheme. The case is important, and of particular relevance to property developers, as it establishes some interesting views on the margin scheme provisions which are inconsistent with the Full Federal Court’s earlier statements in the Sterling Guardian case.
If the ATO applied this judgement literally it would mean many taxpayers who used the margin scheme on strata titled building on land either held at or acquired after 1 July 2000 (as freehold) will have underpaid GST – the margin scheme would not be available.
Fortunately, in its Decision Impact Statement issued on 20 February 2008, the ATO has indicated that its current rulings allowing the margin scheme to apply will continue to be applied at least until an appeal is lodged.
Facts
The taxpayer entered into a contract to acquire a commercial property in May 2000 (“Purchase Contract”). The taxpayer was granted a licence to access the land before settlement. The Purchase Contract was settled in October 2000 and the taxpayer redeveloped the property into stratum units and sold such units in 2001. The taxpayer applied section 75-10(3) of the GST Act (i.e the “valuation method” under the margin scheme) to determine to GST payable in respect of the supply of each unit based on professional valuations of the property as at 1 July 2000 on the basis that it “held” the interest on 1 July 2000.The Commissioner argued that the taxpayer was not entitled to apply the valuation method and should have applied the “consideration method” under section 75-10(2) to calculate its GST liability. This is because, according to the Commissioner, the taxpayer did not hold or acquire the stratum unit as at 1 July 2000 (as required by section 75-10(3)) as it did not hold at 1 July 2000 or acquire before 1 July 2000 the “parent title” (i.e. the legal freehold interest) from which each stratum unit was created.
Decision
Justice Middleton found in favour of the Commissioner but not based on the Commissioner’s preferred argument. Rather, the judge held that section 75-10(3) did not apply because the taxpayer “did not on any view acquire or hold before 1 July 2000 the Stratum Unit which it sold” because the strata titles were not created until after 1 July 2000. According to the judge, in order for section 75-10(3) to apply to the sale of an interest, a taxpayer needs to have held or acquired the same interest that they subsequently supply:“Therefore, the margin scheme can only apply to the same property (in the juridical sense) being acquired and subsequently sold. The specific wording of s 75-10(3), of the table in s 75-10(3) and of s 75-5(2), and then the specific reference back in these provisions to the supply of the stratum unit in s 75-5(1) supports this view”
The judge noted the Full Court’s comments in the Sterling Guardian case but found they did not apply as that case considered the application of section 75-5(2) of the Act rather than sections 75-10(2) and (3). This is somewhat surprising given that Stone J specifically considered the “identity submission” in that case, being whether the same “interest” was required to be both acquired by and supplied by the taxpayer. It was held in that case that it was not necessary to supply that same interest (i.e. the underlying “parent title” is the important interest).
The judge also rejected the taxpayer’s arguments relating to whether it did hold or acquire an interest in the land by virtue of entering into the contract before 1 July 2000 (i.e. whether the provisions require a legal or equitable interest in the relevant land). In the judge’s view, the provisions refer only to legal interests.
Based on the judge’s findings from the case, it could mean that many past property transactions under the margin scheme have not been correctly treated and GST will have been underpaid. If land was acquired as freehold and then subsequently strata titled, those sales of strata titles will not have been eligible for the margin scheme and GST ought to have been determined on the full selling price. As the margin scheme will have been correctly applied on the acquisition of the freehold interest, input tax credits on that acquisition will not be available.
Finally, and unfortunately, because of the manner in which Middleton J decided the application of the margin scheme, the real issue of interest pre-trial wasn’t decided. We are still awaiting guidance as to how, if and when the Commissioner can challenge a professional valuation obtained by a taxpayer which conforms with the Margin Scheme Valuation Requirements Determinations.
ATO response – Decision Impact Statement
The ATO have now released a Decision Impact Statement confirming that they will continue to administer the margin scheme laws in line with their published views in spite of the reasoning of Middleton J. If an appeal is lodged by the taxpayer (which would need to be filed by 10 March 2008), the ATO will maintain the views in its current rulings until the outcome of the appeal is known.
Accordingly, developers and others who rely upon the ATO’s current rulings to determine their GST liabilities under the margin scheme will be protected from any retrospective adjustments. In particular, this means that developers will be able to continue to calculate their GST liabilities during this period using the valuation method on the basis that the margin scheme is available for unit developments and other subdivisions notwithstanding that the strata titles or titles to the separate lots may not have issued at the valuation date.
For more information, please contact:
Andrew Howe
Director, Sydney
61 2 9225 5919
andrew.howe@gf.com.au
Paul Nguyen
Senior Associate, Sydney
61 2 9225 5881
paul.nguyen@gf.com.au
Rhys Penning
Senior Associate, Melbourne
61 3 9288 1910
rhys.penning@gf.com.au