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GST Margin Scheme Decision Overruled A PAPER BY PAUL ANDERSON JULY 2008


GST Margin Scheme Decision Overruled by Paul Anderson

GST Margin Scheme Decision Overruled

Summary An appeal to the Full Federal Court has reversed a decision that threw into question the general availability of the GST margin scheme for strata subdivisions.

Who Does This Impact? All strata developers and their purchasers.

What Action Should Be Taken? Developers and purchasers should welcome a restoration of “normal business� as far as the general application of the margin scheme to strata developments is concerned.

Contents:

TURKSLEGAL

Facts

2

Issues

2

Primary Decision

3

Ramifications

3

Full Court

3

Conclusion

4

PAPER


GST Margin Scheme Decision Overruled by Paul Anderson

The Full Federal Court has overruled the primary judge’s decision in the case of Brady King Pty Limited v Commissioner of Taxation, which was the subject of a previous paper by this firm on 16 May 2008. The original decision threw into question the availability of the GST margin scheme for strata developments.

Facts On 22 May 2000 the taxpayer entered into a contract to purchase an office building located in Melbourne for the price of $9,250,000. The intention was to convert the building into residential units for sale. Planning approval was obtained on 26 June 2000. The GST legislation came into force on 1 July 2000 and the taxpayer was registered on the same day. The purchase contract was settled on 25 October 2000. The taxpayer subsequently redeveloped the property into 158 residential units, most of which were sold “off the plan” between April and November 2001. Progressive settlement of the sales contracts commenced from 28 March 2002. On 25 January 2002 the taxpayer obtained a valuation of each of the residential units as at 1 July 2000 for the purpose of assessment of GST under the margin scheme provisions. The total of such valuations as at 1 July 2000 was $23,232,000. The significant increase in value can partly be explained by the development approval obtained on 20 June 2000.

Issues The principal issue to be considered by the Court was whether in applying the margin scheme the taxpayer was entitled to adopt Section 75-10 (3) of the GST Legislation. Normally, the margin is the amount by which the consideration for the supply exceeds the consideration for the acquisition of the interest in question, i.e. in this case, the difference between the selling prices and the acquisition price of $9,250,000. Section 75-10 is a transitional provision designed to deal with the introduction of GST. The Section provides that if an interest was acquired before 1 July 2000, the margin is the amount by which the consideration for the supply exceeds a valuation as at 1 July 2000, i.e. in this case the difference between the selling prices and the valuation at 1 July 2000 of $23,232,000. It is important to note that the issues raised did not include the availability of the margin scheme generally. The Commissioner’s submission was that section 75-10 was not available to the taxpayer on the limited ground that the interest had not been “acquired” before 1 July 2000. At that point, the taxpayer had only exchanged contracts and did not own the property until completion on 25 October 2000. Certainly, the Commissioner did not submit that the margin scheme was not generally available in the case of strata developments.

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GST Margin Scheme Decision Overruled by Paul Anderson

Primary Decision Middleton, J held that the taxpayer was not entitled to use the 1 July 2000 valuation.

Ramifications The judge’s decision appeared to go beyond the immediate question and suggested that the taxpayer was not entitled to use the margin scheme at all. His Honour stated that “the margin scheme can only apply to the same property (in the juridical sense) being acquired and subsequently sold”.

In this case the property acquired by the taxpayer (being title to the office building) was different to the legal interest sold (being title in each residential unit). His Honour also held that the margin scheme only applied to supplies of legal interests and not equitable interests. As at 1 July 2000, the applicant only had an equitable interest in the whole property and a legal interest did not vest until completion of the purchase contract on 25 October 2000. His Honour reached his conclusion despite Section 75-15 which is in the following terms: “For the purposes of Section 75-10, if the freehold interest, stratum unit or long term lease you supply relates only to part of land or premises that you acquired, the consideration for your acquisition of that part is the corresponding proportion of the consideration for the land or premises that you acquired.”

The decision appeared to conflict with the Federal Court decision of Sterling Guardian Pty Limited v Commissioner of Taxation which involved sale of residential units which had been constructed on bare land. The question was whether the construction costs could be included in the vendor’s margin scheme calculations. The Full Federal Court held that the construction costs could not be included but it was never suggested that the margin scheme was not available at all. The decision had implications not only for developers but also for purchasers of strata units. Developers, not surprisingly, will attempt to pass on GST paid to the ultimate consumer and the unavailability of the margin scheme would only increase the prices paid for strata units.

Full Court The Commissioner argued, as did the appellant, that the primary judge was wrong in holding that for the purposes of the margin scheme, there had to be a strict identity in juridical terms between what the taxpayer acquired and what it supplied. The Full Court agreed. “The beneficial purpose of the Margin Scheme would be frustrated if such a common place transaction as the present one were held to be outside section 75-10 (3). Before 1 July 2000 the appellant held each stratum unit in the sense that it held the property at 270 King Street from which that unit was later carved out. Reading the Act in this way gives it a practical and fair business operation. It is a construction which is reasonably open and more closely conforms to the legislative intent.”

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GST Margin Scheme Decision Overruled by Paul Anderson

The Commissioner and the appellant parted company on the next issue, namely, did the appellant hold the necessary interest before 1 July 2000? The Commissioner argued that the stratum units which the appellant sold were not “derived” from the equitable estate it held as purchaser but rather from the fee simple estate it obtained on completion of the purchase and registration. However, in the Court’s view the appellant was only able to complete the purchase and obtain registration because, by entering into the contract it had obtained or acquired enforceable rights against the previous owner of the property. “The contract was the genesis or source of the appellant’s interest in the stratum unit it supplied. In the language of the Commissioner’s submissions, the contract was the parent”

and “… by entering into the contract the appellant acquired a right enforceable by specific performance, and an asset which properly appeared on its balance sheet.”

The Court also looked at the policy behind the Act, namely that GST is only to be payable on the value added after 30 June 2000. This is the rationale for Sections 75-10 (3). The interpretation advanced by the appellant gave effect to that policy and was consistent with the language of the statute. A purchaser under an uncompleted contract has an “interest” recognised by the law in many different contexts, eg such a purchaser has an insurable and a caveatable interest. In the result, the appeal was allowed and the primary decision reversed.

Conclusion The decision is to be welcomed. The primary decision was widely criticised including by the Property Council of Australia, and the Australian Taxation Office distanced itself from it to the point of partly supporting the appeal. The decision of the Full Court restores the integrity of the margin scheme in its application to strata developments generally and reverts to an interpretation which has been accepted without qualification since the introduction of the legislation. In practical terms, the decision represents a significant saving in GST for developers and ultimately the purchasers of new home units.

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GST Margin Scheme Decision Overruled by Paul Anderson

For more information, please contact:

Paul Anderson Partner T: 02 8257 5742 paul.anderson@turkslegal.com.au

Sydney | Level 29, Angel Place, 123 Pitt Street, Sydney, NSW 2000 | T: 02 8257 5700 | F: 02 9239 0922 Melbourne | Level 10 (North Tower) 459 Collins Street , Melbourne, VIC 3000 | T: 03 8600 5000 | F: 03 8600 5099 Business & Property | Commercial Disputes | Insurance & Financial Services | Workers Compensation | Workplace Relations

www.turkslegal.com.au

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An appeal to the Full Federal Court has reversed a decision that threw into question the general availability of the GST margin scheme for s...

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