The Federal Court has recently ruled that property developers may not apply the margin scheme to calculate GST assessable on land divided into strata units after acquisition.
In Brady King Pty Ltd v Commissioner of Taxation [2008] FCA 81, Brady King Pty Ltd (the Applicant) asked the Court to consider whether it could use the 'valuation method' when assessing its GST liability under the margin scheme.
The property in question was purchased for $9,250,000 under a contract of sale signed in May 2000, however settlement did not occur until October of that year. The Property was subsequently valued at $23,232,000 as at 1 July 2000 on behalf of the Applicant. The Applicant sought to use the valuation for calculating GST payable under the margin scheme rather that the actual consideration paid.
The ATO adjudged that the Applicant could not use the 'valuation method' as it did not acquire a legal interest in the property until October 2000. The ATO submitted to the Court that the Applicant could use the margin scheme however the 'margin' should be assessed as the difference between the consideration paid by the Applicant for the property and the sale price received for the supplies of the strata units.
The Court ruled that it was irrelevant whether the valuation method should be used as, in the eyes of the Court, the margin scheme could only apply where the same interest in property is acquired and then sold. The Court's view was that the division into strata units created a different interest in property and that the sale of this different interest could not be the sale of the interest originally acquired.
The ATO has responded to this decision by stating that whilst it agrees with the decision, it acknowledges that the reasoning employed by the Court is contrary to both its submissions to the Court and its long standing practice. The ATO has stated that it does not intend to re-publish its rulings on the margin scheme and that developers may continue to rely upon those rulings in preparing their Business Activity Statements.
However, the provisions on which the ATO relies in making this statement do not protect taxpayers from changes to the law arising from court decisions. It is telling that the ATO has reserved its position should an appeal of the decision not be filed.
This decision has significant implications for property developers. Whilst the ATO has stated that developers should continue to rely on their rulings with confidence, if no appeal is filed the ATO may change its stance. Should this happen, developers will need to take care when submitting Business Activity Statements, as will those purchasers who acquire property under a contract of sale that seeks to pass the GST liability onto them.
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