Decision impact statement

Brady King Pty Ltd v Commissioner of Taxation

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Court Citation(s):
[2008] FCA 81
2008 ATC 20-008
69 ATR 271

Venue: Federal Court of Australia
Venue Reference No: VID 84 of 2005
Judge Name: Middleton J
Judgment date: 18 February 2008
Appeals on foot:
Yes, taxpayer has appealed to the Full Court of the Federal Court

Impacted Advice

Relevant Rulings/Determinations:

• GSTR 2000/21
• GSTR 2006/7
• GSTR 2006/8

Subject References:
GST
Margin scheme
Freehold interest
Consideration method
Valuation method

Précis

Outlines the Tax Office's response to this case which concerned the application of the GST margin scheme to the acquisition of an office building, its conversion into stratum units (residential apartments) and the subsequent sale of those units.

Brief summary of facts

On 22 May 2000 the taxpayer signed a contract to purchase an office building for $9,250,000. The contract entitled the taxpayer to enter the property upon payment of the deposit for the purpose of carrying out certain specified works and for marketing purposes. Settlement of the contract occurred on 25 October 2000 and the transfer was registered under the Transfer of Land Act 1958 (Vic) on 9 November 2000.

The taxpayer converted the building to stratum units. Most of the units were sold off the plan between April and November 2001.

The taxpayer obtained valuations of the stratum units as at 1 July 2000 prepared by a professional valuer. The taxpayer lodged GST returns calculating GST on the margin between the amounts specified in the valuation (in aggregate, $23,232,000) and the consideration for the sales of the units.

The Tax Office considered that the taxpayer was not entitled to use the valuation method to calculate its margin for margin scheme purposes and issued assessments calculating GST on the margin between the consideration for the taxpayer's acquisition of the office building and the consideration for the sales of the units.

Issues decided by the court or tribunal

The taxpayer argued that it held or had acquired the units at I July 2000 and that it held a valuation that complied with the Commissioner's determination under s 75-10(3) of the A New Tax System (Goods and Services Tax) Act 1999 (the 'GST Act'). Accordingly, the taxpayer submitted that it was entitled to use the valuation method to calculate its margin in accordance with s 75-10(3).

The Commissioner argued that the taxpayer was not entitled to use the valuation method as it did not hold and had not acquired the property at 1 July 2000. In the alternative, the Commissioner submitted that the valuation did not comply with the Commissioner's determination.

The Court held that the taxpayer was not entitled to use the valuation method. The primary reason for the decision was that the taxpayer did not hold the stratum units at 1 July 2000. The Court also concluded that, in any case, it was necessary for a legal interest in the relevant property to be held at the valuation date and the taxpayer, as the purchaser under an uncompleted contract, merely held an equitable interest in the property at 1 July 2000.

The issue of whether the valuation complied with the Commissioner's determination was not addressed by the Court.

Tax Office view of Decision

The Commissioner submitted to the Court that:

•

Although the stratum units did not come into existence until after 1 July 2000, it would be sufficient if the taxpayer held or had acquired a freehold interest in the parent title, that is, the title to the office building from which the units were to be created, at that date.

•

The taxpayer held an equitable interest in the property at the valuation date, but that equitable interest did not constitute a 'freehold interest' (or a 'stratum unit') as required by s 75-10(3) of the GST Act.

•

It is not necessary for the freehold interest to be registered at the land titles office. It would be sufficient for settlement to have occurred so that the taxpayer was in unconditional possession of a registrable instrument of transfer.

•

As settlement had not occurred by 1 July 2000, the taxpayer did not hold and had not acquired a freehold interest in the property.

The Court agreed with the Commissioner that the taxpayer was not entitled to use the valuation method under s 75-10(3). However, contrary to the Commissioner's submissions, the Court decided the matter on the basis the interest held at the valuation date must be the same interest that is the subject of the relevant supply. Because the taxpayer did not hold the stratum units at the valuation date, it was held that the valuation method could not be used.

The effect of this decision may be that developers would be unable to use the valuation method in calculating the margin for unit developments where the strata titles had not issued at the valuation date.

Middleton J also stated that "the margin scheme can only apply to the same property (in the juridical sense) being acquired and subsequently sold". It may follow from this view that developers would be precluded from using the margin scheme at all for unit developments.

The Tax Office respectfully agrees with the decision to dismiss the taxpayer's appeal. However, as noted, the basis on which the Court reached this view is contrary to the submissions made by the Commissioner, and is contrary to the Tax Office's longstanding practice in relation to the margin scheme provisions, as reflected in its public rulings (see GSTR 2000/21, GSTR 2006/7 and GSTR 2006/8) and other guidance material.

Administrative Treatment

Implications on current Public Rulings & Determinations

The taxpayer lodged an appeal to the Full Court of the Federal Court against the decision of Middleton J. The Court granted the Commissioner's application for an expedited hearing and heard the appeal on 16 May 2008. The Commissioner contended that the appeal should be resolved on the basis of the submissions made by the Commissioner before Middleton J, as summarised above.

The Full Court reserved its decision.

The Tax Office is continuing to carefully consider the implications of the decision of Middleton J. A particular area of focus is the comments of his Honour suggesting that an identity of interest is required between the interest acquired and the interest supplied, and the relationship between those comments and the decision of the Full Court of the Federal Court in Sterling Guardian Pty Ltd v Commissioner of Taxation (2006) 149 FCR 255 concerning the calculation of GST under the margin scheme in the context of a unit development.

In meantime, in the interests of providing certainty for the community, the following comments are provided:

While the implications of the decision are being considered, it is not the Tax Office's intention to revise its current rulings in relation to the issues addressed by Middleton J if an appeal is lodged. The Tax Office will maintain the views in its current rulings, until the outcome of the appeal is known.

This means that developers and others who rely upon the current rulings to self assess their GST liabilities under the margin scheme will be protected from retrospective adjustments where the terms of s 105-60 of Schedule 1 to the Taxation Administration Act 1953 are satisfied. In particular, this means that, subject to compliance with all requirements set out in the rulings, developers will be able to continue to self assess GST during this period on the basis that the margin scheme is available for unit developments, and the consideration method under s 75-10(2) of the GST Act or the valuation method under s 75-1-(3) may be used, notwithstanding that the strata titles have not issued at the acquisition or valuation date. The same principle applies in respect of other subdivisions, such as flat land subdivisions, where the title to the lots supplied may not have issued at the acquisition or valuation date.

If similar issues arise in cases before the Administrative Appeals Tribunal or Courts in the meantime, the Commissioner would make similar submissions to those made to Middleton J, as summarised above. However, the Commissioner's counsel would be instructed to draw the Tribunal or Court's attention to the decision of Middleton J and the pending appeal.

The Tax Office will co-operate as fully as possible to facilitate expeditious resolution of any appeal.

The guidance provided above will continue to apply pending the outcome of the appeal. This means that developers and others will continue to have the protection of section 105-60 of Schedule 1 to the Taxation Administration Act 1953 in respect of activity statements lodged while the rulings remain published on the Tax Office website.

Implications on Law Administration Practice Statements

Nil.

This Decision Impact Statement will be updated when the outcome of the appeal to the Full Court is known, and otherwise as required.

Legislative References:
A New Tax System (Goods and Services Tax) Act 1999 ("the GST Act")
Div 75
75-5
75-10(2)
75-10(3)
75-15
195-1

Case References:
HP Mercantile Pty Ltd v Commissioner of Taxation
(2005) 143 FCR 553
2005 ATC 4571
60 ATR 106

Sterling Guardian Pty Limited v Federal Commissioner of Taxation
[2005] FCA 1166
2005 ATC 4796
60 ATR 502

Sterling Guardian Pty Ltd v Commissioner of Taxation
(2006) 149 FCR 255
2006 ATC 4227
62 ATR 119