The impact of this case on ATO policy is discussed in Decision Impact Statement: Brady King Pty Ltd v Commissioner of Taxation (VID 140 of 2008).
BRADY KING PTY LTD v FC of TJudges:
Full Federal Court, Melbourne
MEDIA NEUTRAL CITATION:
 FCAFC 118
Heerey, Goldberg And Dowsett JJ
1. On 1 July 2000 the Goods and Services Tax came into force: A New Tax System (Goods and Services Tax) Act 1999 (Cth).
2. Before that date, on 22 May 2000, the appellant Brady King Pty Ltd entered into a contract to purchase an office building at 270 King Street, Melbourne. The appellant planned to refurbish and develop the building by the construction and sale of apartments. The contract included a term which gave the appellant an "exclusive licence" enabling access to the property prior to settlement for the purpose of carrying out certain non-structural refurbishment works and constructing a display apartment.
3. The appellant completed the purchase on 25 October 2000 and obtained registration of the transfer of title on 9 November 2000. It then developed the property by constructing 158 apartments which it sold "off the plan", ie before the completion of construction.
4. The appellant elected to have its GST liability determined under the Margin Scheme provided for in Div 75 of Pt 4-2 of Ch 4 of the GST Act. More specifically, it relied on s 75-10(3) and the valuations provided for in items 1 or 3 of the table to that provision.
5. The issue before the learned primary judge was whether the appellant "held" or "acquired" the necessary interest in the strata units before 1 July 2000 within the meaning of items 1 or 3. (For present purposes, there is no relevant difference between the two items; the appellant is either within, or outside, both.)
6. The learned primary judge found against the appellant. His Honour held that what was supplied to the purchasers of the apartments had to be identical in juridical terms to that which it acquired:
Brady King Pty Ltd v Commissioner of Taxation 2008 ATC ¶20-008;  FCA 81 at . On the appeal the Commissioner does not support that view (and did not below). Rather, the Commissioner contends that the appellant did not hold or acquire the "parent" property by 1 July 2000.
The Margin Scheme
7. As explained by the Full Court in
Sterling Guardian Pty Ltd v Commissioner of Taxation 2006 ATC 4227; (2006) 149 FCR 255 at , the Margin Scheme is one of a number of special rules provided for in Ch 4 which ameliorate what might otherwise be the unfair operation of the GST Act on some forms of business activity.
8. The Margin Scheme is directed towards developers. Commonly developers acquire land from private owners. Those owners are not liable for GST on the supply of land to the developer because the supply is not made in the course or furtherance of an enterprise and the owners are not registered or required to be registered under the Act. Because the owners are not liable for GST on their supply, application of the general scheme of the Act would mean that the developer, as acquirer, would not be entitled to any input tax credit on the acquisition of the land. The developer would have to pay GST on the whole value of the developed property that it supplied to the ultimate purchasers.
9. Another potential unfairness would arise if the property the subject of supply were acquired by the taxpayer before 1 July 2000. It is a fundamental feature of the GST regime that it only taxes value added after 30 June 2000. Hence Div 75 provides an optional basis for taxpayers supplying real estate of a kind referred to in s 75-5(1)(a), (b) or (c). They can elect to pay GST on the "margin" as defined in s 75-10(2).
10. Section 75-5(1) provides that the Margin Scheme applies in working out the amount of GST on a supply of real property that is made by:
- (a) selling a freehold interest in land; or
- (b) selling a stratum unit; or
- (c) granting or selling a long-term lease,
where the taxpayer and the recipient of the supply have agreed in writing that the Margin Scheme is to apply.
11. "Real property" is defined by s 195-1 of the GST in wide terms. The definition states:
" real property includes:
- (a) any interest in or right over land; or
- (b) a personal right to call for or be granted any interest in or right over land; or
- (c) a licence to occupy land or any other contractual right exercisable over or in relation to land."
12. "Freehold interest" is not defined in the GST Act. "Stratum unit" is by s 195-1 of the GST Act given the same meaning as it has in s 124-190(3) of the Income Tax Assessment Act 1997 (Cth), viz
"A stratum unit is a lot or unit (however described in an Australian law or a foreign law relating to strata title or similar title) and any accompanying common property."
13. Section 75-10 of the GST Act, relevantly for present purposes, provides:
- "(1) If a *taxable supply of *real property is under the *margin scheme, the amount of GST on the supply is 1/11 of the *margin for the supply.
- (2) Subject to subsection (3) and section 75-11, the margin for the supply is the amount by which the *consideration for the supply exceeds the consideration for your acquisition of the interest, unit or lease in question.
- (3) Subject to section 75-11, if:
- (a) the circumstances specified in an item in the second column of the table in this subsection apply to the supply; and
- (b) an *approved valuation of the freehold interest, *stratum unit or *long-term lease, as at the day specified in the corresponding item in the third column of the table, has been made;
the margin for the supply is the amount by which the *consideration for the supply exceeds that valuation of the interest, unit or lease.
Use of valuations to work out margins Item When valuations may be used Days when valuations are to be made 1 The supplier acquired the interest, unit or lease before 1 July 2000, and items 2, 3 and 4 do not apply 1 July 2000 2 ... 2A ... 3 The supplier is *registered or *required to be registered and has held the interest, unit or lease since before 1 July 2000, and there were improvements on the land or premises in question as at 1 July 2000. 1 July 2000 4 ..."
(An asterisk indicates that there is a definition of the expression in the Dictionary in the Act.)
14. The appellant entered into a contract to purchase the property on 22 May 2000. It agreed to pay a deposit of $100,000 on execution of the contract, a second instalment of $400,000 within 90 days and the balance ($8,750,000) on settlement which was to be 120 days after the contract or earlier by agreement. Subject to a special condition not presently relevant, the vendor was to give vacant possession of the property "upon acceptance of title and payment of the full Price".
15. The property sold was described as:
"The Land and any improvements known as 270 King Street, Melbourne, Victoria."
16. Special condition 2(a) provided that upon payment of the deposit the appellant was to be granted an exclusive licence enabling access to the building on the property (save for the basement car park)
"for the purpose of carrying out those works setforth in the attached Annexure 'A' (collectively 'Works') and for the purpose of marketing all of the suites that the property would be divided into if the proposed project where completed..."
Annexure A provided details for the erection of "an internal single story display apartment on floor 12 which is to be for all intents and purposes ready for residential occupation" together with ancillary works.
17. From the date of the contract the appellant was liable for maintenance and repairs, gas, electricity and other similar outgoings: special condition 2(j). Before commencing any works the appellant was obliged to take out insurance policies for Public Liability, Industrial Special Risks and Workers Compensation "naming both the Vendor and the Purchaser as insured parties for their respective interests": special condition 2(k).
18. The appellant commenced the building work before 30 June 2000. On 26 June 2000 it obtained planning permission to develop and subdivide the property for residential apartments.
19. The property appeared as a non-current asset on the appellant's balance sheet for the year ended 30 June 2000.
20. On 25 October 2000 settlement took place and the transfer to the appellant was registered on 9 November 2000.
21. The apartments were sold between April and November 2001. As already mentioned, the appellant elected to have its GST liability determined under the Margin Scheme.
Non-existence of the stratum unit before 1 July 2000
22. The Commissioner argued, as did the appellant, that the learned primary judge was wrong in holding that for the purpose of s 75-10(3) there had to be a strict identity in juridical terms between what the taxpayer acquired and what it supplied.
23. We agree. The beneficial purpose of the Margin Scheme would be frustrated if such a commonplace transaction as the present one were held to be outside s 75-10(3).
24. Before 1 July 2000 the appellant acquired or 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:
CIC Insurance Ltd v Bankstown Football Club (1997) 187 CLR 384 at 408;
Cooper Brookes (Wollongong) Pty Ltd v Federal Commissioner of Taxation 81 ATC 4292; (1981) 147 CLR 297 at 307, 311.
25. This construction is consistent with the approach of Stone J and the Full Court in Sterling Guardian. In that case, which concerned s 75-10(2), the taxpayer argued that the subdivided units which it sold were different, in a strict legal sense, to that which it acquired before 1 July 2000. This argument was made in an endeavour to have included in the consideration for the subdivided lots under s 75-10(2) costs that were incurred after 1 July 2000. The taxpayer did not elect to use the valuation method in s 75-10(3). Stone J accepted the respondent's argument that the GST Act is a practical business tax and it therefore proceeds on the basis that a supply of real property is a supply of a tangible asset, not the disposal of an intangible interest or bundle of rights; see
Sterling Guardian Pty Ltd v Commissioner of Taxation 2005 ATC 4796;  FCA 1166. This analysis, together with the terms of s 75-15 (which provides for allocating the consideration for an acquisition if a supply relates to only part of a freehold interest, stratum unit or lease) supported the respondent's argument that it was not essential that the property acquired should be identical to the stratum unit supplied; see especially  - . The Full Court upheld her Honour's decision and rejected the "identity submission" on which the learned primary judge's decision in the present case is based; see 149 FCR 255 at .
Did the appellant hold or acquire the necessary interest before 1 July 2000?
26. On this issue the Commissioner and the appellant parted company. But in our view, once the "precise juridical identity" approach is rejected and a more practical construction adopted, it is not possible to ring fence the interest the appellant acquired under the contract from the stratum unit which it later supplied to its customer.
27. The Commissioner argued that the stratum units which the appellant sold were not "derived" from the equitable estate it held as purchaser, rather they were derived from the fee simple estate it obtained on completion of the purchase and registration (although senior counsel for the Commissioner disavowed any argument that what was acquired or held was the registered interest). But that fee simple was not conferred on the appellant by the Lands Title Office without regard to anything the appellant had previously done to acquire it. 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 (and of course obligations to) 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.
28. A vendor under an uncompleted contact for the sale of land is not now considered to be a trustee for the purchaser:
Tanwar Enterprises Pty Ltd v Cauchi (2003) 217 CLR 315 at . Nevertheless, by entering into the contract the appellant acquired a right enforceable by specific performance, and an asset which properly appeared on its balance sheet. It was entirely predictable, as it in fact happened, that on completion of the purchase, registration of title stratum units would come into existence (as is now common ground, it does not matter for present purposes that this coming into existence was not until after 1 July 2000).
29. The appellant's case is analogous to the approach adopted by a majority of the High Court in
Federal Commissioner of Taxation v Suttons Motors (Chullora) Wholesale Pty Ltd (1985) 157 CLR 277. The majority held that "trading stock" included motor vehicles in which the taxpayer's only interest was that of a bailee in possession with an option to purchase. The Commissioner's argument (at 283) was that the taxpayer was not at the relevant time either the owner of the goods or under any legally enforceable obligation to buy them. The majority rejected this and implicitly also the contrary view of the dissentient, Brennan J, which was to this effect (at 289):
"It is not to the point that the taxpayer dealt with the vehicles as though it had such a proprietary interest in them when, in truth, it did not. Nor is it to the point that commercial or accountancy practice would treat the taxpayer as the owner of the vehicles which were in its possession at any time and would treat GMAC as entitled to the hiring amount and other moneys referred to in cl 15 of the floor plan agreement."
30. There may be grounds for distinguishing Suttons Motors on the facts. Some of those grounds, however, show the present case is stronger; for example, the appellant had more than an option to purchase, it had an enforceable right and obligation to do so. More importantly, the approach manifested by the High Court is significant. The majority applied a taxing act in a way consistent with business practice and commercial reality. In
Saga Holidays Ltd v Commissioner of Taxation 2006 ATC 4841; (2006) 156 FCR 256 at  Stone J, with whom Gyles and Young JJ agreed, considered as relevant in a GST context reference to "social and economic reality"; see Lord Hoffman in
Benyon and Partners v Customs and Excise Commissioners  1 WLR 86.
31. The Commissioner argued that Suttons Motors relates to other tax legislation (as indeed it does) and is of limited applicability in interpreting a new tax predicated on different concepts. However, one of those concepts is the policy decision that GST is only to be payable on the value added after 30 June 2000. This is the rationale for s 75-10(3): Explanatory Memorandum to the A New Tax System (Goods and Services Tax) Bill 1998 (Cth) at [6.100]. The interpretation advanced by the appellant gives effect to that policy and is consistent with the language of the statute.
32. A purchaser under an uncompleted contract has an "interest" recognised by the law in many different contexts. Such a purchaser has an insurable and caveatable interest. The appellant acquired that interest in the sense of obtaining, gaining or getting something:
Allina Pty Limited v Commissioner of Taxation 91 ATC 4195; (1991) 28 FCR 203 at 209.
33. It was put by the Commissioner that accepting the appellant's case would not bring certainty because a contract of sale may not be completed. As will be seen, the answer to this submission is provided by the recent decision of the High Court in
Commissioner of Taxation v Reliance Carpet Co Pty Ltd 2008 ATC ¶20-028;  HCA 22.
34. After argument was concluded the High Court handed down its decision in Reliance Carpet. On the invitation of the Court, the parties provided written submissions as to the effect of that decision for the purposes of the present case.
35. In Reliance Carpet a vendor of real property rescinded a contract of sale (in the sense of termination for breach by the purchaser; see the High Court's comments at ) and forfeited the deposit. The High Court held that GST was payable by the vendor on the deposit because the vendor had made a "taxable supply", that is a "supply for consideration".
36. The High Court at - accepted the following argument of the Commissioner:
- • The contractual promise of the vendor to convey the subject land on the completion of the contract was "supply" because it was a "grant" (s 9-10(2)(d)) of "real property", that is to say "any interest in or right over land" or "a personal right to call for or be granted any interest in or right over land" or "any other contractual right exercisable over or in relation to land" (Dictionary, s 195-1);
- • The deposit received by the vendor was a payment "in connection with" that "supply" and so was "consideration" (s 9-15(1)(a));
- • By reason of the special provision of s 99-5 (part of Div 99 dealing with deposits as security), the deposit was treated as consideration only if and when the deposit was forfeited; it was a "wait and see" provision (see , ).
37. Their Honours noted at  that
"the identity of the subject matter of the contract, in accordance with ordinary principles of conveyancing, (w)as the title or estate of the vendor in a parcel of land rather than merely the parcel itself in a geographical sense."
38. While Reliance Carpet is not directly in point, the reasoning of the High Court is in our respectful opinion more consistent with the appellant's case. The emphasis on the breadth of the statutory definition of "real property" supports the conclusion that when the appellant entered into the contract on 22 May 2000 it acquired or held something that was an inextricable part of the interest which it sold after 1 July 2000; see the passage cited at  above.
39. The Commissioner's argument as to uncertainty (see  above) is met by the special "wait and see" provisions of Div 99 which are designed, in the words of the Administrative Appeals Tribunal in Reliance Carpet, to "put on hold the question of liability for GST until one or other of the events referred to in s 99-5(1) has occurred" (cited with approval by the High Court at ).
40. There will be orders that:
- 1. The appeal be allowed.
- 2. The orders of the primary judge be set aside.
- 3. There be a declaration that the margin for the supply of the units is to be calculated under s 75-10(3) of the GST Act on the footing that item 1 or item 3 of the table to s 75-10(3) applies.
- 4. The matter be remitted to the trial judge for the determination of the margin in accordance with law.