GST - Brady King Decision Overruled – Margin Scheme Can Apply Following Sub-divisions

In a unanimous decision, the Full Bench of the Federal Court allowed the taxpayer's appeal in the Brady King case and held that the Margin Scheme valuation method can be applied by a Vendor who strata titles property.

Background

On 22 May 2000, the taxpayer had entered into a contract to purchase an office building with the intention of converting the office into strata units. Settlement of the purchase took place on 25 October 2000 and transfer occurred on 9 November 2000. Between April and November 2001, the units were sold off the plan prior to their completion pursuant to contracts of sale based upon a proposed plan of subdivision. The taxpayer calculated its GST liability on the margin between the sale price of each unit and the value of the unit as at 1 July 2000.

The Federal Court held that the taxpayer was not entitled to calculate GST liability on such basis. It held that the margin scheme could only apply when the same property acquired was subsequently sold. Given that the property sold were subdivided lots while the property acquired was a single block, the taxpayer could not satisfy this test.

Decision of the Full Federal Court

The Full Federal Court held that the primary judge was wrong in holding that for the purposes of the application of the margin scheme, there had to be a strict identity in legal terms between what the taxpayer acquired and what it supplied. They argued that “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”.

The Full Federal Court held that before 1 July 2000, Brady King acquired or held each strata unit in the sense that it held the property from which such unit was later carved out.

Interestingly, the Court also held that Brady King had held or acquired the necessary interest at the time of entry into the contract to purchase the relevant property. This departs from the view of the Australian Taxation Office that the supply occurs at settlement rather than at contract stage.

Implications

Accordingly, the Full Federal Court has confirmed the view of the Australian Taxation Office that a taxpayer that has held property as at 1 July 2000 may apply the margin scheme to calculate the GST, notwithstanding that such taxpayer subsequently strata titles and sells subdivided lots off the plan.

 

Written by Ari Schachna, Partner