22 February 2008
This week, a decision of the Federal Court has cast doubt over whether the margin scheme could ever apply to sales of subdivided land. The decision has caused as much consternation for the Commissioner of Taxation as it has for property developers. The Commissioner has responded swiftly with critical guidance for taxpayers.
However, if the taxpayer does not appeal the Court's decision, the Commissioner's interim guidance may be withdrawn, leaving the treatment of past, current and future transactions under the margin scheme at risk and in the hands of a legislative fix from the new Federal Government.
The decision
The decision in Brady King Pty Ltd v Commissioner of Taxation involved the purchase of a property which was subsequently subdivided and sold as stratum units by the taxpayer. The initial purchase contract involved execution of the contract pre 1 July 2000 with exclusive possession provided during the period leading up to settlement on 25 October 2000.
At the time of sale of the stratum units in 2002, the taxpayer sought to apply the margin scheme and adopt a 1 July 2000 valuation (rather than the consideration provided for the taxpayer's acquisition of the property upon completion of the contract on 25 October 2000). In order to be entitled to apply such a valuation, the taxpayer needed to establish that it had "acquired" or "held" the interest before 1 July 2000.
The reasoning
According to Justice Middleton, the margin scheme can only apply where the interest being sold is the same interest "in the juridical" sense as the one which was acquired. In this case, the interests being sold were stratum units. Those specific interests were not in existence at 1 July 2000 because the registration of the strata plan took place at a later date.
The only thing that had been acquired by the taxpayer prior to 1 July 2000 was an equitable interest in land being the right to an exclusive licence to use the land. Justice Middleton held that the margin scheme cannot apply to such equitable interests. When considering acquisition dates for the purposes of valuation under the margin scheme, one must identify when legal title passes; equitable title is not sufficient.
How does this decision affect you?
Justice Middleton's interpretation of the requirement of the margin scheme has implications for all landowners seeking to subdivide land and sell the newly formed interests in the land under the margin scheme. His view has the potential to render the margin scheme inapplicable to any development of strata titled or subdivided properties.
This view is contrary to the Commissioner's public rulings and has such serious implications for the property industry that the Commissioner has been forced to speedily issue a Decision Impact Statement outlining the Commissioner's response to the decision.
However, because it was the taxpayer's appeal that was dismissed by Justice Middleton, the Commissioner is unable to appeal the decision.
If the taxpayer is to appeal, the appeal would need to be lodged before 10 March 2008 and the Commissioner has stated that he will continue to apply the law in accordance with presently existing rulings until that appeal is resolved. Developers with transactions settling before this date can take some comfort from the Commissioner's intention set out in the Decision Impact Statement.
If the taxpayer does not appeal, the Commissioner will be unable to continue to apply the law as set out in current rulings unless legislative amendments are announced by the Government to reverse the decision and clarify the operation of the margin scheme. Developers with transactions due to settle after 10 March 2008 are subject to greater uncertainty.
What is clear is that we are seeing a much stricter approach from the Federal Court to the interpretation of the GST legislation. The Court was prepared to reject the submissions of both the Commissioner and the taxpayer in favour of the Court's own view of the operation of the provisions. This may significantly increase the risks of litigation for both taxpayers and the Commissioner in the days ahead.
