Overpaid GST and margin-scheme for property developers: the Federal Court clarifies

There are a number of GST issues that can arise in the complex property development space, such as non-monetary consideration, the application of the margin scheme and rules dealing with overpaid GST. The Full Federal Court has now explored those issues, and reinforced the importance of seeking clear and timely rulings on all material GST issues, in Geocon Land Holdings No 5 Pty Ltd v Commissioner of Taxation [2025] FCAFC 172.

The property development and margin scheme in the Geocon case

• Geocon paid $5.4 million and agreed to provide development services in order to receive a Crown Lease over land, which it developed and sold as residential units.

• The margin scheme was used to reduce the GST payable on sales of residential units. That is, instead of paying 1/11^th of the sale price as GST, the GST could be calculated on the "margin", being the difference between the sale price and the consideration originally provided to acquire the interest in the unit.

• Geocon initially excluded the value of development services it provided when applying the margin scheme to sales of units. This resulted in a higher margin so Geocon overpaid GST to the ATO. It later obtained a private ruling from the ATO (which confirmed the development services could be taken into account) and then started applying the margin scheme in accordance with the ruling.

• Geocon sought to recover overpaid GST in relation to initial sales from the ATO. However, the ATO refused on the basis that overpaid GST had been "passed on" to purchasers so a refund could not be given until Geocon first refunded the overpaid GST to purchasers (under Division 142 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)).

• The Administrative Review Tribunal held that overpaid GST had been passed on to purchasers and a refund could not be given to Geocon, resulting in an appeal to the Full Federal Court.

The main issue considered by the Court was whether any overpaid GST had been "passed on" for the purposes of Division 142. There were other arguments considered by the Court, including that there was no overpaid GST due to offsetting underpaid GST amounts in the same tax period and also that GST charged on development services provided should be included in applying the margin scheme.

The Court allowed Geocon’s appeal, remitting the case back to the Tribunal for redetermination and giving Geocon another chance to obtain a refund of its overpaid GST.

Was overpaid GST “passed on”?

Geocon argued that prices for units were based purely on market demand and that both prices and purchasers were unaffected by any GST paid or overpaid by Geocon, so any overpaid GST was not passed on to purchasers. The ATO and the Tribunal had presumed that, in the ordinary course, GST is passed on as a component of costs that a profitable developer would recover from purchasers. The Court found that the Tribunal made an error of law in its presumption that GST is passed on by a developer who is profitable, without consideration of the specific circumstances how prices for sales were determined and affected by GST treatment (including overpaid GST). The Court did not consider there to be sufficient evidence before it to decide the issue and held that the Tribunal’s decision must be set aside and remitted back to the Tribunal for redetermination.

Was there any overpaid GST at all?

Geocon argued that there was no overpaid GST from sales of units because there was offsetting underpaid GST payable on its supply of development services that should have been accounted for in the same tax period. However, the Court accepted the Tribunal's findings that underpaid GST was attributable to a different (earlier) tax period.

How much non-monetary consideration to include in applying the margin-scheme

Geocon argued that for the purpose of applying the margin scheme, the value of development services provided as consideration for the Crown Lease should have included the GST charged. However, the Court upheld the ATO’s view that the consideration did not include the GST charged (and also that the private ruling did not include any conclusion on which Geocon could rely).