The recent Federal Court decision has produced an unpalatable result which conflicts with the common application of the margin scheme (i.e. it was concluded that developers cannot rely on the margin scheme upon the sale of strata units developed post-1 July 2000 on land which was held pre-1 July 2000).

The result of this case is, prima facie, extremely detrimental to developers who may be subject to a higher GST liability on the sale of strata units. However, fortunately the ATO has already released a Decision Impact Statement advising taxpayers that this view is contrary to the ATO's long standing practice and the ATO will not seek to make any retrospective adjustments. Furthermore, taxpayers can continue to use the margin scheme to these developments subject to legislative requirements and the requirements in the ATO rulings being met.

Details

In Brady King v FCT, the Federal Court held that the taxpayer was not able to apply the valuation method outlined in s75-10(3) of the margin scheme provisions to calculate its GST liability upon the sale of strata units developed on land in which the taxpayer held an equitable interest prior to 1 July 2000.

In this case, the taxpayer entered into a contract to acquire an office building prior to 1 July 2000 but settlement of the contract only occurred on 25 July 2000. Hence the taxpayer held an equitable but not a legal interest in the property prior to 1 July 2000. The taxpayer then redeveloped the land into strata units and sold the units "off the plan" between April and November 2001.

The taxpayer applied s.75-10(3) in calculating their GST liability. Under this provision, GST is calculated on the margin between the sale price and the value of the units at 1 July 2000. However, the Commissioner issued assessments applying s.75-10(2) (where GST is calculated on the margin between the sale price and acquisition price).

The Federal Court agreed with the Commissioner's conclusion although the court's decision was based on a different argument than that contended by the Commissioner. The court stated that the property (in the legal sense) that was sold was not the same property that was acquired and hence the requirements in s.75-10(3) were not met as the units were not "acquired" or "held" before 1 July 2000. They held that the margin scheme could only apply to the same property being acquired and subsequently sold.

Furthermore, the court held that it was necessary to hold the legal interest in the property at 1 July 2000 and an equitable interest was not sufficient.

Given the ATO's response to this case, developers can continue to apply the margin scheme to these developments. However, in applying the margin scheme, developers should ensure they are familiar with the legislative and ATO requirements in order to avoid being subject to a higher GST liability.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.