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withdrawn, leaving the treatment of past, current and future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 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
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.
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
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.
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.
To print this article, all you need is to be registered on Mondaq.com.
Click to Login as an existing user or Register so you can print this article.
The Council announced planning policies to encourage more inner suburban retirement village and aged care development.
Some comments from our readers… “The articles are extremely timely and highly applicable” “I often find critical information not available elsewhere” “As in-house counsel, Mondaq’s service is of great value”
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).