The Federal Court has recently ruled that property
developers may not apply the margin scheme to calculate GST
assessable on land divided into strata units after
In Brady King Pty Ltd v Commissioner of Taxation  FCA
81, Brady King Pty Ltd (the Applicant) asked the Court to
consider whether it could use the 'valuation
method' when assessing its GST liability under the
The property in question was purchased for $9,250,000 under
a contract of sale signed in May 2000, however settlement did
not occur until October of that year. The Property was
subsequently valued at $23,232,000 as at 1 July 2000 on behalf
of the Applicant. The Applicant sought to use the valuation for
calculating GST payable under the margin scheme rather that the
actual consideration paid.
The ATO adjudged that the Applicant could not use the
'valuation method' as it did not acquire a
legal interest in the property until October 2000. The ATO
submitted to the Court that the Applicant could use the margin
scheme however the 'margin' should be assessed
as the difference between the consideration paid by the
Applicant for the property and the sale price received for the
supplies of the strata units.
The Court ruled that it was irrelevant whether the valuation
method should be used as, in the eyes of the Court, the margin
scheme could only apply where the same interest in property is
acquired and then sold. The Court's view was that the
division into strata units created a different interest in
property and that the sale of this different interest could not
be the sale of the interest originally acquired.
The ATO has responded to this decision by stating that
whilst it agrees with the decision, it acknowledges that the
reasoning employed by the Court is contrary to both its
submissions to the Court and its long standing practice. The
ATO has stated that it does not intend to re-publish its
rulings on the margin scheme and that developers may continue
to rely upon those rulings in preparing their Business Activity
However, the provisions on which the ATO relies in making
this statement do not protect taxpayers from changes to the law
arising from court decisions. It is telling that the ATO has
reserved its position should an appeal of the decision not be
This decision has significant implications for property
developers. Whilst the ATO has stated that developers should
continue to rely on their rulings with confidence, if no appeal
is filed the ATO may change its stance. Should this happen,
developers will need to take care when submitting Business
Activity Statements, as will those purchasers who acquire
property under a contract of sale that seeks to pass the GST
liability onto them.
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.
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