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
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.
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
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
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.
Many retail leases include a covenant to trade, requiring the tenant to open the premises for trade during certain hours.
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).