The Full Federal Court has today upheld the
taxpayer's appeal in Brady King.
You will recall that the Federal Court's earlier
decision had cast doubt on the ability to apply the margin
scheme following a subdivision or strata titling because it
held that the subdivided lots was not the same interest as
The Full Federal Court rejected this reasoning, noting that
the application of the margin scheme would be frustrated by the
Federal Court's earlier ruling. Rather, the Full
Federal Court concluded that the GST Act required an
interpretation that gives "it a practical and fair
As such, the margin scheme was available to the taxpayer
notwithstanding the subdivision of the property following its
acquisition (which is, and otherwise has been, the position set
out in the Commissioner's public rulings on the margin
scheme). In short, the natural order of the world is
However, in a somewhat surprising move, the Full Federal
Court went on to find that the taxpayer was allowed to
calculate its margin using the valuation method even though it
didn't acquire the legal title in the land until
October 2000 (being date that the contract to acquire the land
completed). This was because the taxpayer had acquired an
'interest' in the property when it exchanged
contracts in May 2000. In other words, the Full Federal Court
concluded that the taxpayer acquired the interest in the
property when contracts were exchanged in May 2000, meaning the
taxpayer could be regarded as holding an interest in the
property as at 1 July 2000 for the purposes of assessing its
eligibility to use the valuation method.
This is a significant departure from the
Commissioner's previous practice, which has been that
the land can only be treated as being held at 1 July 2000 if
the taxpayer held 'legal' title to the land at
As such, taxpayers who thought they were required to
calculate their margin under the acquisition method, where they
had contracted to acquire that property prior to 1 July 2000,
may be able to recalculate (and reduce) their GST liability by
recalculating using the 'valuation method'.
Whether this is possible in practice will of course depend on
the circumstances of the individual taxpayer and will be
subject to the various restrictions that exist in relation to
the reclaiming of overpaid GST.
Another issue, that doesn't appear to have been
resolved in the decision, is what the valuation of the
taxpayer's interest would be - for example, there is
case law to suggest that the valuation should be limited to the
amount deposit paid on exchange (which would almost certainly
negate any advantage in using the valuation method). A note of
caution should also be sounded in that, as this is clearly
contrary to the Commissioner's view of the way the
world should be, legislative amendment may also be
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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The income tax treatment of any property lease incentive will vary, depending on the nature of the inducement provided.
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