Australia: Applying The Margin Scheme? Make Sure Your Valuer Dots The “i’s” & Crosses The “t’s”!

Last Updated: 24 February 2009
Article by Stephen Rosenstrauss and Sandra Felli

A recent Federal Court decision has highlighted the need for property developers to ensure that if they are going to apply the margin scheme, they had better do it right.

In the first Brady King case 1 , the taxpayer succeeded in the Full Federal Court in its quest to be allowed to apply the margin scheme to determine its GST liability on the sale of strata units. The margin scheme was allowed even though the company, at 1 July 2000 had only entered into a contract to purchase a building. At that date, it had not received development approval to convert the office building to residential strata title apartments, commenced construction or even completed the building acquisition.

The Full Federal Court held that this was the type of arrangement contemplated by the legislation relating to the margin scheme. In particular it held that the rights held by the taxpayer at 1 July 2000 under the incomplete contract were sufficient to allow it to apply the margin scheme. The Commissioner assessed GST using the "consideration method" described in s75-10(2) of the GST Act, which (at the time) stated that "the margin for the supply is the amount by which the *consideration for the supply exceeds the consideration for your acquisition of the interest, unit or lease in question."

The taxpayer objected, claiming that the "valuation method" authorised by sub-section 75-10(3) of the GST Act should be applied. A higher valuation of the property at 1 July 2000 would have resulted in a lower margin and therefore a reduced GST liability for the company. The Commissioner rejected the taxpayer's valuation, arguing that it did not comply with s75-10(3), which were set out in A New Tax System (Goods and Services Tax) Margin Scheme Valuation Requirements Determination (No 2) 2000 ("MSV 2")2

MSV 2 required a professional value to have regard to:

  1. the market value of the completed premises;
  2. the cost to complete the partly completed premises; and
  3. the profit margin and holding costs that are attributable to the period on or after the valuation date.

Back in the Federal Court3 , Middleton J examined the above factors and determined that the valuer had not properly considered them and thus, held in favour of the Commissioner that the valuations were invalid. Specifically, the valuer erred because he had:

  • Attempted to value the completed premises at 1 July 2000 without reference to actual date relating to subsequent sales of the strata units (which were sold at a discount to the valuer's estimate at 1 July 2000);
  • Not accounted for GST on the sales of the unit in order to determine the required developer's hypothetical profit margin;
  • Calculated interest according to the actual acquisition price rather than the determined market value
  • Failed to take into account rates and land tax as part of the holding costs of the property as well as include stamp duty and legal costs in the hypothetical purchase price.

MSV 2 has been replaced by A New Tax System (Goods and Services Tax) Margin Scheme Valuation Requirements Determination MSV 2005/ 3 4. Whilst MSV 2005/3 does not set out the factors that the valuer must have regard to, it does stipulate that the valuation must include a signed certificate which specifies a full description of the property being valued;

  1. the applicable valuation date;
  2. the date the valuer provides the valuation to the supplier;
  3. the market value of the property at the valuation date;
  4. the valuation approach and the valuation calculation; and
  5. the qualifications of the valuer.

Additionally, MSV 2005/3 requires that the valuation "be made in a manner that is not contrary to the professional standards recognised in Australia for the making of real property valuations" and describes who would be regarded as a "professional valuer".

The Commissioner has stated that where a margin scheme valuation is invalid "We will allow you to fix the actual valuation you used so that it conforms to all our requirements" 5 . Accordingly, taxpayers should ensure that valuations previously performed and those commissioned in the future comply with the requirements. Your Moore Stephens Property Industry contact can assist you with the valuation process.


1 Brady King Pty Ltd v FCT [2008] FCAFC 118 Heerey, Goldberg & Dowsett JJ

2 Found at Schedule 2 to Goods and Services Tax Ruling GSTR 2000/21

3 Brady King Pty Ltd v FCT (No 2) [2008] FCA 1918 (18 December 2008)

4 Found at Schedule 1 to Goods and Services Tax Ruling GSTR 2006/7

5 ATO Fact Sheet "GST and the margin scheme - real property acquired before 1 July 2000"

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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