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
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:
the market value of the completed premises;
the cost to complete the partly completed premises; and
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
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
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;
the applicable valuation date;
the date the valuer provides the valuation to the
the market value of the property at the valuation date;
the valuation approach and the valuation calculation; and
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
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  FCAFC 118 Heerey,
Goldberg & Dowsett JJ
2 Found at Schedule 2 to Goods and Services Tax Ruling
3 Brady King Pty Ltd v FCT (No 2)  FCA 1918 (18
4 Found at Schedule 1 to Goods and Services Tax Ruling
5 ATO Fact Sheet "GST and the margin scheme - real
property acquired before 1 July 2000"
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guide to the subject matter. Specialist advice should be sought
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