The Tax Office has issued a new Margin Scheme Legislative Determination that generally applies from 1 March 2010. All taxpayers that previously obtained margin scheme valuations should ensure those valuations remain valid under a new Determination. Significantly, the new Determination gives the Tax Office explicit powers to challenge a taxpayer's valuation, potentially leading to significant GST exposures for the taxpayer.
The Tax Office has issued a new Margin Scheme Legislative Determination. The Determination sets out the approved valuation methods available to both taxpayers and the Tax Office under the GST margin scheme.
The margin scheme is generally used to concessionally tax sales of new residential property and is widely used by property developers. Under the margin scheme, GST is ordinarily calculated as 1/11th of the difference between the sale price and the purchase price of the property. However, in certain circumstances, the market value of the property at the specified date (determined using an approved valuation method) is used instead of the purchase price. Significant changes have been made to the margin scheme over the last few years and it is now often complex to apply. Valuations of land for margin scheme purposes are now used in various situations, including where:
- the taxpayer held land on 1 July 2000;
- land is sold GST-free as a going concern or farm land and subsequently sold under the margin scheme;
- land is sold between associated parties;
- land is sold between joint venture participants; and
- land is inherited from a deceased estate.
The new Determination generally applies to all sales of land that occur after 1 March 2010. This means that where a taxpayer held land on 1 July 2000, obtained a valuation of the land at that time, subsequently developed the land and is to sell the land after 1 March 2010, the valuation needs to comply with the new Determination. Since the taxpayer's valuation was drafted to meet a previous margin scheme Determination, it is likely that the valuation will not be valid, which may give rise to a significant GST exposure for the taxpayer.
We recommend all taxpayers that previously obtained margin scheme valuations ensure those valuations remain valid under the new Determination.
Similar to the previous incarnation of the Determination, the latest version allows taxpayers to choose between the following three valuation methods:
1. Valuation by a professional valuer.
2. Valuation based on the sale price received by the supplier under a previous contract for the sale of the land.
3. State Government or Territory Government department valuation for rating or land tax purposes.
Generally, the first method will be preferred (since this will normally give the highest valuation and hence the lowest GST liability). However, in the current climate where property values may well be falling, the second or third valuation methods should be considered, since they may well result in a lower GST liability.
This is the sixth margin scheme Determination to issue since 2000 and the Determinations have become more onerous and prescriptive over time. Significantly, the latest Determination sets out the circumstances in which the Tax Office can challenge a taxpayer's valuation. In this regard, taxpayers should be aware of the Brady King Federal Court case handed down earlier this year, which held that the Tax Office can challenge margin scheme valuations even where they contain relatively minor errors.
Clients should be aware that this aspect of the Determination applies retrospectively, that is, it sets out the process by which the Tax Office can challenge margin scheme valuations for sales that occur both before and after 1 March 2010.
There are serious concerns with the Tax Office's ability to challenge valuations under the new Determination. Where the Tax Office forms the view that a valuation does not meet the requirements in the Determination, there is a process by which the Tax Office can replace the taxpayer's valuation with its own valuation, using any of the valuation methods. It is certainly feasible that the Tax Office could replace a valuation by a professional valuer with a State Government valuation for land tax or ratings purposes. Since the latter valuation method is often substantially lower than the former, this would result in a higher GST liability for the taxpayer. It remains to be seen how the Tax Office will apply its new powers under the Determination.
Consequently, there is a good incentive for taxpayers to ensure that their valuations comply with the new Determination before the Tax Office arrives.
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This publication is intended as a first point of reference and should not be relied on as a substitute for professional advice. Specialist legal advice should always be sought in relation to any particular circumstances.