Brady King Pty Ltd v Commissioner of Taxation
Document type: Decision Impact Statement
Venue: Federal Court of Australia (VID 84 of 2005)
Judgment date: 18 February 2008
Date published: 12 February 2012

Summary of decision:
Outlines the Tax Office's response to this case which concerned the application of the GST margin scheme to the acquisition of an office building, its conversion into stratum units (residential apartments) and the subsequent sale of those units.

Overview of facts:
On 22 May 2000 the taxpayer signed a contract to purchase an office building for $9,250,000. The contract entitled the taxpayer to enter the property upon payment of the deposit for the purpose of carrying out certain specified works and for marketing purposes. Settlement of the contract occurred on 25 October 2000 and the transfer was registered under the Transfer of Land Act 1958 (Vic) on 9 November 2000. | The taxpayer converted the building to stratum units. Most of the units were sold off the plan between April and November 2001. | The taxpayer obtained valuations of the stratum units as at 1 July 2000 prepared by a professional valuer. The taxpayer lodged GST returns calculating GST on the margin between the amounts specified in the valuation (in aggregate, $23,232,000) and the consideration for the sales of the units. | The Tax Office considered that the taxpayer was not entitled to use the valuation method to calculate its margin for margin scheme purposes and issued assessments calculating GST on the margin between the consideration for the taxpayer's acquisition of the office building and the consideration for the sales of the units. | Issues decided by the court or tribunal | The taxpayer argued that it held or had acquired the units at I July 2000 and that it held a valuation that complied with the Commissioner's determination under s 75-10(3) of the A New Tax System (Goods and Services Tax) Act 1999 (the 'GST Act'). Accordingly, the taxpayer submitted that it was entitled to use the valuation method to calculate its margin in accordance with s 75-10(3). | The Commissioner argued that the taxpayer was not entitled to use the valuation method as it did not hold and had not acquired the property at 1 July 2000. In the alternative, the Commissioner submitted that the valuation did not comply with the Commissioner's determination. | The Court held that the taxpayer was not entitled to use the valuation method. The primary reason for the decision was that the taxpayer did not hold the stratum units at 1 July 2000. The Court also concluded that, in any case, it was necessary for a legal interest in the relevant property to be held at the valuation date and the taxpayer, as the purchaser under an uncompleted contract, merely held an equitable interest in the property at 1 July 2000. | The issue of whether the valuation complied with the Commissioner's determination was not addressed by the Court.

Issues decided:
The taxpayer argued that it held or had acquired the units at I July 2000 and that it held a valuation that complied with the Commissioner's determination under s 75-10(3) of the A New Tax System (Goods and Services Tax) Act 1999 (the 'GST Act'). Accordingly, the taxpayer submitted that it was entitled to use the valuation method to calculate its margin in accordance with s 75-10(3). The Commissioner argued that the taxpayer was not entitled to use the valuation method as it did not hold and had not acquired the property at 1 July 2000. In the alternative, the Commissioner submitted that the valuation did not comply with the Commissioner's determination. The Court held that the taxpayer was not entitled to use the valuation method. The primary reason for the decision was that the taxpayer did not hold the stratum units at 1 July 2000. The Court also concluded that, in any case, it was necessary for a legal interest in the relevant property to be held at the valuation date and the taxpayer, as the purchaser under an uncompleted contract, merely held an equitable interest in the property at 1 July 2000. The issue of whether the valuation complied with the Commissioner's determination was not addressed by the Court.

ATO view of decision:
The Commissioner submitted to the Court that: • Although the stratum units did not come into existence until after 1 July 2000, it would be sufficient if the taxpayer held or had acquired a freehold interest in the parent title, that is, the title to the office building from which the units were to be created, at that date. • The taxpayer held an equitable interest in the property at the valuation date, but that equitable interest did not constitute a 'freehold interest' (or a 'stratum unit') as required by s 75-10(3) of the GST Act. • It is not necessary for the freehold interest to be registered at the land titles office. It would be sufficient for settlement to have occurred so that the taxpayer was in unconditional possession of a registrable instrument of transfer. • As settlement had not occurred by 1 July 2000, the taxpayer did not hold and had not acquired a freehold interest in the property. | • Although the stratum units did not come into existence until after 1 July 2000, it would be sufficient if the taxpayer held or had acquired a freehold interest in the parent title, that is, the title to the office building from which the units were to be created, at that date. • The taxpayer held an equitable interest in the property at the valuation date, but that equitable interest did not constitute a 'freehold interest' (or a 'stratum unit') as required by s 75-10(3) of the GST Act. • It is not necessary for the freehold interest to be registered at the land titles office. It would be sufficient for settlement to have occurred so that the taxpayer was in unconditional possession of a registrable instrument of transfer. • As settlement had not occurred by 1 July 2000, the taxpayer did not hold and had not acquired a freehold interest in the property. | The Court agreed with the Commissioner that the taxpayer was not entitled to use the valuation method under s 75-10(3). However, contrary to the Commissioner's submissions, the Court decided the matter on the basis the interest held at the valuation date must be the same interest that is the subject of the relevant supply. Because the taxpayer did not hold the stratum units at the valuation date, it was held that the valuation method could not be used. | The effect of this decision may be that developers would be unable to use the valuation method in calculating the margin for unit developments where the strata titles had not issued at the valuation date. | Middleton J also stated that "the margin scheme can only apply to the same property (in the juridical sense) being acquired and subsequently sold". It may follow from this view that developers would be precluded from using the margin scheme at all for unit developments. | The Tax Office respectfully agrees with the decision to dismiss the taxpayer's appeal. However, as noted, the basis on which the Court reached this view is contrary to the submissions made by the Commissioner, and is contrary to the Tax Office's longstanding practice in relation to the margin scheme provisions, as reflected in its public rulings (see GSTR 2000/21 , GSTR 2006/7 and GSTR 2006/8 ) and other guidance material.

Administrative treatment:
Implications on current Public Rulings & Determinations | An appeal against this decision was allowed by the Full Court. An administrative treatment is no longer required in relation to this first instance decision. A Decision Impact Statement exists for the Full Court decision at Brady King (VID140 of 2008).

Legislative references: A New Tax System (Goods and Services Tax) Act 1999 ("the GST Act") Div 75 75-5 75-10(2) 75-10(3) 75-15 195-1
Case references: HP Mercantile Pty Ltd v Commissioner of Taxation (2005) 143 FCR 553 2005 ATC 4571 60 ATR 106 Sterling Guardian Pty Limited v Federal Commissioner of Taxation [2005] FCA 1166 2005 ATC 4796 60 ATR 502 Sterling Guardian Pty Ltd v Commissioner of Taxation (2006) 149 FCR 255 2006 ATC 4227 62 ATR 119
Subject references: GST Margin scheme Freehold interest Consideration method Valuation method