The Margin Scheme and Developers

11 Oct The Margin Scheme and Developers

In the case of Brady King Pty Limited v The Commissioner of Taxation [2008] FCA81, Justice Middleton of the Federal Court has cast doubt on whether the margin scheme can be used by developers where a subsequent subdivision of the land is involved.

In this case, the taxpayer entered into a contract for the purchase of a building in May 2000 for $9,250,000. In June 2000, the developer obtained a DA for the development of the building. The purchase was completed after July 2000. For the purposes of applying the margin scheme the developer obtained a valuation of the property as at 1 July 2000 at which time (and largely because of the grant of the DA) the land was valued at more than $23 million.

The question to be decided in this case was whether the developer could use the valuation as at 1 July 2000 or had to use the consideration in the purchase contract which completed after 1 July 2000. His Honour held that the latter was to apply. The prime reason was that the taxpayer did not hold the stratum units as at 1 July 2000 but also that it was necessary to have a legal interest in the property as at the valuation date. The effect of the decision is that developers would not be able to use the valuation method in calculating the margin in unit developments where the strata titles had not issued at the valuation date.

In the course of his judgment His Honour considered whether the margin scheme should apply at all because the stratum units created on subdivision of the land are different properties to the property which had been purchased. He asserted that the margin scheme can only apply in relation to the same property.

On 26 June 2008, in the case of Brady King Pty Ltd v Commissioner of Taxation [2008] FCAFC 118 the Full Court of the Federal Court upheld the appeal stating inter alia that:

• When the appellant entered into the contract in May 2000 it acquired or held something that was an inextricable part of the interest which it sold after 1 July 2000.
• The primary judge was wrong in holding that for the purpose of section 75-10(3) of the A New Tax System (Goods and Services Tax) Act 1999 there had to be strict juridical terms between what the taxpayer acquired and what it supplied.
• The beneficial purpose of the Margin Scheme would be frustrated if such a commonplace transaction were held to be outside the scope of section 75-10(30).

For further information please contact Alexandra Tzavellas Email: atzavellas@harrisco.com.au