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Application of the Margin Scheme on Property Developments

On 21 February 2006 the Full Federal Court delivered its decision in the matter of Sterling Guardian Pty Limited v Commissioner of Taxation. This was an appeal from a Federal Court decision which involved the application of the margin scheme under Division 75 of the GST Act insofar as it related to the sale of strata units developed on land. The land the subject of the proceedings had been purchased prior to the implementation of the GST Act by a Unit Trust; the applicant in the proceedings was a member of that Trust.

The taxable supplies made by the applicant consisted of the sale of the fee simple in the strata units. The issues raised in this matter were:

(a) whether the margin scheme could be applied to the supplies of strata units made by the Unit Trust; and if so

(b) whether, for the purpose of calculating the margin pursuant to s.75-10(2) of the GST Act, the consideration for the Trust’s acquisition of each strata unit included all the costs of bringing the strata units into existence.

The benefit of such an arrangement to developers would be obvious; not only would the purchase price of land comprise ‘consideration’ for the purposes of s.75-10(2) but also such expenditure as stamp duty, constructions costs, civil work expenses, authority fees, design consultant expenses, project management fees and the like.

The difficulty the court had with the applicant’s argument was that the construction materials only became fixtures by attachment to the land after they were acquired. Accordingly, the applicant’s calculation of the ‘non-land’ element of the acquisition costs included the consideration for supplies to it which were taxable, and on which the GST was worked out without applying the margin scheme, so giving rise to input tax credits. This would effectively amount to a ‘double’ benefit for the applicant – not only would the non-land element of acquisition be included when calculating the margin scheme but also the applicant could claim the input tax credits on those non-land expenses.

Based on this finding, the Federal Court at first instance dismissed the applicant’s claim.

The applicant thereafter appealed to the Full Federal Court. However, again the Court was troubled by the issue of ‘double dipping’. The applicant (now the appellant) met this problem with an argument that only GST exclusive consideration should be taken into account for the purposes of calculating the margin, i.e. the non-land costs less any GST component thereon (for which an input tax credit would have been given).

The Full Court rejected this proposition and noted that the special rules provided in Chapter 4 of the GST Act were directed, inter alia, towards developers. As is often the case, developers acquire land from private owners. Those owners are not liable for GST on the supply of land because the supply is not made in the course of furtherance of an enterprise and, as such, the owners are not registered or required to be registered under the GST Act. Given the owners are not liable for GST on their supply, the developer is not entitled to any input tax credit on the acquisition of the land. However, the developer would be liable for GST on the developed property that was thereafter supplied to purchasers. (In this particular case, no input tax credit was available because the property was purchased prior to 1 July 2000.) Hence Division 75 of the GST Act applies which enables payment of GST on the ‘margin’.

This application does not, however, provide any benefit for untaxed items, such as stamp duty and wages, but the Full Court noted that such benefits were not available under the general provisions of the GST Act in any event.

The Full Federal Court ultimately dismissed the appeal and found that non-land construction costs could not be included when applying the margin scheme.

For further information regarding the application of margin schemes on property developments, please contact Harris & Company on Tel: (02) 9261-8533.

This publication is intended only to provide a summary of the subject matter covered. It does not purport to be comprehensive or to render legal advice. The publication reflects the law at the date the publication was written which may differ at the date the publication is being read. No reader should act on the basis of any matter contained in this publication without first obtaining specific professional advice.
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