Editorial - Margin scheme under attack

Oops… have you ever gone into battle and achieved a victory, but for the wrong reasons? This is the situation in which the ATO finds itself in a recent case in the Federal Court.

In Brady King Pty Ltd v Commissioner of Taxation the Tax Office took on a property developer who purchased an office building and subsequently converted it to stratum units. The central issue in dispute from the Tax Office’s perspective was how the GST was to be calculated using the margin scheme. The margin scheme allows property developers to calculate the GST on the difference between either a valuation or acquisition amount and the sale consideration. The margin scheme offers developers the opportunity to reduce the amount of GST otherwise payable under the normal rules. This is particularly attractive where the purchaser is an unregistered individual and not in a position to claim an input tax credit.

The case was won by the Tax Office, but for the wrong reasons. It overturned the Tax Office’s long-standing views in relation to the margin scheme rules as reflected in a number of their current rulings.

The Tax Office argued that the GST calculated using the margin scheme should be based on acquisition costs rather than the valuation amount.However, the Federal Court questioned the use of the margin scheme in circumstances where what is acquired is different to that which is sold – as is the case in unit developments.

The decision has major implications for taxpayers who have self-assessed their GST liability for unit developments using the margin scheme. The view of the Tax Office was that if a taxpayer bought a block of flats and then converted them to strata titled units the use of the margin scheme is available.

A single judge of the Federal Court has handed down a contrary view of the legislation. The Brady King case has now caused considerable uncertainty. Anyone who has undertaken a unit development and used the margin scheme could be affected by this decision. The Tax Office should be applauded for issuing a “Decision Impact Statement” (“DIS”) so promptly after the decision in this case was handed down. The DIS issued by the Tax Office states that it will continue to apply its current rulings and taxpayers will be protected from retrospective adjustments until the matter is resolved either by appeal or legislative amendment.

The Tax Office has been heavily criticised of late for not following judgements handed down by the judicial system. On this occasion, and to the taxpayer’s advantage, it is holding firm with its longstanding view of how the law applies for unit developments. The case is summarised in the article titled ‘Property developers beware: Margin scheme in doubt’ on page 257.