Decision impact statement

Brady King Pty Ltd v Commissioner of Taxation

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Court Citation(s):
[2008] FCAFC 118
2008 ATC 20-034
69 ATR 670

Venue: Federal Court of Australia
Venue Reference No: VID 140 of 2008
Judge Name: Heerey, Goldberg and Dowsett JJ
Judgment date: 26 June 2008
Appeals on foot:
No

Impacted Advice

Relevant Rulings/Determinations:

• GSTR 2000/21
• GSTR 2006/7
• GSTR 2006/8

Subject References:
GST
Margin scheme
Freehold interest
Consideration method
Valuation method

Précis

Outlines the Australian Taxation Office's ('ATO') response to this case which concerned the application of the GST margin scheme to sales of stratum units following the acquisition of an office building and its conversion into stratum units, and in particular whether the units were held or acquired before 1 July 2000.

Brief summary of facts

On 22 May 2000 the taxpayer executed a contract to purchase an office building for $9,250,000. The contract entitled the taxpayer to enter the property upon payment of a 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 then converted the building to stratum units.

The taxpayer obtained valuations of the stratum units as at 1 July 2000 prepared by a professional valuer. The taxpayer lodged GST returns disclosing GST on the margin calculated as the difference between the consideration for the sales of the units and the amounts specified in the valuation (in aggregate, $23,232,000).

The ATO considered that the taxpayer was not entitled to use the valuation method for margin scheme purposes and issued assessments calculating GST on the margin calculated as the difference between the consideration for the sales of the units and the relevant proportion of the consideration for the taxpayer's acquisition of the office building.

In the alternative, the ATO submitted that the valuation obtained by the taxpayer did not satisfy the requirements of the Commissioner's determination (A New Tax System (Goods and Services Tax) Margin Scheme Valuation Requirements Determination (No.2) 2000 ('MSV 2').

Issues decided by the court or tribunal

The trial judge held that the taxpayer was not entitled to use the valuation method. The primary reason for the decision was that the stratum units did not exist at the valuation date, 1 July 2000, and therefore the taxpayer had not held or acquired them as at that date for the purposes of subsection 75-10(3) of the A New Tax System (Goods and Services Tax) Act 1999 ('the GST Act').

On appeal, both parties argued the trial judge was wrong to conclude that there had to be strict identity in juridical terms between what the taxpayer acquired and what it supplied. The Full Court agreed. Therefore it did not matter that the stratum units did not exist at the valuation date.

However, the parties were in dispute as to whether, by virtue of having entered into, but not completed, the contract to purchase the property, the taxpayer held or had acquired the necessary interest in each stratum unit before 1 July 2000 for the purposes of subsection 75-10(3) of the GST Act. The Commissioner submitted that the stratum units were acquired at the time the taxpayer acquired the property from which those units were derived and that the property was acquired on completion of the contract.

The Full Court did not accept this submission. The Court held that once the primary judge's "precise juridical identity" approach was rejected it was not possible to ring fence the interest Brady King acquired under the contract from the stratum units later supplied to the purchasers. The fee simple estate was itself derived from the interest under the contract; "the contract was the genesis or source of the appellant's interest in the stratum unit it supplied".

The Full Court remitted the matter to the trial judge to determine the margin for the supply of the units having declared that the margin is to be calculated under subsection 75-10(3) of the GST Act. This was necessary because the trial judge did not address the issue of whether the taxpayer's valuations complied with MSV 2.

ATO view of Decision

The Commissioner will not apply for special leave to appeal to the High Court against the decision of the Full Court.

By virtue of section 75-5 of the GST Act, the margin scheme in Division 75 applies to certain supplies of particular kinds of real property, being a freehold interest in land, a stratum unit or long term lease (the 'relevant property'). The ATO considers that the Court's decision is authority for the proposition that, for the purposes of section 75-10 of the GST Act, an entity supplying relevant property is taken to have held or acquired a sufficient interest in that property at a particular time if it had entered into, but not completed, a contract for its acquisition.

In particular, where, as in the Brady King case, an entity has entered into but not completed a contract for the acquisition of freehold title to land out of which stratum units are to be created, the entity is taken to have held or acquired a sufficient interest in the stratum units at that time.

Similarly, an entity that has entered into but not completed a contract for the acquisition of freehold title to land for subdivision is taken to have held or acquired a sufficient interest in the subdivided lots at that time.

However, the ATO does not consider that it follows from the decision that a supply or acquisition of the relevant property itself occurs at the time of entry into a contract for the sale and purchase of that property. The ATO continues to consider that a supply and acquisition of land under a standard land contract occurs upon completion of the contract.

In that regard, the ATO considers that it is important to note exactly what the Full Court decided. The Court decided that Brady King, by holding or acquiring contractual rights as the purchaser under an uncompleted contract of sale, held or acquired a sufficient interest in the relevant property for the purposes of items 1 and 3 in the table in subsection 75-10(3) of the GST Act.

The Court did not decide that a taxable supply or creditable acquisition of the relevant property itself occurs on entering into a contract. Such a conclusion would be contrary to the High Court's reasoning in Commissioner of Taxation v Reliance Carpet Co Pty Limited [2008] HCA 22 at [42] that, in the case of a completed contract for the sale of real property, there is only one taxable supply and that it occurs at completion of the contract.

The Court's decision was based strictly on its reasoning, having regard to the object of the margin scheme, that it was sufficient for the purposes of subsection 75-10(3) of the GST Act for the taxpayer to hold or have acquired a contractual interest as purchaser under an uncompleted contract at the valuation date.

The ATO delayed updating relevant GST rulings to reflect the Court's decision while there was another unrelated matter before the Court involving the issue of when real property is supplied and acquired, in a broader context than that in Brady King. The Federal Court's decision in Aurora Developments Pty Ltd v Commissioner of Taxation [2011] FCA 232, together with the subsequent decision in Central Equity Limited v Commissioner of Taxation [2011] FCA 908,^[1] confirms the ATO's view that a supply and acquisition of land under a standard land contract occurs upon completion of the contract.

In addition to subsection 75-10(3), there are also other provisions in Division 75 of the GST Act which require an entity, in relevant circumstances, to consider when they acquired a relevant interest in real property and whether or not specified conditions existed at the time of that acquisition- i.e. section 75-11 and subsection 75-5(3) of the GST Act.

In reaching its decision in Brady King, the Court did not consider section 75-11 or subsection 75-5(3) of the GST Act, and the reference to the acquisition of an 'interest, unit or lease' in those provisions appears in a different context to that of subsection 75-10(3) of the GST Act.

In the course of updating relevant GST rulings about the margin scheme to reflect the Court's decision, the ATO has identified some adverse and unintended outcomes that can arise if the Court's interpretation of subsection 75-10(3) of the GST Act is applied in the context of section 75-11 and subsection 75-5(3) of the GST Act. For example, where there is a supply of real property between associates, an interpretation of subsection 75-11(7) of the GST Act in line with the Court's interpretation of subsection 75-10(3) will give rise to over-taxation. The interaction of subsection 75-11(7) with section 75-13 of the GST Act will result in any increase in the value of the property, between the time of entry into the contract and settlement, being taxed twice; once at the time of the sale between the associates, and again when the acquiring associate on-sells it to another party.

The ATO will consult with the community about the issues arising in relation to the time of supply and acquisition of a relevant interest in real property under section 75-11 and subsection 75-5(3) of the GST Act.

Justice Middleton delivered his decision ([2008] FCA 1918) dismissing the taxpayer's appeal in relation to the valuation issue on 18 December 2008. The taxpayer lodged a notice of appeal against that decision to the Full Court of the Federal Court; however, the appeal was discontinued.

Administrative Treatment

Implications on current Public Rulings & Determinations

Addenda to the following public rulings published on 22 June 2011, amended those rulings to reflect the reasoning of the Full Court in relation to the application of subsection 75-10(3) of the GST Act.

•

GSTR 2000/21 Goods and services tax: the margin scheme for supplies of real property held prior to 1 July 2000;

•

GSTR 2006/7 Goods and services tax: how the margin scheme applies to a supply of real property made on or after 1 December 2005 that was acquired or held before 1 July 2000; and

•

GSTR 2006/8 Goods and services tax: the margin scheme for supplies of real property acquired on or after 1 July 2000.

If you believe you have overpaid GST based on the ATO's former view, you may be entitled to a refund of the overpaid GST, subject to the application of section 105-55 (Time limit on refunds and credits) and section 105-65 (Restrictions on refunds) in Schedule 1 to the Taxation Administration Act 1953.

Implications on Law Administration Practice Statements

Nil.

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:
Allina Pty Limited v Commissioner of Taxation
(1991) 28 FCR 203
(1991) 99 ALR 295
(1991) 21 ATR 1320
(1991) 91 ATC 4195

Aurora Developments Pty Ltd v Commissioner of Taxation
[2011] FCA 232
(2011) 192 FCR 519
2011 ATC 20-250

Brady King Pty Ltd v Commissioner of Taxation
[2008] FCA 1918
2008 ATC 20-084
69 ATR 670

Central Equity Limited v Commissioner of Taxation
[2011] FCA 908
2011 ATC 20-274

CIC Insurance Ltd v Bankstown Football Club
(1997) 187 CLR 384
(1997) 141 ALR 618

Commissioner of Taxation v Reliance Carpet Co Pty Ltd
[2008] HCA 22
(2008) 68 ATR 158
(2008) 2008 ATC 20-028

Cooper Brookes (Wollongong) Pty Ltd v Federal Commissioner of Taxation
(1981) 147 CLR 297
(1981) 35 ALR 151
(1981) 11 ATR 949
(1981) 81 ATC 4292

Federal Commissioner of Taxation v Suttons Motors (Chullora) Wholesale Pty Ltd
(1985) 157 CLR 277
(1985) 59 ALR 688
(1985) 16 ATR 567
(1985) 85 ATC 4398

Tanwar Enterprises Pty Ltd v Cauchi
(2003) 217 CLR 315

Saga Holidays Ltd v Commissioner of Taxation
(2006) 156 FCR 256
2006 ATC 4841
(2006) 64 ATR 602
(2006) 237 ALR 559

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