The margin scheme usually works by calculating GST on the difference between the cost of the property and the sale proceeds. One exception to this general rule is where a property was acquired before 1 July 2000. In that case the margin can be the difference between the sale proceeds and the value of the property as at 1 July 2000 (rather than the cost of the property).

This is the issue that was in dispute between the developer and the Tax Commissioner in the case of Brady King Pty Ltd v Commissioner of Taxation.

Brady King had paid roughly $10 million for a building which was subsequently strata titled and the units sold. The developer argued that the margin subject to GST was the difference between the sale price of the units and the value of the units as at 1 July 2000 ($25 million) not the $10 million paid to acquire the building. Leaving aside the question of whether the valuation methodology was adequate, the Court held that as the developer did not have legal ownership of the building at 1 July 2000, it could not use the valuation method of working out the margin. This conclusion is not particularly controversial.

The Court went on to say that the developer could not use the margin scheme at all. The court's reasoning was that the strict wording of the margin scheme legislation required that what you sell is the same as what you acquired. Because what was acquired by the developer (the building) and what was sold (stratum units) were not the same, GST was payable at the full rate.

The developer had gone from the prospect of a GST windfall, (if the valuation withstood scrutiny) to the worst of all possible world's, GST at full rates, and most probably no ability to recover this additional GST from the unit buyers.

The Federal Court's decision is at odds with the ATO's previous application of the margin scheme, significantly alters the GST landscape for property developers and appears to undermine the practical commercial use of the margin scheme. The ATO has stated that it will continue with its interpretation of the law, and that developers and others can rely on the ATO margin scheme position and rulings, notwithstanding the Federal Court decision.

While it is comforting that the Taxation Commissioner appears to be taking a commercial and pragmatic approach, the Federal Court decision also reminds us that the ATO views of tax laws are simply the ATO opinion, not the law and that even after 8 years the GST treatment of common transactions is not as simple as we thought.

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