The Full Federal Court has today upheld the taxpayer's appeal in Brady King.
You will recall that the Federal Court's earlier decision had cast doubt on the ability to apply the margin scheme following a subdivision or strata titling because it held that the subdivided lots was not the same interest as originally acquired.
The Full Federal Court rejected this reasoning, noting that the application of the margin scheme would be frustrated by the Federal Court's earlier ruling. Rather, the Full Federal Court concluded that the GST Act required an interpretation that gives "it a practical and fair business operation".
As such, the margin scheme was available to the taxpayer notwithstanding the subdivision of the property following its acquisition (which is, and otherwise has been, the position set out in the Commissioner's public rulings on the margin scheme). In short, the natural order of the world is restored.
However, in a somewhat surprising move, the Full Federal Court went on to find that the taxpayer was allowed to calculate its margin using the valuation method even though it didn't acquire the legal title in the land until October 2000 (being date that the contract to acquire the land completed). This was because the taxpayer had acquired an 'interest' in the property when it exchanged contracts in May 2000. In other words, the Full Federal Court concluded that the taxpayer acquired the interest in the property when contracts were exchanged in May 2000, meaning the taxpayer could be regarded as holding an interest in the property as at 1 July 2000 for the purposes of assessing its eligibility to use the valuation method.
This is a significant departure from the Commissioner's previous practice, which has been that the land can only be treated as being held at 1 July 2000 if the taxpayer held 'legal' title to the land at that time.
As such, taxpayers who thought they were required to calculate their margin under the acquisition method, where they had contracted to acquire that property prior to 1 July 2000, may be able to recalculate (and reduce) their GST liability by recalculating using the 'valuation method'. Whether this is possible in practice will of course depend on the circumstances of the individual taxpayer and will be subject to the various restrictions that exist in relation to the reclaiming of overpaid GST.
Another issue, that doesn't appear to have been resolved in the decision, is what the valuation of the taxpayer's interest would be - for example, there is case law to suggest that the valuation should be limited to the amount deposit paid on exchange (which would almost certainly negate any advantage in using the valuation method). A note of caution should also be sounded in that, as this is clearly contrary to the Commissioner's view of the way the world should be, legislative amendment may also be forthcoming.
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