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The Full Federal Court (Heerey, Goldberg and Dowsett JJ) has upheld the appeal of the taxpayer from a decision of Middleton J, who held that the taxpayer was not entitled to the benefit of the GST margin scheme when it sold new strata units which it had built on land that it had agreed to purchase prior to 1 July 2000. Settlement of the purchase contract occurred on 25 October 2000 and the strata units were subsequently developed on the land and sold to individual purchasers.

In particular, Middleton J held that the taxpayer was not entitled to the benefit of the margin scheme under s 75-5 of the GST Act, because the strata units that were sold to the individual purchasers did not exist at 1 July 2000, those legal interests only having come into existence on the registration of a plan of subdivision after 1 July 2000. Specifically, Middleton J said that what was supplied to the purchasers of the strata units had to be "identical in juridical terms" to that which it acquired. This finding was contrary to the submissions of both the taxpayer and the Commissioner. However, Middleton J did agree, in the alternative, with the Commissioner's submission that the taxpayer was not entitled to use the valuation method under the margin scheme as it did not hold and had not acquired the property at 1 July 2000, settlement not having taken place until after 1 July 2000.

First, the Full Federal Court agreed with both the taxpayer and the Commissioner that Middleton J was wrong in holding that there had to be "a strict identity in juridical terms" between what the taxpayer acquired and what it supplied. The beneficial purpose of the Margin Scheme would be frustrated if such a commonplace transaction as the one in question were held to be outside the margin scheme. Reading the GST Act in the way argued for by both the taxpayer and the Commissioner gives the margin scheme a practical and fair business operation. It is a construction which is reasonably open and more closely conforms to the legislative intent.

Secondly, in relation to the question of whether the taxpayer held or acquired the necessary interest before 1 July 2000, because settlement did not take place until after 1 July 2000, the Full Federal Court, in upholding the taxpayer's appeal, said: "...once the "precise juridical identity" approach is rejected and a more practical construction adopted, it is not possible to ring fence the interest the appellant acquired under the contract from the stratum unit which it later supplied to its customer." The Court continued, at para 27:

"The Commissioner argued that the stratum units which the appellant sold were not "derived" from the equitable estate it held as purchaser, rather they were derived from the fee simple estate it obtained on completion of the purchase and registration (although senior counsel for the Commissioner disavowed any argument that what was acquired or held was the registered interest). But that fee simple was not conferred on the appellant by the Lands Title Office without regard to anything the appellant had previously done to acquire it. The appellant was only able to complete the purchase and obtain registration because, by entering into the contract it had obtained or acquired enforceable rights against (and of course obligations to) the previous owner of the property. The contract was the genesis or source of the appellant’s interest in the stratum unit it supplied."

The Full Federal Court also considered the recent High Court decision in FCT v Reliance Carpet Co Pty Ltd [2008] HCA 22 and said, at para 38:

"While Reliance Carpet is not directly in point, the reasoning of the High Court is in our respectful opinion more consistent with the appellant’s case. The emphasis on the breadth of the statutory definition of "real property" supports the conclusion that when the appellant entered into the contract on 22 May 2000 it acquired or held something that was an inextricable part of the interest which it sold after 1 July 2000..."

Brady King Pty Ltd v FCT [2008] FCAFC 118 (Full Federal Court; Heerey, Goldberg and Dowsett JJ; 26 June 2008).

For a copy of the decision, go here

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