Construction costs NOT included in costs of margin scheme calculations: WYPF v FC of T

The margin scheme can be used for calculating GST on the taxable supply of real property. To be eligible, the real property must be either:

• Sale of a freehold interest in land
• Sale of stratum unit
• Grant or sale of a long-term lease (more than 50 years)

Calculation methods

Where the margin scheme is used to calculate GST, the GST payable is calculated on the ‘margin’ for the supply, rather than the consideration (sale price). There are two calculation methods: the consideration method (property originally held after 1 July 2000) and the valuation method (property held before 1 July 2000. 

The valuation method requires an approved valuation, per the ATO guidelines. The margin is calculated with reference to the difference between the selling price and the value of the property based on the valuation. Usually, the valuation date will be at 1 July 2000. 

The consideration method – more commonly seen today, and the subject of the WYPF v FC of T case – calculates the margin as the difference between the selling price and the original purchase price. The sale price must include settlement adjustments in the sales contract. However, the purchase price cannot other cost base elements such as the costs for developing the property, legal fees, stamp duty, etc.

Background

In WYPF v FC of T [2021] AATA 3050 (‘WYPF case’) the taxpayer was a large property developer in the business of developing residential apartments for sale in Canberra. The taxpayer did not include the value of construction costs when calculating the ‘margin’, then claimed GST had been overpaid as a result. The Commissioner disagreed, stating the cost of the ‘overpaid’ GST was passed onto purchasers of the individual apartments, and therefore the taxpayer was not entitled to a refund. 

The expenses in this case included ‘Preparatory works’ and ‘Building works’. 

            Purchase of land:                           $14 million

            Costs for ‘Preparatory works: $29.7 million

            Costs for ‘Building works’:         $77 million

 Commissioner’s position

The Commissioner agreed that the non-monetary consideration for ‘Preparatory works’ should be included in the calculation of the margin scheme as non-monetary consideration. However, the ‘Building works’ were considered to be the taxpayer’s cost for a commercial benefit, and therefore not characterised as non-monetary consideration. 

Taxpayer argument

The land was purchased from the ACT Land Development Authority (‘SLA’), and the following agreements were entered into: Contract for Sale; Holding Lease, Deed of Agreement requiring the land to be developed, Consequent Leases/Crown Leases (granted stage by stage). The taxpayer argued that as a result, the ‘Building Works’ were also ‘supplied’ to the SLA, and therefore should be considered as part of the non-monetary consideration when calculating the margin scheme. 

Tribunal decision

The Tribunal considered four issues:

• Whether the ‘Building works’ should be included in the ‘purchase price’ as non-monetary consideration for the purposes of calculating the margin
• Whether the ‘Preparatory work’ were agreed to by parties and the effect of an outstanding invoice from the Applicant to the SLA
• Whether the ‘passing on’ of GST was required, where the Applicant stated excess GST was not passed onto purchasers of the apartments
• Whether there was an overpayment of GST

On the ‘Building works’ issue, the Tribunal considered whether there was a nexus between the works conducted and the grant of Crown/consequent Leases. Whilst it was clear that were was a connection, the Tribunal concluded that the ‘Building works’ were a requirement under the Consequent Lease and not a condition of acquiring a new Consequent Lease. 

 Lessons from WYPF

Whilst this case looked at the ‘bigger’ end of town, the margin scheme also applies to smaller developments. Initially, by conservatively calculating their margin scheme, the taxpayer did not include the ‘Preparatory work’ expenses that would have been included in the margin scheme calculation, then, by not ‘passing’ on the cost of excess GST, the developer had to bear that cost themselves. 

This will not only affect the cashflow of a business, but also the profitability of a project. It is important to understand the elements of the margin scheme to ensure proper calculations are done. Electing to use the margin scheme is ‘chosen’ when the contract is entered into, and some purchasers may not be aware of the importance of their selection until it is too late. 

How can Tax Controversy Partners help you?

Firstly, it is important that you consider your position as early as possible if you are considering purchasing property under the ‘margin scheme’ and what effects this may have on cashflow for your business where some development costs are not included in the calculation. 

Obtaining legal advice before it is too late is important, as specialist tax lawyers we can provide you with detailed advice on your circumstances and guide you through making the best choices for you and in helping you to manage any engagement with the ATO. 

At Tax Controversy Partners, our experienced lawyers can represent your best interests in providing advice that is compliant with the current case law and based on understanding likely ATO actions. 

Please contact us to help using our online contact form, via email at admin@taxcontroverypartners.com.au or by phone at 02 8513 3813.