This article is written by John Morgan and was first published on the website taxtechnical.com.au. To subscribe to the Tax Technical newsletter and to keep up to date with all things tax related, please visit https://taxtechnical.com.au/newsletter/.
FCT v Landcom – GST margin scheme applies separately to each of the 4 lots sold under a single contract – protecting the State corporation from GST on some of those lots
The Full Federal Court has upheld a decision that the proposed sale, by a State-owned corporation, of the freehold interests in 4 lots, under a single contract, would NOT be a single supply for the purposes of the margin scheme, and thus allowed the relevant margin scheme provisions, to apply favourably (or not) on a lot by lot basis.
The reason why this mattered, was there was a favourable treatment, for land sold by States and their corporations, which depended on whether there were any ‘improvements’ on the land (if there were, then the favourable treatment would not apply). If it were a single supply, then improvements on one lot, could deprive the taxpayer of the favourable treatment, on one, or more, of the other lots.
When the ‘margin scheme’ applies, GST is paid on the ‘margin’ (not on gross sale ‘consideration’). The favourable treatment for States/their corporations, was under s75-10(3), item 4, which allowed the margin to be calculated, by reference to a market valuation undertaken at the time of the sale. Generally, on an arm’s length sale, the sale price would be equal to, or close to, the ‘market value’, determined at that same sale date. For such sales, item 4 would set the ‘margin’ at $nil or nearly that low. To understand how much of an advantage this was, the ‘margin’ for the sale of post-GST land, is otherwise calculated by reference to its cost, and the margin for sale of pre-GST land, is set, by reference to the market value, determined at 1 July 2000 (when the GST regime commenced).
This favourable treatment for States and their corporations, flows out of the s114 Constitutional protection, they enjoy, from their land being taxed by the Commonwealth (so they can’t be taxed out of existence). There is a ‘carve out’ from the GST Act, for any GST on supplies by States/their corporations, in terms that reflect this constitutional protection. Despite this, however, the States have agreed to pay ‘notional’ GST, to the Commonwealth. The Commissioner ignored these niceties when he first issued the private ruling (that the 4 lots sold, under the one contract, was a single supply). By the time the taxpayer lodged an objection, to this ruling, the Commissioner argued that the ruling, and the objection decision, were (legally) a nullity, and just issued as a courtesy. These issues are summarised, in the ‘Catchwords’ below.
However, the end result was that the Court, at first instance (Landcom v FCT [2022] FCA 510), determined that it did have jurisdiction, and found in the Taxpayer’s favour (that they were separate supplies).
The Full Court then dismissed the ATO’s appeal, on the basis that the subject-matter of the margin scheme is “the sale of a particular freehold interest in land”. Accordingly, where there is a supply of more than one interest, the margin scheme applies to each interest. The Full Court considered that this construction “gives a harmonious operation to the GST Act”.
(FCT v Landcom [2022] FCAFC 204, Full Federal Court, Wigney, Moshinsky and Hespe JJ, 22 December 2022; LTN 1, 4/1/23.)
CATCHWORDS from first instance decision on the issues relating to the Constitutional protections, which the States enjoy
CONSTITUTIONAL LAW – s 114 of the Constitution prohibits the Commonwealth imposing “any tax on property of any kind belonging to a State”
- where GST is not imposed on States, but States have voluntarily agreed to pay notional GST –
- where the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) addresses notional GST, including the amount of notional GST which might be voluntarily paid –
- where applicant being a State owned corporation sought private binding ruling from Commissioner of Taxation in relation to application of a provision facilitating calculation of notional GST relevant to a proposed sale of land –
- where Commissioner issued private binding ruling and made an objection decision in relation to notional GST –
- private ruling and objection decision later claimed only to be a “purported” private ruling and a “purported” objection decision –
- on commencement of the appeal, under Part IVC of the Taxation Administration Act 1953 (TAA53), Commissioner argued Court did not have jurisdiction –
- whether Court has jurisdiction to hear Part IVC appeal –
- whether there is “matter” within the meaning of ss 75 and 76 of the Constitution–
- whether there is a justiciable controversy in circumstances where GST cannot be and is not imposed –
- whether notional GST scheme can give rise to real and enforceable tax liabilities on the part of states –
- whether issue before the Court was hypothetical –
Court found to have jurisdiction –
- states found to have real interest in the calculation of notional GST –
- states entitled to seek rulings about how provisions of GST Act apply
About the Author: John Morgan is a tax specialist lawyer of more than three decades experience now practicing at the Victorian Bar.
