Brady King Pty Ltd v Commissioner of Taxation

THE LEGISLATION 14 GST is payable on 'taxable supplies' under s 7-1 of the GST Act. 15 GST on a taxable supply is normally 10% of the 'value' of the taxable supply: see s 9-70 of the GST Act. The 'value' is 10/11ths of the price: s 9-75. 16 Under s 75-5 of the GST Act a taxpayer may choose to apply a margin scheme if it makes a taxable supply of 'real property' by selling a freehold interest in land, selling a 'stratum unit' or granting or selling a 'long-term lease'. 17 Section 75-5(1) in this regard provides: If you make a taxable supply of real property by: (a) selling a freehold interest in land; or (b) selling a stratum unit; or (c) granting or selling a long-term lease; you may choose to apply the margin scheme in working out the amount of GST on the supply. 18 'Real property' is defined in s 195-1 to include: (a) any interest in or right over land; or (b) a personal right to call for or be granted any interest in or right over land; or (c) a licence to occupy land or any other contractual right exercisable over or in relation to land. 19 A 'stratum unit' is defined by virtue of the operation of s 195-1 of the GST Act and s 124-190(3) of the Assessment Act as: … a lot or unit (however described in an 'Australian law' or a 'foreign law' relating to strata title or similar title) and any accompanying common property. 20 Section 75-10(2) provides: The margin for the supply is the amount by which the consideration for the supply exceeds the consideration for your acquisition of the interest, unit or lease in question. 21 However, pursuant to s 75-10(3), if a valuation of the stratum unit as at the date specified in column 3 of the table in s 75-10(3) has been made that complies with any requirements determined in writing by the respondent for making valuations for the purposes of Div 75 and the circumstances set out in the second column apply, the margin for the supply is the amount by which the consideration for the supply exceeds the valuation of the unit ('the valuation method'). The table, so far as is relevant, is set out below: Item When Valuations may be used Date of Valuation 1 The supplier acquired the interest, unit or lease before 1 July 2000 and no other item applies. 1 July 2000 3 The supplier is registered or required to be registered and has held the interest, unit or lease since before 1 July 2000, and there were improvements on the land or premises in question as at 1 July 2000. 1 July 2000

22 The respondent has made a determination in writing under s 75-10(3)(b) that applies to the sales of Stratum Units by the applicant, viz A New Tax System (Goods and Services Tax) Margin Scheme Valuation Requirements Determination (No. 2) 2000 ('Determination No. 2'), which is found in Sch 2 to GST Ruling GSTR 2000/21. 23 The applicant adopted the valuation method for determining its GST liability on the basis that it held the property before 1 July 2000 (see Item 3 of the table) or, if Item 3 did not apply, on the basis that it acquired the property before 1 July 2000 and Item 1 of the table applied. It engaged Colliers Jardine to make the Valuations for the purposes of s 75-10(3). The valuer sought to apply the valuation method set out in Determination No. 2.

ANALYSIS 24 With this background and legislative framework in mind, I now turn to the first issue, namely whether the applicant was entitled to determine its GST liability under s 75-10(3) of the GST Act, based on the difference between the sale price of each Stratum Unit and the value of the Stratum Unit as at 1 July 2000. Both parties accept that there is no previous authority directly considering this issue now before the Court. 25 This proceeding involves the acquisition by the applicant of at best an equitable interest in the land before 1 July 2000, and the making of a taxable supply by selling the Stratum Units (which it is accepted were 'legal interests') after that date, which Stratum Units did not exist prior to 1 July 2000. 26 The first instance decision in Sterling Guardian Pty Limited v Federal Commissioner of Taxation [2005] FCA 1166 per Stone J, and the Full Court decision in Sterling Guardian Pty Ltd v Commissioner of Taxation (2006) 149 FCR 255, did not directly consider the operation of the provisions before me, and the purchase of the land there was completed before 1 July 2000, although the relevant stratum units were not registered under the relevant legislation until 2 March 2002. The focus of the Court's attention in that case was upon the operation of s 75-5(2) of the GST Act. 27 However, before me the respondent contended as follows: In the present case the stratum units that were sold by way of the Supply Contracts did not exist at 1 July 2000, those legal interests only came into existence on the registration of a plan of subdivision after 1 July 2000. Accordingly, it could be contended that s 75-10(3) has no application to the present circumstances as the stratum units could not have been acquired (within the meaning of Item 1 in the table) or held (within the meaning of Item 3 in the table) as at 1 July 2000 as they did not exist at that time. However, it is the Respondent's position that the references in s 75-10(3) to an "interest, unit or lease" should be interpreted in accordance with the principles set out by the Federal Court at first instance in Sterling Guardian Pty Ltd v Commissioner of Taxation [2005] FCA, at [23-40] in relation to Section 75-10(2). In that case, Stone J held that, where the property was subdivided after the purchase, the acquisition cost of each unit for the purposes of s 75-10(2) was the cost of the corresponding portion of the "parent" title and it was irrelevant that the individual stratum units did not exist at the time of acquisition. Applying these principles to the present case the Respondent contends that the stratum unit is only acquired or held on 1 July 2000, if the parent freehold title was acquired or held on that date and it is not to the point that the stratum unit interests did not exist at that time. This approach appears to have been implicitly assumed by the Applicant in its submissions. 28 My view is that the initial contention posited by the respondent is correct. Whilst the respondent sought to take a different position, I must construe the provisions as I consider they are to be properly understood as a matter of law. The failure of one party to adopt a particular interpretation cannot prevent a court from adopting that interpretation if the court considers the interpretation is correct: see generally Pearce DC and Geddes RS, 'Statutory Interpretation in Australia' (6th ed, LexisNexis, 2006) at [1.5]. 29 The property (in the juridical sense) that was sold by way of the Supply Contracts was not the same property that was acquired or held (no matter what meaning is given to those terms). Accordingly, s 75-10(3) does not apply; the applicant did not on any view acquire or hold before 1 July 2000 the Stratum Unit which it sold, and the requirements specified in the second column of the table were therefore not met. This, in my view, is the correct way to interpret and apply s 75-10(3) and the table. 30 I accept that one should adopt a purposive approach to the interpretation of the GST Act and apply the GST Act in a practical, business-minded way. 31 As stated by the Full Court in HP Mercantile Pty Ltd v Commissioner of Taxation (2005) 143 FCR 553 at [44]: It is clear, both having regard to the modern principles of interpretation as enunciated by the High Court in cases such as CIC Insurance Ltd v Bankstown Football Club Ltd (1997) 187 CLR 384 and s 15AA of the Acts Interpretation Act 1901 (Cth) that the Court will prefer an interpretation of a statute which would give effect to the legislative purpose, as opposed to one that would not. This requires the Court to identify that purpose, both by reference to the language of the statute itself and also any extrinsic material which the Court is authorised to take into account. 32 The margin scheme was introduced to obviate unfairness on some forms of business activity - see Sterling149 FCR at [16]. However, I cannot ignore the text of the GST Act, particularly here Div 75, and the clear wording of the operation of the provisions under consideration before me. Further, the interpretation I favour does give effect to the legislative purpose of obviating unfairness, but as confined by the words of the provisions themselves. 33 Whilst the Explanatory Memorandum to the relevant legislation talks in general terms, nowhere can the applicant demonstrate that the Explanatory Memorandum addresses the first issue before the Court. The appropriate way to consider the ambit of s 75-10(3) is to look to the text itself, keeping in mind the ordinary principles of statutory construction. 34 In my view, the table in s 75-10(3), when referring to (relevantly here) the unit acquired, refers to the corresponding 'juridical concept or intangible legal interests' referred to in s 75-5(1), namely the 'stratum unit': see Sterling149 FCR at [21] (per Heerey, Dowsett and Conti JJ). The table specifically refers to 'the' unit. This is consistent with the approach in s 75-10(2) - the margin is normally to be calculated by the comparison of the consideration for supply and acquisition in respect of the unit 'in question'. The margin scheme envisages the comparison between the same units and, for that matter, between the same interests or leases. One would readily expect this to occur so that the calculation of the margin can be determined, putting aside the identification of a date, on the basis of the acquisition and supply of the same unit, interest or lease. 35 Therefore, the margin scheme can only apply to the same property (in the juridical sense) being acquired and subsequently sold. The specific wording of s 75-10(3), of the table in s 75-10(3) and of s 75-5(2), and then the specific reference back in these provisions to the supply of the stratum unit in s 75-5(1) supports this view. 36 The applicant, in an attempt to refute the approach that the acquired property should be identical to the supplied or sold property, referred to s 75-15, which provides: Subdivided land For the purposes of section 75-10, if the freehold interest, stratum unit or long-term lease you supply relates only to part of land or premises that you acquired, the consideration for your acquisition of that part is the corresponding proportion of the consideration for the land or premises that you acquired. 37 Section 75-15 has a specific function. In referring to 'land' and 'premises', this provision (unlike the general definition of 'land') is referring to the physical subdivision of the land or premises. The context in which these terms are used shows that they are not being used in the juridical sense. Section 75-15 is not dealing with the situation that has arisen here nor, in my view, does it assist in the determination of the issue here. Section 75-15 simply provides for a mechanism for calculation when part only of the physical land or premises that have been acquired is sold. 38 The applicant also relied upon some observations of Stone J in Sterling[2005] FCA 1166. In the course of her judgment, her Honour made the following comments: Although it is common to speak of the "stratum units" or "home units" being sold, technically it is the fee simple estate in the relevant stratum unit, being the lot(s) and common property, that is the subject matter of the sale. The fee simple is a proprietary interest in land and, as with all interests (as opposed to the subject of those interests), it is intangible. The point is made in the following extract from an essay by K Gray and SF Gray, "The Idea of Property in Law" in Land Law: Themes and Perspectives, Bright and Dewar eds, 1998 at p 15: '[T]he beginning of truth about property is the realization that property is not a thing but rather a relationship which one has with a thing. It is infinitely more accurate, therefore, to say that one has property in a thing than to declare that the thing is one's property. To claim property in a resource is, in effect, to assert a strategically important degree of control over that resource; and to conflate or confuse this relationship of control with the actual thing controlled may often prove to be an analytical error of some substance.' The attraction of the identity submission diminishes somewhat when its implications are considered. If that approach is correct, s 75-5(2) does not apply in this case because the taxable supplies acquired for the purpose of building the home units were of property that is not identical to the stratum units that were sold. It follows that the margin scheme could apply to any such development, even if the land subject to the development was acquired pursuant to a taxable supply. In other words, on the applicant's approach, a developer could buy the land, the construction materials and everything else required for the building of home units pursuant to a taxable supply and still pay GST only on the margin which, in general terms, is the difference between the costs and the sale price. It would be irrelevant whether the land was acquired before or after the commencement of the GST Act. That would not be the case, however, for a developer who bought individual lots for development as individual residences rather than for strata development. … The respondent submitted that the GST Actis not concerned with whether property in land is a matter of physical fact or abstract right but rather with supplies as business transactions "made in the course or furtherance of an enterprise that you carry on"; s 9-5. According to the respondent, the GST Actproceeds "on the basis that a supply of real property is a supply of tangible asset" not the disposal of an intangible interest or bundle of rights. Putting the matter another way, one can say that the applicant acquired the Camperdown land (technically the fee simple estate in the land) prior to the GST Act commencing and disposed of it after subdivision by registration of the Strata Plan and construction of the home units. The disposition was piecemeal as each stratum unit was sold but ultimately the whole of the land (or the entire interest) that was acquired was sold. The reference in s 75-15 (see [12] above) to the stratum unit supplied being a supply of "part of the land" acquired supports this practical analysis rather than a technical legal analysis. Had the latter approach been intended one might expect the section to refer to the part as being less than the whole of the interest in the land rather than to the land itself. This practical approach is consistent with the approach taken by Mason J in Moruben Gardens Pty Limited v Federal Commissioner of Taxation (1972) 46 ALJR 559 at 562. The respondent's approach is also supported by the role of the margin scheme and the context in which it operates as described above … . The explanation given in the EM … makes it abundantly clear not only that GST is only payable on value added after the GST Actcommenced on 1 July 2000 but also that the cost of improvements to the property made since that date could not be taken into account when calculating the original purchase price. The EM ignores the fact that improvements may not only have added to the value of the real property but become, in law, part of the real property. It is not the juridical nature of the improvements that is critical but the fact that they have been brought about pursuant to a taxable supply. The clear thrust of the GST Act, both in its wording and as explained in the EM, is that of a practical business tax imposed with respect to elements of commerce. As Senior Counsel for the respondent pointed out, although in economic terms the burden of the GST is borne by the ultimate consumer, in terms of "imposition, collection and administration" it is a tax on business. It is for the taxpayer to prepare business activity statements and pay the appropriate GST and in this context abstract propositions about interests in land and the acquisition of a brand new set of rights arising from registration of a strata plan are irrelevant. … [T]he applicant's submissions are not consistent with this purpose. For these reasons I do not accept the applicant's identity submission. In my view, it therefore follows that unless the margin on which the GST is payable is to be calculated without reference to the non-land costs the application of the margin scheme would be precluded by s 75-5(2) of the GST Act. 39 The reference to the 'identity submission' was a similar submission to the one addressed above, but her Honour was not specifically dealing with the operation of s 75-10(3) or s 75-10(2), but s 75-5(2) of the GST Act. Her Honour did not consider the specific wording of s 75-10(3) or s 75-10(2), or the factual scenario before me. In my view, the comments of Stone J do not lead in this proceeding to the applicant's construction of s 75-10(3) being accepted. 40 Whilst my above conclusion as to the proper interpretation to be given to s 75-10(3) disposes of this proceeding in favour of the respondent, it is appropriate to make some further observations on submissions made by the parties in respect of this first issue. 41 There were a number of submissions concerning the meaning to be given to the words 'held' and 'acquired' as found in the table in s 75-10(3). A number of cases were referred to, including Federal Commissioner of Taxation v Suttons Motors (Chullora) Wholesale Pty Ltd (Suttons Motors case) (1985) 157 CLR 277. I have not found these authorities to be of any assistance. The Court must look at these words in the context in which they appear, and consider the purpose for which they have been adopted. My view is that the terms 'acquired' and 'held' as used in s 75-10(3) do not have a different operation and refer to the same concept. I note that Item 1 in the table refers to the interest being acquired before 1 July 2000, whilst Item 3 refers to the supplier having held the unit since before 1 July 2000, which may denote a holding over a period of time. Nevertheless, the scope of the word 'acquire' is to be determined by the scope of what is meant by 'interest, unit or lease', and so is the word 'held'. If the term 'unit' is to include, say, an 'equitable interest', then one may readily understand that such acquisition or holding could arise on the entering into the contract of sale for such unit. A purchaser of land under an uncompleted contract may acquire the necessary equitable interest in the land commensurate with the purchaser's ability to protect the interest under the contract by obtaining specific performance. 42 This then leads to an analysis of the phrases 'freehold interest in land', 'stratum unit', and 'long-term lease'. Do these phrases refer to both equitable interests and legal interests, or only legal interests? 43 I do not treat the decision at first instance or in the Full Court in Sterlingas having decided this issue, despite some reference to legal interest. The issue sought to be agitated before me was not considered by either the Full Court or Stone J. 44 A freehold interest may be described as legal or equitable. The Explanatory Memorandum states that the margin scheme applies to the supplies of real property and premises that are held at 1 July 2000, but that statement is too wide when one considers the actual terms of the GST Act. Whilst the definition of 'real property' is wide, s 75-5(1) restricts the application of the margin scheme to specific sub-sets of real property, namely the juridical concepts of the three forms set out, 'freehold interest in land', 'stratum unit' and 'long-term lease'. 45 In my view, looking at the context of the phrases used, they refer only to legal interests. The phrases are normally employed, although not always, to refer to legal interests. The reference to stratum unit (as defined) would ordinarily be confined to a registrable interest created by statute. The three sub-sets are presumably referred to because each of the estates or interests have accepted and well known meanings, and are to be distinguished from each other. 46 The Explanatory Memorandum does suggest that the term acquisition is to be defined as broadly as possible, and the term acquisition as employed in the GST Act will include any form of acquisition. However, this does not necessarily inform one of the subject matter of what needs to be acquired, namely a legal or equitable interest. Further, I do not think that the definition of 'acquisition' in s 11-10 in referring to acquisitions of any interest in real property assists, because we are not concerned generally which 'real property', but only with the three specific sub-sets, with are separately described. The general definitions of 'acquisition' and 'real property' must be read in the context in which they are used, here in s 75-10(1), and do not in themselves inform as to the subject matter of the sub-sets. 47 It was argued by the applicant that to adopt this approach to the interpretation of the phrases freehold interest, stratum unit, and long-term lease, will lead to anomalies which Parliament would not likely have intended. 48 For example, if a person acquired land under a terms contract, possibly several years before 1 July 2000, but did not settle the contract until after 1 July 2000, this interpretation of s 75-10(3) would leave the purchaser ineligible to adopt the margin scheme. If a person acquired an equitable interest in land before 1 July 2000, which was sold after that date, that person would be ineligible for the margin scheme. If a person acquired a long term lease but did not register it, that person would be ineligible for the margin scheme. If a taxpayer acquired land under a contract before 1 July 2000 due for completion after 1 July 2000 and disposed of it by assigning the rights under the contract of sale to a third person after 1 July 2000, the taxpayer would not be able to adopt the margin scheme. 49 I do not accept that these are examples of anomalies, or give rise to a situation where it can be said the legislative purpose behind s 75-10(3) would be frustrated. To read the three sub-sets of property referred to in s 75-5(1) as being limited to legal estates or interests is not to restrict unreasonably the operation of the margin scheme, but to describe the limits to the concessions provided by Parliament. To my mind such limits are not unreasonable, and a practical business person would understand the need for clear parameters to be set by the legislature. The GST Act should be interpreted, as far as possible, in a way that brings certainty to ordinary business dealings. An interpretation focusing upon the passing of legal title brings certainty, and business people can readily identify that point in time. 50 Further, if the legislature had intended to extend the operation of the margin scheme to a range of interests other than legal interests, I would have expected the legislature to have been more explicit in its reference to the range of interests that are to be included in the scheme, such as a taxpayer's rights under a contract of purchase. 51 In view of my conclusion on the first issue raised in this proceeding, I do not need to consider the second issue, namely whether the Valuations the applicant relied upon to carry out the calculation complied with the requirements of s 75-10(3) of the GST Act. 52 The application should be dismissed. The parties agreed that irrespective of the outcome there would be no order as to costs. I certify that the preceding fifty-two (52) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice MIDDLETON.

Associate: Dated: 15 February 2008 Counsel for the Applicant: Mr M Flynn

Solicitor for the Applicant: Arnold Bloch Leibler

Counsel for the Respondent: Mr T Murphy SC, Mr S Sharpley

Solicitor for the Respondent: Australian Government Solicitor