Sterling Guardian Pty Ltd v Commissioner of Taxation

REASONS FOR JUDGMENT 1 On 8 November 1999 the appellant contracted to purchase land at Camperdown, New South Wales. Settlement of the contract occurred on 23 March 2000. 2 The appellant constructed on part of the land a residential unit development and obtained registration of a strata plan in respect of the units under the Strata Scheme (Freehold Development) Act 1973 (NSW). The appellant incurred expenditure of not less than $33,928,325.70 (exclusive of goods and services tax (GST)) as follows: Land cost 4,000,000.00 Stamp duty 216,104.70 Construction costs 23,097,982.00 Civil works 3,704,903.00 Authority Fees 57,677.00 Design consultants 1,318,070.00 Project management 1,533,562.00 $33,928,325.70 3 In respect of part of the expenditure incurred in construction the appellant received tax invoices for amounts totalling $26.4 million (i.e. inclusive of GST) and claimed input tax credits of not less than $2.4 million. 4 The estimated total proceeds of sale of the units was $39,361,704. 5 For the purposes of GST under A New Tax System (Goods and Services Tax) Act 1999 (Cth) (the Act) the appellant chose to apply the margin scheme under Div 75 of Pt 4-2 of Ch 4 of the Act. 6 In Div 75, s 75-5 provides (asterisks appearing in the Act indicate that the terms are defined in the Act's Dictionary at s 195-1): "75-5 Choosing to apply the margin scheme (1) 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. (2) However, you cannot choose to apply the *margin scheme if you acquired the freehold interest, *stratum unit or *long-term lease through a *taxable supply on which the GST was worked out without applying the margin scheme." 7 Section 75-10 relevantly provides: "(1) If a *taxable supply of *real property is under the *margin scheme, the amount of GST on the supply is 1/11 of the *margin for the supply. (2) 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." 8 Does the "consideration for (the appellant's) acquisition of the … unit" within the meaning of s 75-10(2) consist of, as the Commissioner contends, only the land cost of $4 million or, as the appellant contends, the land cost plus the construction costs? Stone J upheld the Commissioner's contention: Sterling Guardian Pty Limited v Commissioner of Taxation [2005] FCA 1166. 9 At first blush the appellant's case presents an attractive simplicity. The appellant had to spend money to buy the land and further money to construct the units. Why is not the total of those two forms of expenditure the consideration for the acquisition of its interest in the units? On further examination however, the appellant's contention is seen to be not conformable with the purpose, structure and text of the Act. 10 Division 75 is, as the Act states, one of a number of special rules contained in Ch 4. These are rules which, at the option of the taxpayer, may be applied to achieve a result, beneficial to the taxpayer, different from that which the general scheme of the Act would have achieved. 11 The central provisions of the Act involve the imposition of GST on "taxable supplies": s 7-1(1). A supply is any form of supply whatsoever s 9-10(1). Although in ordinary language land is neither a good nor a service, "supply" under the Act is defined to include a grant, assignment or surrender of real property: s 9-10(2)(d). 12 By s 9-5 a supply is taxable if, amongst other things, it is made for a consideration in the course of an "enterprise" (s 9-20) carried on by a person "registered or required to be registered" (Div 25). The amount of GST payable is 10 per cent of the value of the taxable supply: s 9-70. The value of a taxable supply is ten-elevenths of the price: s 9-75(1). 13 Persons who acquire anything are entitled to "input tax credits" on "creditable acquisitions": s 7-1(2). A creditable acquisition is, amongst other things, something acquired by means of a taxable supply by a person registered or required to be registered: s 11-5. The amount of the input tax credit for a creditable acquisition is an amount equal to the GST payable on the supply of the thing acquired: s 11-25. 14 The burden of GST is progressively passed down the chain of persons who make taxable supplies as for example, in the case of goods, from manufacturer to wholesaler to retailer. At each transaction the price includes GST, which the supplier pays to the Commissioner. The acquirer gets an input tax credit for the amount of GST included in the price which he has paid and includes GST in the price he charges the next person in the chain. Finally, the ultimate consumer pays a price which includes the GST paid by the previous person in the chain (in this example, the retailer). The ultimate consumer does not get any input tax credit because he is not registered or required to be registered. 15 In economic terms it may be correct to call the GST a consumption tax, because the effective burden falls on the ultimate consumer. But as a matter of legal analysis what is taxed, that is to say what generates the tax liability (and the obligations of recording and reporting), is not consumption but a particular form of transaction, namely supply; see generally H P Mercantile Pty Ltd v Commissioner of Taxation (2005) 143 FCR 553 at [10]-[15]. 16 However, the drafters of the Act recognised that this system might operate unfairly on some forms of business activity. Thus special rules were provided in Ch 4 of the Act. The special rule with which the present case is concerned was directed towards developers. Very commonly developers acquire land from private owners. Those owners are not liable for GST on the supply of land to the developer because the supply is not made in the course of furtherance of an enterprise and the owners are not registered or required to be registered under the Act. Because the owners are not liable for GST on their supply, application of the general scheme of the Act would mean that the developer, as acquirer, would not be entitled to any input tax credit on the acquisition of the land. The developer would have to pay GST on the whole value of the developed property that it supplied to the ultimate purchasers. (In the present case no input tax credits would have been available for another reason: the supply was before 1 July 2000.) Hence Div 75 provided an optional basis for taxpayers supplying real estate of a kind referred to in s 75-5(1)(a),(b) or (c). They can elect to pay GST on the "margin" as defined in s 75-10(2). Of course the margin scheme would not be appropriate for all land transactions. If A sells his factory to B, A would be liable to GST on the value of that supply and B would be entitled to an input tax credit. 17 A submission of the Commissioner shows how this system works in the present case and the effect of adopting the appellant's argument. The submission is reproduced as an annexure to her Honour's judgment. "The intended operation of the GST Act on the acquisition and supply of the stratum lots if a choice to apply the margin scheme is made is, on the (Commissioner's) submission and adopting the figures in the agreed statement of facts, as follows: Sale proceeds 39,361,704 Land costs (4,000,000) Margin 35,361,704 GST on margin 3,214,700 Taxable supplies to trust 26,400,000 Input tax credits (2,400,000) Net GST payable 814,700 The effect of this is that the trust is liable to GST on the value added to the land by the exertions of the (appellant) and its employees: Sale proceeds 39,361,704 Land costs (4,000,000) Input tax creditable costs 26,400,000) Profit plus non-credit costs 8,961,704 GST thereon (1/11) 814,700 The (appellant's) contention has the result that although it makes a profit from its dealing in (ie value is added to) the units, it claims a refund: it 'double dips' [by obtaining both] a reduction in the margin and its input tax credit claims: Sale proceeds 39,361,704 Land costs (4,000,000) Non-land costs (excl GST) (29,928,325) Margin 5,433,379 GST on margin 493,944 Taxable supplies to trust 26,400,000 Input tax credits (2,400,000) GST refund claimed (1,906,056) Moreover, if the appellant's contention were correct, the margin would be based on what was actually the consideration for the non-land supplies, not the notional ex-GST cost: Sale proceeds 39,361,704 Land costs (4,000,000) Non-land costs (incl GST) 32,328,325) Margin 3,033,379 GST on margin 275,762 Taxable supplies to trust 26,400,000 Input tax credits (2,400,000) GST refund claimed (2,124,238)" 18 The appellant sought to meet the double dipping criticism by arguing that "consideration" where it appears twice in s 75-10(2) should be read as meaning "GST-exclusive consideration". Courts have long been reluctant to read into an Act of Parliament words which are not there: Thompson v Goold & Co [1910] AC 409 at 420, Marshall v Watson (1972) 124 CLR 640 at 649. Both the ordinary meaning of "consideration" and the definitions in s 9-15 and s 195-1 mean the total payment, act or forbearance in connection with the supply of something. The term appearing alone is not, as the appellant argued, "neutral" as to whether the consideration is "GST-inclusive" or "GST-exclusive". The latter terms are not concepts found in the Act. The appellant's construction involves ignoring the consideration actually paid and calculating some notional portion of what was paid. 19 With the margin scheme the taxpayer still gets the benefit of input tax credits representing GST of which he has born the burden. The only thing additional is the value of the land acquired. As already mentioned, if it were not for the margin scheme the taxpayer would, in many cases, pay, on the supply he makes, GST on the whole value of the land. The purpose of Div 75 is to give the taxpayer the option of bringing into account the value of the land. 20 True it is that under the margin scheme, on the Commissioner's case, the taxpayer gets no benefit for untaxed items such as stamp duty and wages, but this would be so under the general provisions of the Act anyway. 21 The "interest, unit or lease" in s 75-10(2) refers back to the different forms of "real property" in s 75-5(1)(a),(b) and (c). The definition of "real property" in s 195-1 " includes: (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." Thus "real property", even in the non-exhaustive terms of the definition, is much wider than the ordinary concept of real property and, a fortiori, wider than the three forms in s 75-5(1) (note for example that "long-term lease" is a lease for at least 50 years: s 195-1). Therefore, relevantly for s 75-10(2), what is acquired is not "real property" in the broad s 195-1 sense, which would include bricks and mortar of structures that are affixed to the land, but a subset of that concept, namely the juridical concept or intangible legal interest of the three kinds indicated. 22 This reading is consistent with s 75-5(2). On the appellant's argument, the taxable supply of construction costs etc amounting to $26.4 million were supplied to it through a taxable supply (e.g. builder to appellant) on which GST of $2.4 million was worked out without applying the margin scheme. In that event, s 75-5 would prevent the appellant from choosing to apply the margin scheme to its supply to purchasers of units (see her Honour's judgment at [45]). 23 The appeal will be dismissed with costs. I certify that the preceding twenty- three (23) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justices Heerey, Dowsett & Conti.