The Federal Court has upheld an appeal against an AAT decision that the taxpayer had not provided an approved valuation when applying the margin scheme on the supply of subdivided lots.
The ‘margin scheme’ can be applied to taxable supplies of ‘real property’ by way of sale (or grant of a long term lease) – s75-5 of the GST Act. It is important to developers, as their typical end purchaser is a person who can’t claim an input tax credit for the full GST (and, thus, full GST just increases the price they have to pay). So, rather than paying GST on the whole price of the land supplied, GST is only charged on the ‘margin’ over the relevant cost of acquiring the land (s75-10(1)&(2)).
The ‘margin scheme’ has another important function, which was applicable here. For land the taxpayer acquired before the 1 July 2000 introduction of the GST, the margin can be calculated over the market value of the land, on 1 July 2000, under an ‘approved valuation’ (s75-10(3)(b)).
That was the case here. The taxpayer had acquired land before 1 July 2000 and wished to not only use the margin scheme, but do so by reference to the market value at 1 July 2000, under an ‘approved valuation’. The case law has been notoriously difficult for taxpayers trying to establish that their valuation was an approved valuation.
Section 75-35 allows the Commissioner to specify the requirements for an ‘approved valuation’ by legislative instrument, which he did (relevantly for this case) as MSV 2009/1. The relevant part of the requirements was para 4, which stated as follows:
(4) the valuation must be made in a manner that is not contrary to the professional standards recognised in Australia for the making of real property valuations;
The issue before the Court was, whether the valuation that the taxpayer had used was an ‘approved valuation’ (so that the margin could be calculated over this value) and that, in turn, depended on whether the valuation was ‘not contrary to the [relevant] professional standards’.
The taxpayer’s valuer had used, in 2009, a discounted cash flow methodology, to value the land, as at 1 July 2000.
- However, he did not work from the state of the land, as it was on 1 July 2000, with its then zoning and conditions, and then predict possible future cash inflows and outflows, to determine the likely net cash over a period of years.
- Rather, he used the actual outflows and inflows that had occurred since 2000 to the date of his valuation. In his calculations he assumed a 2% contingency expense and a 20% profit and risk allowance which he believed was an accepted rate of return on investment for developers.
The ATO took the view that a discounted cash flow methodology must be based on predicted cash flows and can never use, or almost never use, the actual cash flows from the date of valuation (perhaps fearing an advantage by using ‘hindsight’).
The AAT (Senior Member Fice) found for the Commissioner in [2017] AATA 2418, and did so, in such virulent fashion, as to increase (on its own motion) the 25% ‘lack of reasonable care’ penalty, to 50%, of the shortfall in tax, based on his finding of ‘reckless’ conduct.
On appeal, the Court agreed with the taxpayer’s contention that the AAT had erred in law in not taking into account the evidence of the ATO’s valuer that had conceded that the applicant’s valuation was in accordance with applicable professional standards. According to the Court, that opinion was a “decisive matter”.
The Court also commented that the AAT had seemingly misunderstood the legislative scheme. The issue for determination was whether the applicant’s valuation was made in a manner not contrary to professional standards. If it was, it would constitute an “approved valuation” made in accordance with the ATO’s requirements.
In contrast, the issue for determination was not whether the methodology was in accordance with the relevant standards, but whether it was ‘not contrary’ to those standards. The issue is not whether the valuation, on its merits, was worthless.
(Decleah Investments Pty Ltd and Prince Removal and Storage Pty Ltd as Trustees for the PRS Unit Trust v CofT [2018] FCA 717, Steward J, 22 May 2018.)
27.5.18
[FJM; LTN 99, 25/5/18; Tax Month May 2018]
Study questions (answers available)
- Was the taxpayer allowed to calculate its GST based on the margin over its value, as at 1 July 2000 (by virtue of that valuation being an ‘approved valuation’)?
- Does use of the ‘margin scheme’ help developers keep the price down for purchasers who can’t claim credits for full GST that might otherwise be paid?
- Did the taxpayer’s valuer use a discounted present value methodology, based on predicted cash flows?
- Was the valuer’s methodology ‘in accordance’ with the relevant professional standards?
- Was the ‘in accordance with’ test, the applicable one, under MSV 2009/1 (which set out the requirements for an ‘approved valuation’?
