The AAT has found a taxpayer company did not provide an approved valuation for the purposes of the GST Act when applying the margin scheme to calculate GST payable on the supply of subdivided lots.
The taxpayer and another company are trustees of the PRS Unit Trust. The other company acquired land for subdivision, and the taxpayer became a joint trustee of the Unit Trust on 1 July 2002. A local council endorsed the subdivision of the land.
The Tribunal said when the dispute came before it, the taxpayer was part way through a 14-stage development on the land. However, prior to making the application for review, valuation issues had already arisen.
The taxpayer lodged BASs reporting GST payable from the sale of 284 lots from the subdivision between 1 January 2004 and 31 March 2006.
- The taxpayer applied the margin scheme to those sales and calculated the GST payable per lot on a base value of $45,000 as at 1 July 2000 for the tax periods between 1 January 2004 and 30 September 2005.
- For sales settled in the tax periods between 1 October 2005 and 31 March 2006, the taxpayer used a value of $20,000 per lot to calculate its GST payable under the margin scheme.
In June 2006 the Australian Taxation Office (ATO) conducted an audit. The ATO determined that Decleah had not provided a complying approved valuation and therefore it used the consideration method, that is, the purchase price of the entire land, for the application of the margin scheme.
In the course of the audit, Decleah provided to the Commissioner three further valuations. They were as follows:
- (a) an undated valuation from Mr Tom Gibson of Elders Real Estate (the First Valuation) who assessed current market value of the property as at 10 December 2003 at $12,780,000;
- (b) a valuation dated 14 July 2006 from Mr Tom Gibson of Alex Scott & Staff who assessed the current market value for the property at 1 July 2002 at $10,750,000; and
- (c) a third valuation dated 22 September 2006 from Mr Tom Gibson valuing the property as at 1 July 2000 at $20,000,000.
(d) On 16 November 2009 Mr Gibson provided a fourth valuation which valued the land, as at 1 July 2000 at $34,000,000.
The Commissioner accepted none of these valuations and engaged his own consultant, who valued the land, as at 1 July 2000, at $8,155,000
After review, the Tribunal found that the taxpayer did not provide an approved valuation, for the purposes of the GST Act, when applying the margin scheme to calculate GST payable on the supply of subdivided lots between 1 October 2009 and 30 June 2012. The Tribunal said the flawed nature of a valuation methodology used by the taxpayer’s valuer “must necessarily result in a valuation that does not comply with either MSV 2005/3 or MSV 2009/1“. That is because, the Tribunal said, even if the discounted cash flow method met the standards recognised in Australia for making real property valuations, because he has misapplied the methodology, his valuation is not in accordance with professional standards and is worthless”.
The Tribunal found that the valuation of the land in question, as at 1 July 2000, was $8,155,000, as assessed by a valuation consultant engaged by the Commissioner. The Tribunal found the taxpayer had a significant tax shortfall as a consequence of lodging the BASs, throughout that period, based on a valuation which was not an approved valuation.
Although the Commissioner, in his objection decision, found that the base penalty rate should be 25%, because the taxpayer’s behaviour demonstrated a lack of reasonable care, the Tribunal found that the taxpayer’s behaviour was reckless and accordingly found that the correct base penalty rate was 50% of the tax shortfall.
The Tribunal concluded that
- the objection decision, made by the Commissioner, regarding the correct valuation to be used, in determining GST payable under the margin scheme, between 1 October 2009 and 30 June 2012, was incorrect. It set aside that decision and in substitution determined that the correct valuation for the purposes of the GST Act was $8,155,000 or, accepting there were 591 lots, $13,798.65 per lot.
- The Tribunal also set aside the Commissioner’s decision regarding the application of shortfall penalties at the rate of 25% and found that the correct rate of tax shortfall penalty was 50% for recklessness.
(Decleah Investments Pty Ltd and Anor as Trustee for the PRS Unit Trust and FCT [2017] AATA 2418 (AAT, Fice SM, File No: 2016/0200, 1 December 2017.)
This decision has now been appealed.
[Another Decleah case – 2013 TT Tax Month article; FJM; LTN 234, 6/12/17; Tax Month Dec 2017]
Extracts from Division 75 of the GST Act – relating to the ‘margin scheme’
Division 75 – Sale of freehold interests etc.
75-10 The amount of GST on taxable supplies
(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) Subject to subsection (3) and section 75-11, 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.
(3) Subject to section 75-11, if:
(a) the circumstances specified in an item in the second column of the table in this subsection apply to the supply; and
(b) an *approved valuation [per s75-35(2) – see below] of the freehold interest, *stratum unit or *long-term lease, as at the day specified in the corresponding item in the third column of the table, has been made;
the margin for the supply is the amount by which the *consideration for the supply exceeds that valuation of the interest, unit or lease.
| Use of valuations to work out margins | ||
| Item | When valuations may be used | Days when valuations are to be made |
| 1 | The supplier acquired the interest, unit or lease before 1 July 2000, and items 2, 3 and 4 do not apply. | 1 July 2000 |
| 2 | The supplier acquired the interest, unit or lease before 1 July 2000, but does not become *registered or *required to be registered until after 1 July 2000. | The date of effect of your registration, or the day on which you applied for registration (if it is earlier) |
| 2A | The supplier acquired the interest, unit or lease on or after 1 July 2000, but the supply to the supplier: (a) was *GST-free under subsection 38-445(1A); and (b) related to a supply before 1 July 2000, by way of lease, that would have been GST-free under section 38-450 had it been made on or after 1 July 2000. |
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 |
| 4 | The supplier is the Commonwealth, a State or a Territory and has held the interest, unit or lease since before 1 July 2000, and there were no improvements on the land or premises in question as at 1 July 2000. | The day on which the *taxable supply takes place |
(3A) If:
(a) the circumstances specified in item 4 in the second column of the table in subsection (3) apply to the supply; and
(b) there are improvements on the land or premises in question on the day on which the *taxable supply takes place;
the valuation is to be made as if there are no improvements on the land or premises on that day.
75-35 Approved valuations
(1) The Commissioner may, by legislative instrument [see MSV 2005/3 & MSV 2009/1 above], determine in writing requirements for making valuations for the purposes of this Division.
(2) A valuation made in accordance with those requirements is an approved valuation .