GST – WYPF v CofT – ACT developer could not deduct $77m of ‘Building Works’ under the margin scheme’ but did get a refund for a margin overstated by $29m of ‘Preparatory Works’

On 25 August 2021, the AAT decided a GST case: WYPF v CofT, in which it held that an ACT developer, of new residential premises, could not reduce the ‘margin’, on which GST is payable, under Div 75 of the GST Act, by $77m cost of its ‘Building Works’. The ATO accepted that both the $14m cost of the development site, and the $29m cost of works ‘preparatory’ to subdivision, could be included as the cost of ‘acquiring’ the 99 year ‘long-term’ leases, over the subdivided parcels of land. The refused to refund GST overpaid, by returning a margin reduced by only the $14m cost of the development site. This was under Division 142, designed to prevent taxpayers getting a windfall, by getting a refund of tax ‘passed on’ to the recipient of the lease, with the building on it. The AAT found, however, that this was one of the ‘rare’ cases where the GST had not been passed on and gave the taxpayer a refund.

See below, for further details.

[Tax Month – August 2021]

The taxpayer was a developer of residential units in the Australian Capital Territory (ACT), where land tenure is by 99 year long-term lease (not freehold). It paid $14m to ‘buy’ the development site; incurred another $29m in undertaking Preparatory Works, necessary for subdivision; and $77m for Building works, on the subdivided lots [see para 4 of the AAT’s reasons]. This was under the following transactions [22].

1. A contract of sale, under which the Developer paid $14m, for the grant of a 66 month ‘Holding Lease’.
2. The grant of the 66-month Holding Lease, under which the Developer performed the Preparatory Works, necessary to allow development site, to be ‘subdivided’ into multiple residential lots, which would be the subject of ‘Consequent Leases’, ultimately assigned to the ‘purchasers’ of the developed dwellings. The Developer incurred $29m in undertaking these ‘Preparatory Works’.
3. The grant of Consequent Leases to the Developer (over the subdivided parcels of land). The Developer could forfeit these Leases, if had not completed the Building Works, within 48 months of their grant.
4. A Deed of Agreement, providing that the Developer had to undertake the Building Works, at its cost. The cost of these works, was $77m.

The sale of residential premises is normally ‘input taxed’ – meaning there is no GST on the supply (and the inputs remain taxed, because there is are no credits for the GST embedded in the cost of the inputs). The sale of ‘new residential premises’ is ‘taxable’ (GST on the supply and inputs creditable). Developers can, however, avoid passing on GST on the cost of the land, if the supply of the land, to them, was not taxable. They can do this, by applying the ‘margin scheme’ in Div 75 of the GST Act. This means that they need only pay GST on 1/11th of the ‘margin’ (s75-10(1)).

The ‘margin’ is defined, in s75-10(2) as:

75-10(2)   …. amount by which the * consideration for the supply exceeds the consideration for your acquisition of the [freehold] interest, unit or [long-term] lease in question.

The ATO accepted that the $14m purchase price, and the $29m cost of Preparatory Works were included as costs, when calculating the ‘margin’ for GST purposes (viz: the cost that was ‘consideration for [its] acquisition of the [‘Consequential’/subdivided] lease’).

However, the Developer also claimed that the $77m cost of undertaking the ‘Building Works’ were relevantly ‘consideration for [its] acquisition of the [Consequential’/subdivided] leases’. This sum was nearly double the $14m & $29m amounts that the ATO had accepted as costs that reduced the ‘margin’ and would very significantly reduced the ‘margin’ and the GST thereon.

The Taxpayer took a ‘conservative’ position in claiming the the lower GST and reported a ‘margin’ based on only the $14m cost of the development lot, as a cost that reduced the margin. It then pursued its claim with the ATO, to ensure the ATO accepted its position. ‘Conservative’ is what counsel for the Taxpayer called it (‘sensible’ is what I’d call it, given it was a fairly contentious position to take).

The Building Costs were, the Taxpayer argued, part of the cost of acquiring the Consequent Leases (over the subdivided parcels of land), because of the interlocking nature of the obligations of the above transactions [28]. However, this failed [46].

• The Developer argued that it was either legally, or effectively [30], obliged to undertake the Building Works, in order to ‘acquire’ the Consequent Leases – pointing out, for instance, that it could forfeit these leases, if it hadn’t completed the Building Works, on each one, within 48 months of their grant to the Developer [29].
• It argued that these Building obligations ‘moved’ the grant of the ‘Consequent Leases’ in the same sense as “the various payments, development works and other undertakings, moved the conveyance of the development land to Lend Lease” [31] (see High Court case: Commissioner of State Revenue (Victoria) v Lend Lease Development Pty Ltd [2014] HCA 51). In that case state duty was paid on the conveyance, based on the higher ‘developed’ value of the land – because those development works had ‘moved’ the conveyance, to the developer –  in that case: Lend Lease.
•  This argument failed before the AAT, on the basis of the different statutory contexts (though, I could observe, that in both cases, more tax was the end result). It seems that the AAT had some doubts about this basis, as it said, it reached this conclusion with ‘some hesitation’ [35].
• The AAT went on to distinguish Lend Lease, on the basis that it involved ‘interlocked’ obligations that comprised a “‘single, integrated and indivisible’ transaction [that ] could and should [not] be divided between the transfers of the land and other matters or transactions”. The AAT held that this case was not the same [36]. It found that ‘Preparatory Works’ was a condition of the grant of the Consequent Leases, whereas the Building Works were not (even though the Consequent Leases could be forfeited, if the Building Works were not complete within 48 months of their issue) [37]. I’m not sure that I ‘buy’ the difference between a ‘condition precedent’ and a ‘condition subsequent’ being material here.
• The Taxpayer also relied on the Full Federal Court case of Department of Transport v Case [2010] FCAFC 84 [41]. This was the case where the Victorian Government contributed half the cost of taxi rides, for certain disabled persons – ‘because the provision of taxi services to a sector of the public who, because of their disabilities, were unable to access conventional public transport, was in pursuit of the Department’s statutory functions.’ [42] Under the scheme, half the government’s money went directly to the taxi company. The Developer argued, in the alternative, that it relevantly made supplies of the Building Works, to the ACT authority (just like the Taxi Companies did – even though the ride was supplied to the passenger). It’s contention was, that the ACT’s authority had a statutory mandate, to develop ACT land, which was the equivalent of the Victorian Governments objective of assisting disabled persons.
• The AAT rejected this, also, saying that the Federal Court had not said that a the supply of a thing, is necessarily to the Authority, or not necessarily, for the thing, that taxpayer has received from the Authority, just because the thing supplied, is consistent with its public objectives [43].

The cost of the Preparatory Works (29m) was not amongst the costs the Developer included, when calculating the ‘margin’ in its initial GST return (when it lodged its initial return, with a ‘conservatively’ low ‘margin’ figure – whilst it established whether the ATO accepted its arguments for accepting a figure reduced by each of the $29m cost of the Preparatory Works and the $77m cost of Building Works). The ATO conceded they it was proper that this $29m amount ought to have reduced the ‘margin’ but resisted paying a refund (of the overpaid GST) based on  Division 142 of the GST Act, which prevents a taxpayer, getting a windfall, from a GST refund, if the taxpayer has ‘passed on’ the cost of the GST, to the recipient of the supply. The AAT found a way to give the Developer a refund, for the overpaid GST [76], though it was a struggle.

• GST is an indirect tax – so called because they are paid by the supplier, but built into the price of the supply, and thus born by the recipient. [56]
• Sales Tax law had the same type of prohibition, on refunds of overpaid sales tax, if the supplier had ‘passed on’ the cost of the tax, to the recipient. Indeed, it was in respect of sales tax that the High Court, in Avon Downs v Commissioner of Taxation [2006] HCA 29 noted it would be rare to find a case, where the sales tax was not ‘passed on’. [57]
• The Developer argued that it had not passed on the cost of GST, because it priced its apartments, on the cost the market would bear [59]. This would be the same, though, for all developers of residential premises. The High Court picked up on this, in the Avon Downs case, holding that taxpayers must be presumed to intend to trade profitably and thus, to price their sales so as to include all costs – especially significant and expected costs, such as such as GST.
• Cutting through a lot of argument, however, the AAT found that the Developer had not relevantly ‘passed on’ the cost of the GST (under s142-10) because it did not expect the GST to be this high, and had only returned GST on a ‘conservatively’ lower amount, whilst it established, with the ATO, whether it accepted its arguments for the ‘margin’, and the GST consequently payable, to be reduced by each or both of the $29m cost of the Preparatory Works or the $77m cost of the Building Works. This was enough, for the AAT to conclude that the Developer had not passed on’ an amount that was not only ‘never payable’ (like any refunded amount) but which it believed, was not payable, also. [76]

This is a good refresher on the intricacies of the ‘margin scheme’, especially in a development context, complicated by the ACT long-term lease tenure for land. It is also a good refresher, on how difficult it can be to get a ‘refund’ of overpaid GST, which might change what you think is a ‘conservative’ approach to paying disputed GST. It might be better to claim the lower amount, then seek to establish your basis, with the ATO.

(WYPF and Commissioner of Taxation [2021] AATA 3050, AAT, Senior Member Olding, 25 Aug 2021)

[7.9.21]