Properties that are held by companies or other structures, that are now being sold to fund retirement, may be subject to the margin scheme.
Where the margin scheme applies, GST is calculated as 1/11 of the difference between the sale price of the property and the consideration for the property (or its value as at 1 July 2000 – the date that GST was introduced).
If the supplier or developer of the property acquired it prior to 1 July 2000, they may use an ‘approved valuation’ of the land, as at 1 July 2000, to determine its value at that date (rather than using the price at which the supplier acquired the property before 1 July 2000).
For example, property acquired in 1995 for $100,000, with an approved valuation of $150,000 at 1 July 2000, and sold in 2011 for $225,000, will be subject to GST for 1/11 of the difference between $225,000 and $150,000.
A valuation is considered ‘approved’ if it meets the requirements set out by the Australian Tax Office (ATO). There have been a number of disputes concerning the margin scheme, commonly in relation to whether valuations obtained are ‘approved valuations’. The Federal Court recently considered what constituted an ‘approved valuation’ for the purposes of the margin scheme in the Brady King case.
In considering whether the valuation in the Brady Kind case was an ‘approved valuation’, the Federal Court received evidence from both the valuer, who had prepared the valuation, and an expert valuer, called as a witness by the ATO.
After considering the evidence, the court concluded that the valuation did not meet the requirements of an ‘approved valuation’ and as a result, the margin scheme did not apply. The court accepted that a valuation could not be ruled out as an ‘approved valuation’ solely due to a difference in opinion.
In the Brady King case, the failure to satisfy the requirements of an ‘approved valuation’ came about for several reasons. The property sold was not the same as the one acquired (an office building was converted into strata units). In addition, there was a failure to properly account for the profit margin and GST, the costs of interest on acquisition, transaction costs (such as stamp duty and legal costs) and holding costs (rates and land taxes).
As the Brady King case was subsequently overturned in a decision by a full Federal Court which held that the margin scheme did apply, it reveals that the application of the margin scheme needs to be carefully considered when being used.