March 23, 2017 by Noé Vicca - Principal
The Trustee for the Whitby Trust and Commissioner of Taxation (Taxation)  AATA 343 (20 March 2017)
The issue: The question as to the treatment of an option fee paid on the purchase of developable land and whether or not it formed part of the purchase price for the Margin Scheme will have many practitioners and their clients revisit accepted tax practices after the AAT decision in The Trustee for the Whitby Trust and Commissioner of Taxation (Taxation)  AATA 343 (20 March 2017).
The issue at question is whether the option fee of $2,000,000, paid by the owner of the development land under the Option Deed, forms part of the acquisition cost when determining the Taxpayer vendor’s application of the Margin Scheme to the sale of the subdivided residential lots. Noting the contract purchase price in this case was $28,000,000, inclusive of a non-refundable option fee of $2,000,000 payable in tranches.
A short synopsis of the facts
1. This application concerns the “margin scheme” rules in Division 75 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) which allow the calculation of the goods and services tax (GST) liability attaching to certain sales of real property to be based, not on the amount of consideration for the supply (as is the general liability rule), but, rather, on the difference between the consideration for the supply and the cost of its acquisition (i.e. on the “margin” on the sale). Consequently, use of the “margin scheme” rules will provide a lower GST cost to the supplier than would be the case under the general provisions of the GST Act.
2. On 7 December 2005, Whitby Land Company Pty Ltd, as trustee for the Whitby Trust (Whitby) entered into a Deed of Option with Ms Maria Jabado for an option to purchase Lot 22 on Diagram 45151, more commonly known as 293 Nicholson Road, Forrestdale, Western Australia (Lot 22), for a “Purchase Price” of $28,000,000, inclusive of a non-refundable option fee of $2,000,000 payable in tranches (Option Deed). The particulars of the Option Deed are discussed in detail later in these Reasons for Decision.
3. On 15 November 2007, Whitby exercised the call option in the Option Deed and, on 16 January 2008, it became the registered proprietor of Lot 22.
4. Whitby subsequently developed Lot 22, subdividing it into residential lots and selling the lots to third parties.
5. At issue is whether the option fee of $2,000,000, payable by Whitby to the Owner under the Option Deed, forms part of the acquisition cost of Lot 22 when determining Whitby’s “margin” on the sale of the subdivided residential lots to third parties in applying the “margin scheme” rules in Division 75 of the GST Act. The total amount of tax in dispute in this case is $5,414,019.
The Decision: Whitby’s position was that the option fee (of $2,000,000) should be included in the acquisition cost of Lot 22 when applying the “margin scheme”. The Commissioner disagreed contending that the acquisition cost of Lot 22 is $26,000,000 (being $28,000,000 purchase price less the $2,000,000 option fee). Broadly, the Commissioner contended this on the basis that, in this case, there are two separate taxable supplies under the GST Act. That is, the supply of an option (i.e. a bundle of rights) from the vendor Maria Jabado to Whitby for consideration of $2,000,000 and the supply of Lot 22 (the real property/land itself) to Whitby for consideration of $26,000,000.
The Administrative Appeals Tribunal agreed with the Commissioner’s construction of the taxation arrangement, albeit the intended legal terms to the contrary, and the Developer Whitby’s cost base for the Margin Scheme is $26,000,000 and not $28,000,000 per the purchase price on the contract. In short the position prefaced by the AAT was that the drafting of the option Deed and subsequent contract did not defeat the intention of the GST Act , i.e. Whitby, the taxpayer, could not “contract out” of the fact and law as determined in the GST Act.
Margin Scheme cost base $26,000,000 (not the purchase price of $28,00,000)
The case reference is as follows: http://www.austlii.edu.au/au/cases/cth/AATA/2017/343.html
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