On 9 May 2022 the Federal Court of Australia handed down judgment in the Landcom Case (Landcom v Commissioner of Taxation [2022] FCA 510).
The case deals with a number of interesting GST matters, and in this article we bring to your attention to one aspect of the case regarding GST and the margin scheme.
As Landcom is a government related entity this issue may be of particular relevance to Councils and other government related entities.
Background
The key central facts and issues as stated in the judgement were:
- Landcom was the registered proprietor of a freehold interest in a number of lots of land which it intended to sell.
- The lots were held by the State of New South Wales since before 1 July 2000, when the GST was introduced.
- The lots were previously owned by the New South Wales Land and Housing Corporation (LAHC).
- On 1 January 2002, the lots were transferred from LAHC to Landcom pursuant to an order of the Minister made under s 17 of the Landcom Act.
- A number of the lots had been used for the purpose of farming activities, although these activities had ceased a number of decades before Landcom became the owner of the lots. The lots have also been subject to other human interventions. Lot M, for example, had an aero club for remote control plane enthusiasts, including a runway and a clubhouse.
- Landcom were marketing the lots for sale.
- Landcom sought a private ruling concerning the application of Item 4 in the table in s 75-10(3) of the GST law, which applies if the following conditions apply:
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.
- If Item 4 applies then the margin for the supply is the amount by which the consideration for the supply exceeds the valuation.
- The relevant valuation time for Item 4 is the date of supply.
- Typically, therefore, where Item 4 applies, there will be no margin because the consideration paid on the date of supply would ordinarily be the market value such that there will not be any ‘margin’.
- The question of significance for Landcom was the operation of Div 75 in circumstances where four freehold interests in land were sold in one contract. For the purposes of the application of Div 75, was there one supply of all of the lots the subject of the Contract or single supplies of each of the lots?
- If the sale of the property was a single supply for Div 75 purposes, then any improvement on any one of the four lots would be sufficient to take the supply of all of the land outside Item 4, put another way, any improvement on one lot would ‘taint’ all of the lots.
- If the transaction involved separate supplies of individual freehold interests in land, then some of the lots might fall within Item 4 and some might not.
The Commissioner ruled that the sale of the property under the Contract was a single supply, and the sale of the freehold interest in each Lot was not a single supply.
Landcom’s Submission
At paragraph 187 of the judgement, Thawley J summarised Landcom’s principal submission as follows:
- Landcom’s principal submission was that s 75-5(1)(a) of the GST Act provides separate treatment for any taxable supply of real property made by selling a freehold interest in land. Even if it is possible for a supply of multiple freehold interests to be a single supply under the basic rules, s 75-5(1)(a) (contained in the special rules) focusses upon and treats separately each supply made by selling “a freehold interest in land”.
- This is evident from the balance of the provisions in Div 75 of the GST Act, including ss (2) and (3) of s 75-5. When introduced, s 75-5(2) referred to “the freehold interest”, being a reference to s 75-5(1). It now refers to the supplier’s acquisition of the “entire freehold interest”, a phrase introduced to deal with situations where the freehold title which was sold (the subject of s 75-5(1)(a)) arose from the amalgamation of two or more freehold titles (discussed further below). Section 75-5(3) addresses supplies which are “ineligible for the margin scheme” and again focusses attention on “the interest”, namely the supply of the freehold interest referred to in s 75-5(1)(a).
- Landcom submitted that s 75-10 also focusses on the supply of the freehold interest.
- It does not matter to the operation of the special rules that the supply of the particular freehold interest to which the provisions are directed might be part of a larger supply for the purposes of the basic rules.
From paragraph 188 the principal submission of the Commissioner is summarised as follows:
- The Commissioner submitted:
- if the sale of the four Lots is “the supply”, then the question whether there were improvements as at 1 July 2000 needs to be answered in the context of the “land or premises” which is the subject of that supply – namely, all four Lots together; and
- if the sale of each Lot constitutes a separate supply, then the question whether there were improvements as at 1 July 2000 needs to be answered in the context of each supply, meaning each separate Lot would need to be examined on a stand-alone basis to see if that Lot had improvements.
- The Commissioner submitted that “the supply” was the sale of all four Lots, namely the entirety of the freehold interests making up what is referred to as Property B2.
- The Commissioner submitted that the “substance and commercial reality” was that the four Lots were to be sold in a single transaction with an indivisible purchase price to one purchaser, as a development site for a new suburb.
The Decision – Margin Scheme
In summary, the Federal Court ruled that in the context of the Division 75 and applying the margin scheme, the sale of each freehold interest in land is a separate supply. Rather than paraphrase the basis of that conclusion, we have included below the relevant paragraphs:
194 The better construction of s 75-5(1)(a) is that it contains a special rule applicable where there has been a supply by selling a particular freehold interest in land and the supplier and recipient have agreed that the margin scheme is to apply. Where that has occurred, the margin is calculated by reference to the particular freehold interest which was sold. It applies whether or not that particular supply, made by selling a freehold interest in land, is part of a larger supply. This construction better accords with the ordinary meaning of the language employed in s 75-5(1) and Div 75 as a whole.
…
196 The reference to “the interest” in Item 4 is a reference to the particular freehold interest referred to in s 75-5(1)(a); Sterling Guardian Pty Ltd v Commissioner of Taxation [2006] FCAFC 12; (2006) 149 FCR 255 at [21] (Heerey, Dowsett and Conti JJ). Contrary to the Commissioner’s submission, the reference to “the land … in question” is a reference to the land to which the particular freehold interest relates, not to the “tangible land that has been supplied”.
197 It does not matter whether the contract of sale, namely Contract B2, is properly characterised for the purposes of s 9-5 of the GST Act as giving rise to a single “taxable supply” of four freehold interests in land or four taxable supplies of freehold interests in land. In either case, the margin scheme is to be applied to each freehold interest in land sold because, for the purposes of s 75-5(1)(a), there has been a supply of each freehold interest by selling each freehold interest in land. To the extent this should be regarded as modifying the “basic rules” (which must in any event be read in the context of the GST Act as a whole, including the “special rules”) so much is expressly contemplated by the statutory regime: s 2-15; see also: ss 9-99 and 37-1 of the GST Act. The GST Act contemplates that a single supply might be made up of several supplies attracting differing treatment – see, for example: s 9-80. (emphasis added)
Therefore, when considering whether there were improvements on the land under Item 4, each freehold interest is to be considered separately.
If there were no improvements on a freehold interest, Item 4 is capable of applying to that freehold interest meaning no GST would be payable as the margin for GST purposes would be ‘nil’.
As with any application of the margin scheme, the parties must agree in writing to apply the margin scheme to the sale of each eligible freehold interest.