The study presents the analysis of case between “Brady King Pty Ltd, the taxpayer” and the commissioner of tax with respect to the compliance of Goods and Service Tax valuation. The assignment covers the summary of the facts of selected case along with the legal issues involved between the taxpayer and the commissioner of Australian taxation system. Further, the assignment contains legal principles involved in the issue as well as the reasons for the breach of such issues along with the analysis on federal court’s decision.
The case involves a contract to acquire an office building valued at $9,250,000 during the year 2000. The taxpayer signed the contract on May 22 2000 that permitted the taxpayer to enter the building after the payment of deposit money for carrying out marketing and other specified works. It was noted that the contract was settled on October 25 2000 while the registry of transfer was done on November 9 2000. Further, the building was converted into branch units most of which were sold between the months April 2001 and November 2001. In order to determine the value of branch units as on July 1 2000, professional valuer determined the value while the taxpayer filed the returns of GST which was calculated on the margin amount as per the valuation $23,232,000 for sale of units.
However, the Australian Taxation Office (ATO) contended that the taxpayer, Brady King Pty Ltd was not eligible to apply the method of valuation for the purpose of margin scheme. In addition, the taxpayer was also not permitted to apply assessments issued for computing marginal GST that was determined from the difference of amount sales considerations of the units and proportionate consideration for the building acquisition made by taxpayer. Further, the Australian taxation Office or Commissioner of tax stated that the valuation of units determined by Brady King Pty Ltd had not been done as per the regulations of Goods and Services Tax Act, 1999. The Commissioner of tax contented that the valuation of units was not in compliance with the provisions of section 75- 10(3) under GST Act 1999.
Accordingly, the case incorporates the rulings of Goods and Services Tax Act, 1999 i.e. GSTR 2000/21, GSTR 2006/07 and GSTR 2006/08 along with the subject reference of margin scheme, freehold interest, method of sales consideration and method of valuation. In the given case, the professional valuer derived the valuation of the units using the freehold interest for the days specified in the purchasing contract between the taxpayer and the contractor. As Brady King Pty Ltd converted the office building into stratum units which were sold against the terms and conditions of contract plan.
Considering the method of valuation used by the taxpayer for valuing the units, the case was ensued to the Commissioner of Australian Taxation Office along with the compliance of regulations of Goods and Services Tax Act 1999. The Commissioner of Tax constituted that the taxpayer was not allowed to apply the method of valuation since it includes the valuation of several units and not the entire building. Moreover, application of valuation method on the margin amount was also not appropriate as per the regulations of section 75-10(3) under GST Act 1999 because consideration of units cannot be compared with the valuation of entire building (Crawford 2016). It has been stated that the margin used for units supply should be computed as per the regulation of GST Act based on the appropriate consideration amount of stratum units.
Rules: According to the provision of section 75-10(3) of the Goods and Service Act 1999, the GST amount applies on the taxable supplies of the real property as per the margin scheme. It provides that the valuation of GST is to be done on the taxable supply through one- eleventh part for the supply margin (Ato.gov.au 2016). As per section 75-11, subsection (3) the amount of margin supply has been referred as the amount of consideration by which the value of supply is excess to the amount of consideration for the property acquisition in terms of interest or the amount of lease. In order to work out the margin value, the method of valuation is required to be used as per the table provided under section 75-11, GST Act 1999 (Ato.gov.au 2016).
Further, clause 5 of section 75-10, GST Act 1999 provides that the determination of valuation is to be provided by the professional valuer and the valuation must be according to the fair market value of the completed office premises. Valuation should include the relevant cost to complete the half or unconstructed premises along with the margin of profit attributable for period after the date of valuation (Ato.gov.au 2016).
Breach of Rules: As the case was trialed by the Federal Court of Australia, the judge contended that the Brady King Pty Ltd was not allowed to apply the method of valuation because the stratum unit was not subsisted as on the valuation date i.e. July 1 2000. It had been noted that the taxpayer breached the provisions of section 75-10 GST Act 1999 since the property was acquired before July 1 2000 i.e. on 22 May 2000 as well as the conversion and sale of units made between the months April and November. However, as per the provisions of GST Act on valuation, the method of valuation is to be used only if the supplier acquires the property units on or before July 1 2000, then the valuation should be done as on July 1 2000 (Dodge 2016).
Moreover, the Federal Court of Australia contended that for the use of valuation method, it is essential to establish legal interest in the real property to be acquired at the date of valuation date i.e. July 1 2000. However, in the given case, taxpayer entered the contract to purchase the real property, which was partially completed and the acquisition merely established the equitable interest as on the valuation date July 1 2000. Additionally, provision of valuation for measuring the marginal value should be in compliance of method 1 stated in the GST Act 1999 as well as the “Margin Scheme Valuation Requirements 2000” (Bellman and ?hman 2016). It had been noticed that the taxpayer did not comply the regulations as the margin value was determined by considering unit consideration and proportionate value of the acquisition value of the entire property.
During the period of appeal, the parties argued that the contention of court during the trial period was not appropriate in terms of jurisdiction. It was held that the court did not consider the acquisition factor and supplies factor as per the terms of contract entered during May 2000. The Commissioner of tax contended that the taxpayer acquired the stratum units at the time of acquiring the real property since it the entire property was completed after the acquisition. Accordingly, it had been considered that the taxpayer breached the provisions of section 75-10(3) under Goods and Services Tax Act, 1999 for applying valuation method as well as considering the margin value for GST (Jones and Dunse 2015).
Analysis of decision of court
Considering the facts and issues of the given case, Commissioner of Australian Taxation System, it was stated that even the stratum units of the property was not formed until the period of July 1 2000. However, the taxpayer obtained the freehold interest in accordance with the ownership title for the entire property. Apart from that, the taxpayer acquired equitable interest in the real property at the date of valuation which was considered against the regulations under section 75-10(3) under GST Act 1999 (Emoh and Uzuanje 2015). The court contended that the registration of the freehold interest is not essential for the purpose of valuation method since it is sufficient to provide unconditional possession through a legal transferrable instrument.
The court agreed the contention of the Commissioner on non- entitlement on applicability of valuation method as per the provisions of 75-10(3) under GST Act. It had been stated that the date of settlement of the contract was created after July 1 2000 while the freehold interest of the real property also acquired after date of July 1 2000. Therefore, it can be analyzed that the provision of section 75-10 is applicable as per the valuation date for measuring the value of Goods and Service Tax. It is also essential to analyze the acquisition of freehold interest for the property as per the specified date i.e. July 1 2000 however, registration for the same can be done after the specified date (Tyvimaa, Gibler and Zahirovic-Herbert 2015). The Brady King Pty Ltd acquired the property on 22 May 2000 while the contract was settled on the date October 25 2000 and transfer was made on November 9 2000. Further, the property was sold on the during the period April and November 2001 therefore it had been analyzed that the property was acquired and held till July 2000 even though it was converted in the units.
It was observed that Brady King entered the contract before the specified date but the same was not completed for the purpose of purchasing the property. Accordingly, title of freehold interest could not be created on the real property as well as the creation of stratum units formed only sufficient interest for the division of the land and property. On the contrary, Australian Taxation Office did not consider the compliance of valuation of Goods and Services Tax stating that the transaction of acquiring the property or selling off the property occurs if the contract has been signed and accepted by the parties for the purpose (Enever, Isaac and Daley 2014). Hence, the contract of acquisition the real property by Brady King can be said to be completed since the taxpayer had signed the contract. Besides, the scheme of margin as per the regulations of Goods and Services Tax Act 1999 should be applicable to the difference of consideration value for the same property only in accordance with the acquisition cost or sales price. However, in the present case, it had been analyzed that the Brady King Pty Ltd considered different types of properties to determine the margin value i.e. acquired property value and sales consideration of stratum units.
In view of the implications of the regulations and its application on the valuation of property determined by the professional valuer, it was analyzed that the valuation of GST on the property value should be determined on the registered property as on the valuation date July 1 2000. On the contrary, section 75- 11 provides that, if the acquired interest property should be done before July 1 2000 but the supply of the property is after the relevant date, then the valuation of GST would be considered as GST- free as per sub- section 38-445 (Ato.gov.au 2016). Accordingly, it had been analyzed that the decision of the court was based on the reasoning for the property acquisition and related valuation based on the scheme of margin under GST Act (Yan, Lee and Mattavelli 2013). Further, while placing the decision on contention of Commissioner and Brady King, it had been analyzed that the court ignored the regulations of section 75 subsection 11 as well as 75-5(3) under the Act of Goods and Service Tax Act. Besides, it had been analyzed that the valuation done by the professional valuer was not appropriate and according to the provisions of GST Act and the same cannot be considered to invalidate the court’s decision. Similar to the case of “Central Equity Limited v Commissioner of Taxation” Australian Taxation Office contended that land valuation for supply or acquisition under a contract is to be considered after its completion. Considering the contravention of section 75- 11 GST Act 1999, the valuation of the property did not reflect the fair value as on July 1 2000. Therefore, in case of Brady King Pty Ltd, court’s decision can be said to be valid as the contract between the taxpayer and other party was incomplete until the valuation date.
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