The GST margin scheme

Did Fabio revive the ‘practical business tax’ concept?

In the years after the introduction of the Australian Goods and Services Tax (GST), a number of courts and tribunals used the term ‘practical business tax’ for describing how they went about interpreting its provisions. Such an approach took a view that it was a practical analysis, rather than a technical legal analysis that should prevail. However, once GST matters started making their way through to the High Court, this ‘practical analysis’ approach was mostly rejected in favour of a more technical one. The recent decision by the Administrative Appeals Tribunal in the matter of The Trustee for the Seabreeze Estate Unit Trust and Commissioner of Taxation has perhaps (just fleetingly) returned us to that sensible, practical approach.

Since its introduction, the GST margin scheme has been the subject of much contention between individual taxpayers, and also between taxpayers and the Commissioner. The 2005 amendments that replaced the vendor election with a written agreement between the parties in order for it to apply, has mostly removed the taxpayer v taxpayer disputes (which were mainly about a purchaser wanting an input tax credit). However, disputes between taxpayers and the Commissioner are still common and can feature issues such as eligibility, cost base value and apportionment. The Seabreeze Estate matter involved whether a taxable supply was eligible for the margin scheme.

A central feature of applying the margin scheme is working out whether the interest you are supplying has ever been the subject of a disqualifying supply (mainly one where GST was payable and calculated at 10%). The longer property is held often means that such a task can become harder where relevant evidence is not available to base decisions on. Added to the fact the margin scheme now has a number of look-through provisions that require a vendor to go back to an earlier transaction they were most likely never involved in, sometimes makes the task downright difficult (and some would say almost impossible).

In Seabreeze Estate, the taxpayer was required to determine if it could use the margin scheme on the sale of new townhouses that were built on land it had acquired ten years earlier. The question became whether its acquisition of the land had been under the margin scheme and without there being any direct evidence, whether other evidence could be used to support its position the margin scheme would apply.

It is here that ‘Fabio’ steps up to the plate (‘Fabio’ being a pseudonym for a former director of the Trustee), as it is his evidence of the circumstances surrounding the Trust’s acquisition of the land that helps to give the Tribunal the grounds to reach the conclusion the margin scheme could be applied. Fabio’s evidence included his recollection of the pertinent GST issues to do with the Trustee’s purchase of the land, which importantly, included that no GST was payable and there was also no need to register the Trustee for GST at the time to claim an input tax credit as a result.

The Fabio evidence complemented other evidence around the circumstances of the vendor, namely the supply produced a zero ‘margin’ (and therefore no GST payable) as well as that the vendor did not return any details of the sale in its Business Activity Statement (which would have been the case had it been a fully taxable supply). While acknowledging the GST choice to apply the margin scheme made by the vendor could not be known with certainty, the Trustee argued the Tribunal should infer that the margin scheme was used by the vendor on the sale of the land to it.

Not surprisingly, the Commissioner’s submissions centred on the onus of proof borne by the Trustee as it was unable to provide any direct evidence of the vendor’s choice to use the margin scheme. The Commissioner submitted it was up to the Trustee as the taxpayer to establish the facts on which it relies to displace the assessment issued by the Commissioner. The Commissioner’s position was there must be a body of evidence that might reasonably sustain a relevant finding of fact or permit the Tribunal to draw such an inference requested by the Trustee.

Based on the evidence before it, the Tribunal considered it was sufficient to support the drawing of strong inferences regarding the conduct of the vendor and the Trustee. As a result, the Tribunal held the vendor had used the margin scheme on its supply to the Trustee, and therefore the Trustee was able to use the margin scheme on its taxable supplies of the new townhouses.

The case reinforces the importance of obtaining proper documentation and direct evidence to support a taxpayer’s eligibility to apply the margin scheme. However, it also highlights that where such direct evidence is unavailable, there may be an option to draw on other supporting evidence to reach a conclusion as to the application of the margin scheme. The question now will be whether the Commissioner accepts such secondary evidence in his decision making process at assessment or objection stage, or whether he will hold his direct evidence approach and require taxpayers to ultimately seek relief at the Tribunal. Let’s hope it is a practical approach to such matters that prevails.