When I was flatting at university, dessert was a mixture of whatever was sweet and mushy in the fridge, mixed up and covered in whipped cream. We called it "the blancmange". One is tempted to conclude that this is also an apt description of the current state of the GST regime in relation to property developments and the provision of non-monetary consideration.
In that context, there is much to contemplate in the most interesting decision of WYPF and FCT [2021] AATA 3050 (reported at 2021 WTB 36 [876]). Two of the key issues of the case concerned whether:
- the taxpayer had "overpaid" GST by not including certain items of non-monetary consideration in its margin scheme cost base; and
- whether Div 142 of the GST Act was enlivened to allow the Commissioner to refuse refunding that overpaid GST (which is an issue that could have much broader implications beyond the property industry).
Developer's GST margin scheme dispute on non-monetary consideration
Relevantly for present purposes, the taxpayer (a developer) acquired land from a government agency (the ACT's Suburban Land Agency), initially pursuant to a holding lease and ultimately by way of a 99-year crown leases (referred to as "Consequent Leases"). The Consequent Leases were only granted following the undertaking by the taxpayer of various development and subdivision works (the "Preparatory Works"). In addition, the contractual arrangements also required the taxpayer to complete the agreed residential development (the "Building Works") within 48 months of granting of the Consequent Leases.
Both the taxpayer and Commissioner agreed that the Preparatory Works were part of that non-monetary consideration for the acquisition of the land and so formed part of the taxpayer's "cost base" under the margin scheme, but the Commissioner did not accept that the Builder's Works were also non-monetary consideration. Notwithstanding the agreement that the Preparatory Works should be included in the margin scheme cost base, the taxpayer calculated its margin scheme GST by reference to the monetary consideration only. This was somewhat surprising, but was apparently due to uncertainty as to the correct value of those Preparatory Works at the time.
Key issues and reasoning
The first key issue concerned whether the taxpayer's contractual obligation to undertake the Builder's Works were part of the consideration provided to the SLA for the acquisition of the land. Those familiar with GSTR 2015/2 might reasonably conclude that the starting proposition is that such works do form part of that consideration. However, things are different in the ACT. Accordingly, rather than applying the principles in that ruling (which both parties accepted as not binding), it was necessary to consider whether the High Court's decision in the Commissioner of State Revenue (Victoria) v Lend Lease Development Pty Ltd required those Builder's Works to be properly characterised as consideration.
The AAT accepted that in Lend Lease certain of the works required to be undertaken pursuant to the taxpayer's contractual right to acquire land were part of the consideration for that acquisition. However, this was based on the High Court's conclusion that this obligation arose pursuant to documents that were part of a "single, integrated and indivisible" transaction, such that the taxpayer's acquisition of the land and the obligation to do those works were "interlocked".
While acknowledging the force of Lend Lease, the AAT rejected such a construction of the arrangements in the present case. Instead it focussed on the fact that the land was transferred (ie the Consequent Leases were granted) before the Builder's Works had to be undertaken. This was notwithstanding the AAT's acceptance that the obligation to complete the Builder's Works within 48 months was a condition of the granting of the Consequent Leases, the breach of which could lead to their forfeiture.
Put simply, the fact that the Builder's Works were not a condition precedent to the granting of the Consequent Leases seemed to be sufficient to break the nexus between those works and the acquisition of the land – in other words, the undertaking of those works was not consideration because they did not "move" the supply of the Consequent Leases.
The second key issue concerned the Commissioner's decision to apply Div 142 to refuse a refund of the overpaid GST due to the Preparatory Works not being included in the margin scheme cost base.
The AAT rightly recognised that the application of Div 142 depended on whether the taxpayer "passed on" GST when it sold the completed units. The AAT acknowledged that it would be rare for GST to be not passed on – accepting the High Court's observation in Avon Products that it is in the very nature of a sales tax to be passed on to consumers. Notwithstanding this, the AAT accepted the taxpayer's evidence that it sold the units for the price that the market would bear (ie the price was set based on the market, not the imposition or quantum of GST).
The AAT also seemed swayed by the fact that the taxpayer acted conservatively by calculating and returning GST without including any of the Preparatory Works in its margin scheme cost base, due to the uncertainty as to the correct value of those works. In that context, the AAT concluded that the taxpayer had discharged the burden of proof that it had not "passed on" the GST to its customers because it elected to return the overpaid GST (ie adopting a conservative position) pending resolution of its correct margin scheme cost base.
Commentary
The author considers it reasonably likely that one or both parties will pursue an appeal, in what is undoubtedly a relatively untested area of GST law. In that context, it would be both presumptuous and premature to issue definitive pronouncements about the correctness of the AAT's decision. Nonetheless, a number of observations readily follow the AAT's reasoning.
What is non-monetary consideration and how to do you value it?
In relation to the determination of whether the Building Works were non-monetary consideration it is somewhat perplexing that the Commissioner continues to maintain that the principles in GSTR 2015/2 are correct everywhere except the ACT. Does the distinctive Crown lease regime that operates in the ACT really alter the principles underlying the identification and characterisation of consideration that otherwise applies elsewhere in Australia?
In that context, is there really a distinction between obligations that are a condition precedent and a condition subsequent for the purposes of determining what is consideration? The AAT readily accepted that the Preparatory Works were consideration because they were a condition precedent of the granting of the Consequent Leases. But is there really a distinction between obligations that are a condition precedent compared to a those required as a condition subsequent?
To the author's thinking, there is a compelling argument that the contractual obligation to do the Builder's Works (whether before or after the transfer of land) is sufficient to create the necessary nexus. Particularly in the case where the failure to complete those Builder's Works in a specified (relatively short) time frame could lead to forfeiture of those Consequent Leases. At most, it is respectfully submitted that the distinction might (perhaps) justify a different approach to determining the value of that non-monetary consideration, not whether such consideration was provided in the first place. Of course, it is acknowledged that determining the correct value of the Builder's Works (or at least the obligation to do those works) is a topic best discussed very late at night at the next national GST conference…..
Division 142 – a shield or a sword?
When it was originally enacted in 2014, Div 142 was welcomed by many practitioners because it eliminated the risk of a GST registered purchaser being denied input tax credits if the supplier incorrectly charged (or overcharged) GST, by effectively deeming that GST to be payable (hence preserving the purchaser's input tax credit entitlement under s 11-25). Further, in many situations it saves the need to file amended BASs when the GST treatment of a transaction is subsequently determined to be incorrect, particularly where the parties are otherwise fully creditable.
However, the Commissioner's willingness to apply Div 142 to deny a refund of overpaid GST may give some taxpayers pause when deciding how to manage an uncertain GST position, particularly in a situation where the Commissioner does not otherwise dispute the legal position which gave rise to that overpayment.
It doesn't take a great leap of imagination to conclude that this may ultimately discourage some taxpayers from adopting a conservative position – specifically, if you have an uncertain liability, why pay the GST up front if you know the Commissioner will apply Div 142 to refuse a refund even if you are ultimately successful?
This obviously needs to be balanced against the risk of interest and penalties – and it is perhaps viewed in this context that the AAT's decision can be regarded as fair and pragmatic. In the author's view, if a taxpayer elects to return GST on a conservative basis pending resolution of uncertainty, in a market where prices are demonstrably set by the normal laws of supply and demand, it is wholly sensible that the taxpayer should not be inadvertently punished by adopting that position. Clearly this proposition has relevance well beyond the property industry. In this situation, acknowledging this is likely to be subject to further judicial consideration, it is the author's respectful view that in situations such as this Div 142 should only be a shield, never a sword!
Conclusion
It is evident from the above that there is still much uncertainty regarding the identification and quantification of non-monetary consideration, particularly in the property industry. There is also a need for clarification of the scope and intent of Div 142 in relation to the Commissioner's entitlement to withhold refunds of overpaid GST.
The AAT's decision in WYPF is an interesting and thought provoking step on the journey to resolve these complex areas of law which perhaps, just perhaps, may ultimately save us from the blancmange.
This was featured in Thomson Reuters Weekly Tax Bulletin 37 - 10/09/2021.
