Tribunal Rules in Favour of ATO in Developer Tax Stoush

A Canberra developer has lost its bid to overturn an order from the Australian Tax Office to pay millions in incorrectly calculated GST on a 360-apartment project.

The developer, under the pseudonym SFQV, was also required to pay additional GST.

The case highlights the importance of correctly calculating GST contributions for developers.

The project

While the project in question is not named in tribunal documents, the developer reportedly acquired land from the ACT Land Development agency under a 99-year lease for $5.4 million in 2014 as well as the obligation to build the agreed development of residential apartments on the site, valued about $103 million.

Planning approvals were granted initially in 2015, after which 180 apartments were developed as part of stage one, while stage two comprised another 180 apartments, commercial premises and parking for 140 cars. 

Construction began in 2016 and a certificate of occupancy was granted in 2017. Unit sales were completed in 2021, according to tribunal documents.

GST calculations

The developer applied the GST margin scheme concession to work out its GST liability on the sales.

According to Grant Thornton indirect tax partner Rhys Penning, calculating this margin scheme concession is challenging and often trips up developers of residential properties. 

“Ordinarily, GST is payable by the vendor on the full selling price, but where the margin scheme is applied you can take into account your cost of acquiring the land and only pay GST on selling price minus that cost,” Penning said. 

At the time of sale, the developer only recognised the $5.4 million cash amount paid to the land development agency for the Crown Lease in its margin scheme “cost base”.

▲ Indirect tax partner at Grant Thornton, Rhys Penning.

However, following advice from PwC, which was confirmed by the ATO in a private ruling, it should also have included the value of the “development services” it was obliged to perform, being additional “non-monetary consideration” in the form of the construction of the apartments.

The ATO agreed and the tribunal confirmed that GST had been overpaid by $10.3 million, as the developer had not included $103.1 million for those development services in its margin scheme calculations. 

“While it is clear and it was agreed that GST was overpaid, which is very common in margin scheme matters, the question that’s really important for developers is whether the ATO is obliged to refund that overpayment to you,” Penning said.

To refund or not to refund

A provision in the GST Act, Division 142, is intended to prevent developers achieving a windfall gain by obtaining a refund of GST from the ATO where in practice it has passed on the GST cost. 

“We know for the most part, the purchaser bears the economic cost of GST, so even though the vendor or supplier has the legal liability to pay the tax, it’s built into the price [of apartments],” Penning said. 

This was where SFQV fell down, as the tribunal considered whether the developer had passed on the GST to purchasers of the apartments, which would mean they had considered the correct amount of GST to pay. 

▲ The ATO’s new Canberra offices.

“The provision says that the developer can only be refunded overpaid GST in the event they have “passed on” the GST to the purchaser if they have also reimbursed the purchaser, the whole idea being that the developer should not get refunded if the cost was really borne by the purchaser,” Penning said. 

The tribunal found that the developer was aware how its GST was payable and should be calculated, and did not establish a set price for the apartments irrespective of GST. 

“The tribunal concluded they did pass it on in the relevant sense because GST was part of their thinking even though the ultimate price was influenced by the prevailing market conditions,” Penning said.

“GST was a clear consideration in the feasibility studies and investment decisions, including calculations of return on investment, and so the refund was denied because the tribunal found that the GST had been passed on to the purchasers.”

Margin scheme calculations

The case raises wider issues about the incorrect calculation of GST for developments. 

“It’s a frequent issue, especially with margin scheme calculations and we see these problems commonly, so it does put pressure on developers to ensure, especially in a residential context, that you get your GST calculations right,” Penning said.

“This is because as this case and others have shown, it’s going to be extraordinarily difficult to get the refund.”