Is the Option Fee Treated as Consideration When Calculating GST Under the Margin Scheme?

 

In The Trustee for the Whitby Trust v Commissioner of taxation [2017] AATA 343 (20 March 2017), the AAT has held that an option fee paid by a developer do not form part of the consideration for acquiring the property for the purposes of calculating GST under the margin scheme in accordance with Div 75 of the GST Act.

In The Trustee for the Whitby Trust v Commissioner of Taxation [2017] AATA 343 (20 March 2017), the AAT has held that an option fee paid by a developer did not form part of the consideration for acquiring the property for the purposes of calculating GST under the margin scheme in accordance with Div 75 of the GST Act. Facts The Trustee for the Whitby Trust (Whitby) entered into an option agreement to purchase a parcel of land for $28 million inclusive of a $2 million option fee. Whitby exercised the option, became the registered proprietor of the land and then proceeded to subdivide the land which was sold to third parties as residential lots. The issue in dispute was whether the $2 million option fee paid by Whitby formed part of the acquisition cost of the land in in applying the “margin scheme” rules in Division 75 of the GST Act. Whitby argued that the $2 million option fee was an acquisition cost so that the consideration for the land was $28 million. The Commissioner took the view that the consideration for the land was $26 million, being $28 million less the $2 million option fee, based on the reasoning that the option and sale were 2 separate taxable supplies. Decision The AAT agreed with the Commissioner’s reasoning that the option and sale were separate supplies and that the $2 million option fee should not form part of the acquisition cost of the land. The AAT held that under s9-17 of the GST Act, when there was an option fee paid, the consideration for the supply of a “freehold interest in land” was limited to the consideration paid in addition to any option fee. The AAT also considered provisions in the option deed which provided that the $2 million option fee “forms part of the Purchase Price” and held that such provisions did not circumvent the effect of s9-17 of the GST Act. What developers should take away Developers intending to use the margin scheme should ensure that the “margin” reported to the ATO complies with Div 75 of the GST Act, as clarified in the above case. In structuring an option agreement, Developers should be aware that the option fee will not be taken into account in calculating the acquisition cost of the land. option fee consideration GST margin scheme