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  • Issue 3 Property

    3.1 When will guidelines be issued to confirm what actions a taxpayer wishing to adopt the margin scheme should take to value the property as at 30 June 2000?

    Goods And Services Tax Ruling GSTR 2000/21External Link issued on 23 June 2000. It deals with the margin scheme for supplies of real property held prior to 1 July 2000.

    The ruling explains in particular:

    • in what circumstances the margin scheme may be used;
    • how valuations are to be made under the determinations made by the Commissioner;
    • what documentation is required to satisfy the determinations; and
    • when valuations are to be made under the GST Act.

    3.2 What will be the valuation requirements under Division 75?

    The valuations requirements are explained in GSTR 2000/21.

    The ruling explains at paragraph 21:

    The value that can be adopted for completed premises or land subdivisional projects is:

    • the market value of the property determined in writing by a professional valuer;
    • the value of the consideration provided by a purchaser in a contract for the sale and purchase of real property executed or exchanged prior to 1 July 2000 by parties dealing at arm's length; or
    • the value as determined by the State Government or Territory Government department as the unimproved value, the site value, or the capital value of the land.

    Documentation required

    The valuer should provide a signed certificate which specifies:

    1. a full description of the property being valued;
    2. the valuation date;
    3. the date the valuer provides the valuation to the supplier;
    4. the market value of the property including the valuation approach and the valuation calculation; and
    5. the qualifications of the valuer as outlined above.

    The ruling explains at paragraphs 29 and 30:

    The value that can be adopted for partly completed premises is:

    (a) value determined in writing by a professional valuer2 having regard to the market value of the completed land subdivision, or land and buildings;

    i. the cost to complete the project; and

    ii. the profit margin and holding costs that are attributable to the period on or after the valuation date.

    (b) the value determined by using the costs of completion method.

    3.3 Why is the valuation necessary under Division 75 different from the one that applies to section 19 of the Transition Act?

    Under Division 75 of the GST Act, the need for a valuation only arises where a freehold interest in land, a stratum unit, or a long term lease which is acquired or held before 1 July 2000 is granted or sold on or after that date. This valuation includes the land.

    In contrast, the need for a valuation under section 19 of the A New Tax System (Goods and Services Tax) Transition Act 1999 ('the Transition Act') arises where certain construction agreements span 1 July 2000. Section 19 of the Transition Act requires a valuation of work and materials permanently affixed to the construction site as at the start of 1 July 2000, or a later date as determined by the Commissioner. This valuation does not include the land and means the builder will be subject to GST only on the work and materials supplied and permanently affixed on the site on and after 1 July 2000.

    The following example from GSTR 2000/21External Link illustrates the different application of the two methods.

    Example

    Andrew owns land on which he is developing a block of units. On 15 March 2000, Andrew enters into an agreement with Bob, a builder, under which Bob carries out the construction work. Construction is in progress as at 1 July 2000. Bob may value, under section 19, the work and materials that have gone into the building as at 1 July 2000 and he is not liable for GST on that value.

    If Andrew chooses to apply the margin scheme in working out the GST on the subsequent sale of the units, Andrew values as at 1 July 2000 the freehold interest in the land and the building being constructed. Andrew may engage a professional valuer to determine the valuation, or choose the cost of completion method. In either event the value of the land itself is included.

    End of example

    3.4 Will it be necessary to individually value units in an incomplete apartment block? How do you value individual units that may not physically be commenced?

    Yes, it will be necessary to individually value units in an incomplete apartment block if their selling price is likely to vary. This issue is also dealt with in Goods and Services Tax ruling GSTR 2000/21External Link.

    The valuation methods for partly completed premises can be applied to individual units that may not physically be commenced.

    The following examples are taken from the ruling.

    Example 4

    Strata title units of equal value

    Townhouses Pty Ltd constructs a block of 4 units. The company is registered for GST as at 1 July 2000. At 30 June 2000, it incurs costs of $900,000 made up as follows:

     

    $

    Land

    250,000

    Local government application fees

    20,000

    Legal fees for acquisition

    10,000

    Design fees

    40,000

    Construction costs

    580,000

    Total

    900,000

    Total costs to completion are $1,200,000. Construction costs include labour, materials and subcontracting expenses which relate both to the units directly and to common property.

    The percentage of completion as at 1 July 2000 is calculated as 900,000/1,200,000, or 75%. The developer sells each of the residential units for $360,000. The value of each residential unit at 1 July 2000 is apportioned accordingly as 75% of $360,000, or $270,000.

    The GST payable under the margin scheme is calculated as follows:

    Margin = GST-inclusive sale price - value at 1 July 2000

    = $360,000 -$270,000
    = $90,000

    GST payable = 1/11 of $90,000

    Strata title units of differing value

    In some projects the selling price of the strata title units may vary over a wide range. This would usually happen when the project consists of a multi-storey development with penthouses selling at a substantial premium over units at lower levels.

    The valuation of each unit is that percentage completed applied to the sale price for each of the units to be valued.

    End of example

     

    Example 5

    Azure Apartments Pty Ltd is a project developer registered on 1 July 2000 for GST. It constructs a residential tower which comprises five storeys, including a mix of one-bedroom apartments, two-bedroom apartments and penthouses:

    Levels 1 and 2 10 one-bedroom apartments
    Levels 3 and 4 8 two-bedroom apartments
    Level 5 2 penthouses

    At 30 June 2000, work has not commenced on the upper two levels of the building, but the developer has incurred the following costs:

     

    $

    Land

    1,100,000

    Local government fees

    60,000

    Legal fees

    20,000

    Design fees

    80,000

    Construction costs

    1,740,000

    Total

    3,000,000

    On completion the developer finds that total project costs are $6,000,000. The percentage completion as at 1 July 2000 is calculated at 3,000,000/6,000,000, or 50%. The valuation of each apartment at 1 July 2000 is calculated as 50% of the sale price for the apartments.

    The valuations for each apartment using this method are:

    Apartment

    GST-inclusive sale price per unit

    Unit valuation

    Total unit valuation

    6 one-bdrm

    250,000

    125,000

    750,000

    4 one-bdrm

    240,000

    120,000

    480,000

    8 two-bdrm

    350,000

    175,000

    1,400,000

    Penthouse

    740,000

    370,000

    370,000

    Penthouse

    700,000

    350,000

    350,000

    Total

     

     

    3,350,000

     

    End of example

    3.5 It is common in the case of tenancies for an owner of premises to enter into an agreement to lease with a prospective tenant for example, because premises may not be in a state ready to be leased. A formal lease is then executed when the premises are available. The definition of supply in s.9-10 of the GST Act means that there are 2 supplies, one upon entering into the contract (the agreement to lease) and again when the underlying asset is delivered (the underlying lease). In effect, this will result in the same transaction being subject to GST twice. A similar issue arose in relation to the CGT regime in the Orica case.

    In minutes of the NTLG meeting on 10 June 1998 the ATO responded to this problem by stating that: "where contractual rights are the means by which some other asset is transferred, the capital gains tax provisions will apply only to the acquisition of the underlying asset." Will the ATO accept that the same approach should be followed in the case of agreements to lease and the subsequent formal lease agreement? That is, will they be treated as a single taxable supply at the point in time when the lease agreement is entered into? Otherwise, what is the value of the agreement to lease?

    It may be that this issue extends beyond agreements to lease.

    While there are two distinct supplies; being the entry into the agreement to lease and the lease respectively, the GST consequences of each transaction will depend on whether there is separate consideration for each supply. The fundamental question is "what supply is the consideration changing hands for".

    If there is no separate consideration for the agreement to lease, that transaction will not be a taxable supply. However, if the would-be lessee provides distinct consideration for an option or right to enter into a lease at a later date, the granting of the option or right will be a separate taxable supply to the making of the lease.

    3.6 For the purposes of the A New Tax System (Goods and Services Tax) Act 1999, is the sale of a commercial building which has a commercial lease in place (so that it is an enterprise) the sale of a going concern for the purposes of Subdivision 38-J?

    Yes, the owner of a commercial building which has a commercial lease in place can make the supply of a going concern provided that the recipient of the supply is not also the lessee at the time of the sale. All of the things that are necessary for the continued operation of a leasing enterprise includes the supply of the property and the covenants under the lease.

    For the purposes of subdivision 38-J of the GST Act, the supply of a going concern will be GST-free if the supply is under an arrangement under which all of the things that are necessary for the continued operation of the enterprise are supplied, the identified enterprise is carried on until the day of the supply and the conditions imposed by subsection 38-325(1) are satisfied.

    Subsection 38-325(1) of the GST Act requires that the supply is for consideration, the recipient is registered or required to be registered and the supplier and the recipient have agreed in writing that the supply is of a going concern.

    The Draft Goods and Services Tax Ruling GSTR 2001/D2 explains when the 'supply of a going concern' is GST-free for the purposes of the Subdivision.

    3.7 Is the sale of land and/or a new building by a builder previously acquired as zoned residential land an input taxed supply?

    ATO position

    In certain circumstances the sale of land and/or a new building is a taxable supply and Division 40 of the GST Act will not apply.

    Under the GST Act a sale of real property is input taxed, but only to the extent that the property is residential premises to be used predominantly for residential accommodation. However such a sale is not input taxed to the extent that the residential premises are:

    a. commercial residential premises; or

    b. new residential premises, other than those used for residential accommodation before 2 December 1998.

    The definition of 'residential premises' in section 195-1 of the GST Act refers to land or a building that is occupied as a residence or is intended and capable of being occupied as a residence. The definition includes a floating home.

    For the purposes of the definition of 'residential premises', paragraph 25 of GSTR 2000/20 requires that land must have a building affixed to it and that the building must have the physical characteristics that enable it to be occupied or be capable of occupation as a residence. Vacant land of itself can never have sufficient physical characteristics to mark it out as being able to be or intended to be occupied as a residence. This means that land that has no buildings attached to it does not fall into the category of 'residential premises'. Therefore, vacant land is subject to GST under the basic rules unless:

    • supplied as part of a going concern (section 38-235);
    • farm land supplied for farming or subdivided (Subdivision 38-0)
    • supplied by a vendor who is not registered or required to be registered;
    • not part of an enterprise.

    Accordingly the sale of zoned residential land (on or after 1 July 2000) is a taxable supply by the builder. The land is not capable of being occupied as a residence regardless of the fact that it is zoned residential land.

    GSTR 2000/21 at paragraph 14 provides the following table illustrating how GST is applied to some supplies of real property by way of sale:

    Type of supply

    GST consequences

    Sale of residential properties that are not new, for example existing residential properties.

    Input taxed

    Sale of newly constructed residential property in the course or furtherance of an enterprise (irrespective of whether bought by an owner occupier or as an investment property). Note 1

    Taxable supply

    Sale of commercial or industrial property.

    Taxable supply

    Sale of vacant land by an individual not in the course or furtherance of an enterprise.

    Not a taxable supply

    Sale of vacant land by a developer in the course of the developer's enterprise

    Taxable supply

    Sale of real property as part of a going concern, when the recipient is registered or required to be registered. However, both parties must agree in writing that the supply is a going concern.

    GST-free

    Sale of farming land to a recipient who intends to carry on farming.

    GST-free

    Note 1: (a) other than those used for residential accommodation before 2 December 1998; or
    (b) the premises have only been used for making input taxed supplies pursuant to paragraph 40-35(1)(a) for the period of at least five years since they first became residential premises, were last substantially renovated or were last built.

    3.8 Can an entity use the cost to completion method to value land on hand as at 1 July 2000?

    ATO position

    There are two ATO determinations regarding the margin scheme and the valuation of real property on hand as at 1 July 2000. These determinations relate to completed and partly completed premises and projects. They are attached to Goods and Services Tax Ruling GSTR 2000/21.

    • For completed premises and projects there are three methods of valuation:
      • engage a professional valuer to determine the market value; or
      • adopt the sale price in a contract of sale and purchase of real property executed or exchanged prior to 1 July 2000 by parties dealing at arm's length; or
      • adopt the most recent value as determined by the State Government or Territory Government department as the unimproved value, site value or capital value of the real property for rating or taxing purposes obtained prior to 1 July 2000.
       
    • For partly completed premises and projects there are two methods of valuation:
      • engage a professional valuer to determine the value having regard to a number of factors; or
      • an entity can calculate the value as a percentage of the sales price under the costs of completion method if the sale occurs on or before 1 July 2005.
       

    Value determined using the costs of completion method

    This method requires an entity to calculate the costs incurred prior to the valuation date as a percentage of the total costs of completion. The valuation under Division 75 is this percentage applied to the consideration for the supply of the property.

    The costs of completion method is an approximate method used to determine the value as at 1 July 2000. Accordingly this method can only be used if the sale of the freehold interest, stratum unit or long-term lease occurs on or before 1 July 2005. If the value is determined as a percentage of the sale price, it is considered that a sale occurring after this date will not reflect the value as at 1 July 2000 using this method. For sales occurring after 1 July 2005, the supplier will need a valuation by a professional valuer if the supplier chooses to calculate the GST payable using the margin scheme.

    What types of costs are included using the costs of completion method?

    This method requires an entity to calculate the costs incurred prior to the valuation date as a percentage of the total costs of completion.

    Costs incurred are calculated on the basis of absorption costing and the following costs are required to be included in this method:

    a. land at cost;

    b. direct construction costs;

    c. internal infrastructure costs;

    d. external infrastructure costs directly related to the property.

    The internal infrastructure costs are those associated with developing the infrastructure land. That is the part of the unsubdivided land that does not ultimately form part of the subdivided lots (eg streets or specially dedicated areas).

    External infrastructure costs may arise where a developer is required to undertake infrastructure works outside the subdivision area. Those works may include upgrading of roads, sewerage treatment works, water and sewerage mains, and drainage schemes. Alternatively, a developer may be required to make financial contributions towards such works.

    Costs which an entity should not include are:

    • administrative costs that are not directly related to the finished premises or subdivided land; and
    • holding costs, such as rates and taxes, or interest on borrowing's to acquire or develop the property.

    If an entity is in the business of developing and subdividing undeveloped land, the approach to determining costs is the same as for valuing land as trading stock at cost for income tax purposes. The same approach applies to the construction of stratum units or commercial premises.

    3.9 New residential premises

    Contributed by TPA

    Definition of new residential premises has been amended (Sec 40-75). Residential premises which have been used solely as residential premises for at least 5 years will not be considered new residential premises. For newly created premises, when do the premises first become residential premises?

    ATO response

    Section 195-1 of the GST Act defines residential premises as land or a building that:

    • is occupied as a residence; or
    • is intended to be occupied, and is capable of being occupied, as a residence...

    Therefore newly created premises become residential premises, when they are capable of being occupied as a residence. To be residential premises as defined, a place need only provide sleeping accommodation and the basic facilities for daily living, even if for a short term.

    Paragraphs 28 and 29 of GSTR 2000/20External Link provide some information on sleeping accommodation and facilities for human habitation.

    28. The definition states that residential premises must be capable of occupation as a residence. To be a residence in this sense, a place normally should have the facilities required for day to day living. These characteristics are inherent in the fabrication of the structure itself. The premises should have such things as areas for sleeping, eating and bathing, but it is not necessary that these things be arranged in a similar manner to a conventional house or apartment.

    29. Premises that lack these basic features, may not be either residential premises or commercial residential premises. Supplies of buildings or other structures without these characteristics are subject to GST under the basic rules, regardless of whether or not they are or have been at one time, occupied as some form of residence.

    3.10 Zoning and GSTR 2000/20

    What is the significance of zoning in determining whether premises are 'residential premises'?

    Municipal or Shire zoning is mentioned in connection with residential premises in GSTR 2000/20 at paragraph 36. It states:

    For premises to be residential, it must be legal for them to be used for accommodation. As the concepts of 'residential' are given a broad treatment under GST, it is only necessary that the land on which premises stand is zoned by the Council or Shire in a way that contemplates human habitation or accommodation.

    To be understood, this paragraph must be read in the context in which it appears. Zoning is one of the considerations that can be used when establishing whether or not premises are residential premises or commercial residential premises. The zoning requirement for these is the same; it is only necessary that the zoning contemplates human habitation, regardless of whether it is for a long or short term, or whether other industrial or commercial uses are also permitted.

    In itself, the zoning of the land on which premises stand is a minor consideration in determining whether premises are residential. The principal considerations are the physical characteristics of the premises, their purpose and their use. The land or building must have certain physical characteristics that bring it within the definition of residential premises:

    Residential premises means land or a building that:

    a. is occupied as a residence; or

    b. intended to be occupied, and is capable of being occupied, as a residence and includes a floating home.

    Zoning alone cannot alter the identity of land sufficiently for it to meet this definition. For example, vacant land that is zoned for residential purposes is not intended to be, or capable of being occupied as a residence in such a state and is not, therefore residential premises.

    In support of this, the Explanatory Memorandum to the Indirect Tax and Consequential Amendments Bill 1999 at clauses 1.167 - 1.168 states in relation to the definition of residential premises:

    1.167 Item 157 repeals the definition of residential premises and substitutes a new definition. The new definition requires that for land to be considered residential premises it must be intended to be occupied and capable of being occupied, as a residence. That is, it is permissible to use the land for residential purposes and the land has some facilities ordinarily associated with residence (ie water and sewerage).

    1.168 The amendment ensures that sales of vacant residential land will not be input taxed under section 40-65. The supply of land is not input taxed where it is:

    • vacant residential land;
    • commercial land; or
    • new residential premises.

    Read together, these paragraphs indicate that the definition of residential premises was not intended to apply to vacant residential land, that is, land without buildings. It is the buildings that give land the character of residential premises, rather than the zoning.

    3.11 Properties acquired after 1 July 2000

    Can the formula in GSTR2000/21 (paragraph 75) be used to work out the GST-inclusive price of a property acquired after 1 July 2000 by GST registered entities?

    If not, then what basis do taxpayers use to determine the tax inclusive price? The above-mentioned ruling only covers property held prior to 1 July 2000.

    ATO position

    If you are registered or required to be registered and you make a taxable supply of real property, you must pay GST on that supply. However, under section 75-5 of the GST Act, if you make a taxable supply of real property by:

    a. selling a freehold interest in land; or

    b. selling a stratum unit; or

    c. granting or selling a long-term lease

    you may choose to apply the margin scheme in working out the amount of GST payable on the supply.

    The margin scheme cannot be used if the freehold interest, stratum unit or long-term lease was acquired by you through a taxable supply on which the GST was calculated without applying the margin scheme. This requirement also applies to the situation where the interest, unit or long-term lease is acquired on or after 1 July 2000.

    If the interest, unit, or long-term lease is acquired on or after 1 July 2000 then the margin is the difference between the consideration for the supply and the consideration for the acquisition of the interest, unit, or long-term lease in question (subsection 75-10(2)).

    Can the formula in paragraph 75 of GSTR 2000/21 be used for a post 1 July 2000 acquisition?

    The answer: The formula can be used by replacing V (the 1 July valuation), with C (the cost of acquisition). This only applies for post 1 July 2000 acquisitions.

    For example:

    I = (11E-C)/10

    where:

    I = GST-inclusive price
    E = GST-exclusive price
    C = the consideration for your post 1 July 2000 acquisition of the interest, unit or lease in question

    GST-exclusive price = 110,000
    C = 100,000

    I =

    (11 x 110,000) - 100,000
    10

    = 111,000

    The Margin = 111,000 - 100,000

    = 11,000

    The GST payable = 1/11 of 11,000
    = 1,000

    The GST-exclusive price is 110,000

    3.12 Sale of Property to an Associate under the Margin Scheme

    Issue

    Where a property has been sold pursuant to the margin scheme and section 75 is applied, does the Tax Office believe that section 72 can have any effect if the consideration paid by the associate is below what might be a market value?

    Example

    Company A owns and develops land which it purchased for, or was valued at 1 July 2000, at $200,000. This land is sold to an associate for $100,000. The sale is genuine and there is no intention to avoid or minimise GST.

    For stamp duty purposes the State Revenue Office values the property at market value of $250,000.

    Does the Tax Office believe that Division 72 can be applied in these circumstances given that Section 75 has been correctly applied and that the correct amount of consideration has been used in calculating the GST?

    Would the Tax Office seek to use Division 72 in these circumstances?

    End of example

    ATO response

    Division 72 will have no effect on the calculation of GST payable on a supply of a freehold interest in land where the margin scheme (Division 75) has been applied.

    Reasons for Decision

    Division 75 allows a supplier to use the margin scheme when they make a taxable supply of real property by selling a freehold interest in land (section 75-5).

    The amount of GST on the supply is one eleventh (1/11th) of the margin. The margin for the supply is the amount by which the consideration for the supply exceeds the consideration for your acquisition of the interest (subsection 75-10(2)).

    Where the supplier acquired the interest before 1 July 2000, the margin for the supply is the amount by which the consideration for the supply exceeds the valuation of the interest as at 1 July 2000 (subsection 75-10(3)).

    Consideration for a supply or acquisition means any consideration, within the meaning given by section 9-15, in connection with the supply or acquisition (section 195-1).

    Division 72 ensures that supplies and acquisitions between associates without consideration are brought within the GST system, and that supplies to associates for inadequate consideration are properly valued for GST purposes.

    Subsection 72-70 (1) provides that if a supply to your associate for consideration that is less than the GST-inclusive market value is a taxable supply, its value is the GST-exclusive market value of the supply. Section 9-70 provides that the amount of GST payable on a taxable supply will be 10% of the value of the taxable supply.

    However, if the supplier chooses to apply the margin scheme to the supply, the amount of GST payable on the taxable supply will be 10% of the margin rather than the value of the taxable supply. Because the margin is based on the consideration received for the supply rather than the value of the supply, Division 72 will have no effect on the calculation of GST where the margin scheme is applied.

    The margin for the supply will be the amount by which consideration for the supply of the property ($100,000) exceeds the consideration for the acquisition of the property (subsection 75-10(2)) or the valuation of the interest as at 1 July 2000 ($200,000) (subsection 75-10(3)). The margin in these circumstances and the amount of GST payable on this supply will be nil.

    Should a registered associate choose to sell the interest and apply the margin scheme, the consideration for the acquisition on which the margin will be calculated will be the $100,000 paid.

    Where real property is supplied to an associate for no consideration, the margin scheme is not available as there is no 'supply of real property by selling a freehold interest in land; or selling a stratum unit.'

    This answer assumes the transaction is one to which Division 165 has no application.

    3.13 Fixtures and fittings

    In the light of the Tax Office response to issue 106, the following further issues are raised:

    Issue

    1) What is the GST position when a landlord rents furnished residential premises? Is the landlord required to apportion the rent between the occupancy of the real property and the right to use the furnished items? If the value of the rent from the use of the furnished items exceeds $50,000 per annum, is the landlord required to register for GST and remit GST on this supply?

    2) Where new residential premises are sold with certain chattels included (for example, a furniture package and/or moveable dishwasher), will there need to be an apportionment made between the 'real property' element of the sale (which can be subject to the margin scheme) and the 'chattels' element (which may not)?

    ATO response

    1. The answer will depend on whether the rental of the furnished premises consists of separate supplies of the residential premises and the furnished items (chattels not fixtures), or is a single composite supply or a single mixed supply (as referred to in Goods and Services Tax Ruling GSTR 2001/8). The analysis is essentially a question of fact and degree in each case, involving an examination of all the circumstances in which the transaction takes place.

    Unless the supply of the premises can be separately identified from the supply of the furnished items, we will treat the rental of furnished residential premises as a single supply. It is then a question of whether it is a mixed supply or a composite supply according to the guidelines set out in GSTR 2001/8.

    Apportionment of the rent will only be necessary where the rental of the furnished premises consists of separate supplies of residential premises and other things, or is a mixed supply. This is to enable the application of the correct GST treatment to the transaction in question.

    Under Division 23 of the GST Act, a landlord will need to register for GST if the landlord is carrying on an enterprise and the landlord's 'annual turnover' meets the 'registration turnover threshold' (currently $50,000, or $100,000 for a non-profit body). To the extent that the provision of furnished items in residential premises is a separate supply or a component of a mixed supply, the value of that supply or component must be included in determining whether the landlord's 'annual turnover' (as defined in Division 188 of the GST Act) meets the registration turnover threshold.

    2. Yes. We consider the sale of new residential premises with chattels included to be a transaction that consists of separate supplies of the new residential premises and the chattels. This is because, as a matter of commercial reality, the sale of the real property and the chattels will be separately identifiable in the sale contract and from the circumstances surrounding the transaction. Otherwise, the purchaser buying the property with the chattels will not be able to ensure the legal transfer of the chattels from the vendor given that the chattels, by their nature, are not affixed to the real property.

    3.14 Sale of going concern - debtors

    Issue

    1. Are debts not yet collected by a cash basis GST registered taxpayer GST-free if they are sold as part of a going concern?

    For example, A Co sells their business to B Co under a sale which is GST-free under S.38-325. A Co has debtors of $11,000 which it has not yet collected, and as such no GST has been remitted on this amount. Under the contract, A Co receives $11,000 for the debtors. Is this amount GST-free under S.38-325?

    2. When B Co collects the debtors, is this an input taxed financial supply? Is there an adjustment to B Co under Division 135?

    ATO response

    Are debts not yet collected by a cash basis GST registered taxpayer GST-free if they are sold as part of a going concern?

    When the supplier/vendor sells their enterprise and assigns the debtors to the purchaser, this supply and consideration for the supply are separate to the original supply to the debtor. As the debtors account is part of the operation of the enterprise, when supplied by the supplier to the purchaser, it will be a GST-free supply under section 38-325.

    Is there an adjustment to B Co under Division 135?

    Division 135 requires the purchaser to make increasing adjustments if the supplies that the purchaser intends to make will be input taxed. If no supplies will be input taxed supplies, then Division 135 will not apply.

    When B Co collects from the debtors, is this an input taxed financial supply?

    No, it is not a financial supply when B collects the debts from the debtors.

    Assume A had made taxable supplies of $11,000 to his debtors and was accounting for GST on a cash basis. A sells the debtors to B as a part of the sale of the going concern (as mentioned in 1 above). The sale of those debtors is not a financial supply made by A to B. It is a part of the sale of the going concern and so has GST-free status (for the reasons given above).

    When the debtors make their payments to B, A would attribute GST equal to 1/11th of those payments - as required by section 29-5(2). That is, the GST payable for the taxable supplies made by A to the debtors is attributed to the tax period in which the consideration is received in respect of those supplies. Consideration in respect of the supplies need not necessarily be received by the supplier (A). Note that notification of payments to A would be part of the contractual arrangements between A and B.

    However, in a similar situation, but one not involving a sale of a going concern, there may be a financial supply being made by A. Assume that A sold A's debtors to a debt factor for say $9,500, and that that sale was not a part of a sale of a going concern. In this case, A would have made a financial supply to the debt factor. But again, when the debtors made their payments to the debt factor, A would attribute GST equal to 1/11th of those payments.

    For more details on debt factoring, please refer to the Banking & Finance FAQs.

    3.15 Margin schemes, Division 75 and fractional interests

    Issue

    Was settlement adjustments included within the margin scheme fact sheet?

    ATO response

    Settlement adjustments are discussed in the GST fact sheets on the margin scheme under the heading 'Do you take into account adjustments on property settlements when you calculate the consideration for your acquisition and supply?'

    The fact sheets are titled 'How to use the margin scheme to work out GST when you sell real property that you acquired before 1 July 2000' and 'How does the margin scheme apply to supplies of real property acquired on or after 1 July 2000?'

    3.16 Margin scheme and valuations

    Issue

    Can the ATO please provide an update on the progress of its reconsideration of the margin scheme and valuations?

    It is understood that the ATO will not finalise audits on the margin scheme where the following three situations exist:

    Full option to tax used but taxpayer becomes aware of margin scheme and wants to now use it

    No valuation received before the end of the tax period in which the property settles

    Margin scheme chosen but the valuation is defective in some way

    Where any of the above happens the current addendum to GSTR 2000/21 arguably says that the margin scheme (if available) can only be based on historical purchase price. This is contrary to the GST policy of only taxing the value added since 1 July 2000.

    It is considered that the ATO should be able to allow a taxpayer, who has chosen the margin scheme but used the wrong method statement, to obtain a complying valuation and use Division 19 to adjust the GST payable.

    Certainly an adjustment should be available if the valuer has made an arithmetic error. The problem is that Division 19 arguably does not apply and there needs to be an amendment to the determinations issued under GSTR 2000/21 or an amendment to Division 75.

    Further to this it appears that the ATO are suggesting that they can substitute their complying valuation and assess on that basis. If the taxpayer had a complying valuation, then if the taxpayer relies on GSTR 2000/21 the ATO cannot reassess or if they do, will need to remit any additional GST under section 37 of the TAA. This is because the taxpayer has used a registered valuer and that is all the ruling requires.

    ATO response

    Please note that a number of these questions have been clarified by the fact sheets produced and available on the ATO website. ('How to use the margin scheme to work out GST when you sell real property that you acquired before 1 July 2000' and 'How does the margin scheme apply to supplies of real property acquired on or after 1 July 2000?'). The following answers provide a summary of the views contained in the fact sheets.

    1. Taxpayer has paid GST in full but has become aware of the margin scheme and now wants to use it (to make an adjustment)?

    You will pay GST of one-eleventh of the whole of the selling price. You have to choose to apply the margin scheme at or before the making of the supply of real property. You cannot retrospectively choose to apply the margin scheme. For example, where you sell real property under a standard land contract, you must have chosen to apply the margin scheme, at or before the date of settlement. You must keep a record containing the particulars of your choice to apply the margin scheme.

    Where you, whether through genuine mistake, misunderstanding or otherwise, did not choose the margin scheme at or before making the supply, you cannot do so after the supply has been made. The purchasers of real property need to have certainty about their GST entitlements. The purchaser of real property acquired under the margin scheme is not entitled to claim input tax credits. Alternatively, if the margin scheme is not applied, the purchaser will not be able to choose to apply the margin scheme to a later sale of the real property. The question of whether or not the margin scheme is applied is also a factor which may be important to the purchaser when establishing the purchase price of the property. If you were allowed to choose to use the margin scheme retrospectively, that could affect the purchaser who may already have claimed an input tax credit.

    2. No valuation received before the end of the tax period in which the property is settled?

    You can calculate the margin based on a valuation obtained at any time until the due date for lodgment of the activity statement for the tax period in which the GST on the supply is attributable. This will be referred to as the 'BAS due date'. Provided you chose to apply the margin scheme at or before the time you supplied real property, you can change your mind about how you calculate the margin (consideration or valuation) as often as you like until the BAS due date but not after that. You can also change your mind as to which valuation you rely on (if you have obtained more than one) at any time before the BAS due date but not afterwards.

    You are entitled to choose the calculation or valuation that will result in you paying the least amount of GST. As a general rule, if you have chosen to apply a valuation method to calculate the margin, you must have undertaken a valuation that satisfies the requirements of the Commissioner's determination (a 'valid valuation') by the due date for lodgment of your BAS for the relevant tax period to which GST on the supply is attributed.

    Where you have chosen to apply the margin scheme but a valid valuation was not acquired before the due date for lodgment of your BAS, there are two possibilities:

    • we will allow you to calculate the margin based on a value determined using any of the 'valuation methods' set out in the Commissioner's determinations which pertains to your circumstances, or
    • you may choose to use the 'consideration method' to calculate the margin.

    If this results in more GST being payable, administrative penalties and the general interest charge are likely to apply.

    If you have a valid valuation by the BAS due date for the relevant tax period and calculate the margin based on that valuation, you cannot change your calculation of GST after that date. After that time, you cannot change:

    • to another valuation
    • to a different method of valuation, or
    • to a calculation based on consideration.

    If you had more than one valid valuation at the BAS due date, for example, you have a valid valuation from a professional valuer and one calculated using the costs of completion method, you need to choose one of these by the BAS due date. After that time, you cannot change that choice.

    3. Margin scheme is chosen by the time of supply but the valuation is defective in some way?

    There are four possibilities.

    • We will allow you to fix the actual valuation you used so that it conforms to all our requirements.

    For example - you may have used a valuation determined by a professional valuer where the valuation fails to take into account relevant, comparable sales. Those sales should be taken into account, and you can use the new valuation amount to calculate the margin on which GST is payable.

    In other instances you may have used the costs of completion method and have included certain costs that are not allowed under that method. You may recalculate the valuation by excluding those costs and use that amount to calculate the margin on which GST is payable.

    Or, you may have used a value determined on or after 1 July 2000 as shown in a rates or land tax assessment. In this case, you may recalculate the margin on which GST is payable using a value for rating or tax purposes made before 1 July 2000.

    • If you have another valid valuation that was done by the BAS due date that you chose not to use you may substitute that valid valuation to recalculate the margin and GST payable.
    • You may recalculate the margin on which GST is payable on a supply of completed premises using a value for rating or tax purposes made before 1 July 2000, or
    • You may choose to recalculate the margin and the GST using the 'consideration method'.

    4. You consider that where the taxpayer has chosen the margin scheme and used the wrong 'method statement' then the taxpayer should be allowed to obtain a complying valuation. It does not matter what method they used originally. Therefore where a registered valuation is obtained for partly completed premises and it is found to be defective, you consider that the client should have the capacity to use the 'cost of completion' method in lieu of obtaining another valid valuation from a registered valuer.

    The margin scheme involves making a choice to use it at or before the time of supply. The Taxation Administration Act 1953 Section 70(1) indicates that if you make a taxable supply, taxable importation, creditable acquisition or creditable importation; or make a supply that is GST-free or input taxed, you must keep a record and explain all transactions and other acts you engage in that are relevant to the supply and retain this record for 5 years. S 70(1AAA) goes on to state that you must keep records containing particulars of that calculation and the basis on which the calculation was made for 5 years. As explained in item 2 above, once you make a choice relating to the method which you will apply to valuing partly completed premises, you may then only correct these calculations to achieve a valid valuation and not change to another method altogether. Allowing a change in methods could mean that a taxpayer may without consideration for any time limit, swap 'backwards and forwards' from one method to the other and create a considerable amount of uncertainty. The time for making a choice to use the margin scheme and undertaking the valuation to calculate the margin is at the time of supply and when the BAS is completed respectively. Once these choices are made, they cannot be changed at a later date. To do so would create considerable uncertainty for taxpayers, purchasers and the Tax Office.

    5. You further state that the ATO are suggesting that they can substitute their complying valuation and assess on that basis. You consider that if the taxpayer has a complying valuation, and the taxpayer relies on GSTR 2000/21, the ATO cannot reassess or if they do, will need to remit any additional GST under section 37 of the TAA. All the ruling requires is that a registered valuer is used by the taxpayer?

    The ATO cannot substitute a valuation that complies with the Legislation for one supplied by the taxpayer that does not comply. If the ATO determines that the taxpayer's valuation does not comply, and the taxpayer clearly chose to use the margin scheme, then the taxpayer can choose to obtain a fresh valuation that does comply with the Commissioners requirements. If however the taxpayer decides that they do not wish to obtain a fresh valuation, then the Commissioner will revert to s75-10(2) when assessing GST payable in terms of the Addendum to GSTR 2000/21, where the margin for the supply is the amount by which the consideration for the supply exceeds the consideration for the acquisition of the interest.

    When a taxpayer obtains a valuation from a professional valuer for use when calculating the margin when choosing to use the margin scheme, the valuation needs to comply with the requirements of the Commissioners Determinations (1) and (2) attached to GSTR 2000/21. If it is determined that the valuations do not comply, then the taxpayer has some options to obtain a valuation that does comply in line with the fact sheet and as discussed in items 2 and 3 above.

    3.17 Residential premises and commercial residential premises

    Issue

    Can the ATO please provide guidance on the GST treatment in the following scenario? A property owning company wishes to lease 2 floors of a multi-storey building to another company. The lessee company will use the premises to provide hostel -style accommodation to both secondary and tertiary students. The secondary student accommodation will be in connection with a school.

    The issue concerns the lease payments to be made to the property owning entity by the lessee ie are these payments:

    a. input taxed (view 1)

    b. taxable supplies (view 2), or

    c. partly taxable and partly input taxed (view 3).

    According to the ATO in GSTR 2000/20, it is the physical characteristics of premises that mark them out as both 'residential premises' and 'residential premises to be used predominantly for residential accommodation'. Further, according to the ATO, the premises need only provide sleeping accommodation and the basic facilities for daily living, even if for a short time, to be considered 'residential premises used predominantly for residential accommodation'. This approach to the construction of the meaning of 'residential premises' may have the effect of treating the whole of the lease payments to the property owning company as being input taxed.

    An alternative view is that in determining the question of whether particular premises are 'residential premises to be used predominantly for residential accommodation', one should have regard to the actual use to which the premises are put by the recipient of a particular supply. In this case this could mean that the lease of the 2 floors would be a taxable supply because the recipient lessee would not intend to occupy the floors itself for residential purposes.

    A third view is that the lease payments would be taxable to the extent that the floors will be used to provide accommodation to students in connection with a school (ie secondary students). This is because, to this extent the premises will be commercial residential premises ( see the definition of 'commercial residential premises' in section 195-1 of the GST Act) and therefore not subject to input taxation under section 40-35 of the Act. To the extent that the building will be used to provide accommodation to students in connection with an education that is not a school, the supplies under the lease will be input taxed. This is because, to this extent, the premises will be residential premises that are not commercial residential premises (in accordance with the proviso at the end of definition of 'commercial residential premises' in section 195-1). The problem in this case appears to stem from the fact that in determining whether premises come within paragraph (b) or the proviso to the definition of 'commercial residential premises' in section 195-1 an inquiry must be made as to the actual use of the premises.

    This is in conflict with the approach adopted by the Commissioner in relation to characterising 'residential premises'. In the above case, if the proportion of secondary and tertiary students using the premises changes from month to month (eg in one month 60% of the students are secondary students, while in the next month, 60% are tertiary students) then the GST treatment of the rental payments may vary from one month to the next depending on the institution which students are attending (a fact which the property owning company will not know).

    It is submitted that, in the above scenario, the Commissioner's approach to the interpretation of the expression 'residential premises' in GSTR 2000/20 is flawed and that the premises should be treated as a taxable supply to the lessee.

    ATO response

    Characterisation of the supply of two floors of a building from property owner to lessee

    To determine the GST treatment of this supply we have to look at what property owner is supplying to lessee.

    The supply made by property owner will be a taxable supply unless the supply is input taxed or GST-free.

    The supply is not GST-free as it does not come within any of the provisions contained in Division 38. The supply will be input taxed if section 40-35 applies (this is the only relevant section within Division 40).

    The supply will be input taxed under section 40-35 if it is a supply by way of lease of residential premises other than commercial residential premises.

    Whether the supply of the two floors is a supply of residential premises will depend on the physical characteristics of the units located on the floors supplied. It is assumed that the units are capable of being occupied as a residence.

    Is the supply of units by property owner to lessee the supply of 'commercial residential premises'?

    When the premises are supplied by property owner through entry into the lease with lessee, property owner is not supplying commercial residential premises. The premises that property owner is supplying, the units, do not have the characteristics of commercial residential premises. It is lessee who puts the premises together with the management services and then offers accommodation to students. Property owner does not use the premises to supply accommodation in connection with a school nor does property owner supply a hostel or anything similar to a hostel as it does not hold the premises out to the public or provide services (para 83 GSTR 2000/20).

    The supplies made by lessee are not relevant in characterising the supply made by property owner.

    On the assumption that the units contain the facilities referred to in paragraph 26 of GSTR 2000/20, the supply made by property owner will be an input taxed supply.

    If the part of the building that property owner leases does not contain the ability for day to day living that enable it to be occupied as a residence, it will not be residential premises. By this we mean, if the property owner leases empty floors of a commercial office building, the supply will not be input taxed. In this case the floors leased will not have the physical characteristics of residential premises.

    3.18 Margin scheme press release

    Issue

    I refer to the concession announced by the Commissioner in a press release dated 22nd May 2003 in relation to the margin scheme. One crucial point may have been missed. If the valuation is invalid and it is for partly completed premises then the option should also exist to use the cost of completion method. While this will not involve using a valuer it still would be a choice that was open to the taxpayer at the time they supplied the property(ies) and has no mischief. In fact, the cost to complete after the event will be based on actual expenditure and thus not be open to the vagaries of what was going to be the sale price (given that at the time the new calculation was made the sale price would be known).

    This could be fixed by reading the word 'obtain' in the second dot point below as being 'substitute' and add 'or calculation' after valuation.

    Extract from the Commissioner's 22nd May press release on the margin scheme:

    'Mr Carmody said businesses that had elected to use the margin scheme but not used a valid valuation would now be given the choice of:

    • Substituting another existing valid valuation if one is available (for example, an existing ratings value of the property);
    • Obtaining a new valid valuation (for example, by engaging the services of a professional valuer); or
    • Defaulting to calculating the margin as the difference between the selling price and the original purchase price

    "Under this approach, no penalty will apply in cases of genuine misunderstandings or honest mistakes," Mr Carmody said.'

    ATO response

    The Commissioner's press release was followed by the release of the fact sheets entitled 'How to use the margin scheme to work out GST when you sell real property that you acquired before 1 July 2000' and 'How does the margin scheme apply to supplies of real property acquired on or after 1 July 2000?'

    The issue of substitution of valuations for property acquired before 1 July 2000 is covered in the fact sheet after the heading 'Can you change to another valuation amount or another valuation method?'

    3.19 GST Transition Act and the acquisition of land

    Issue

    Under Division 75, when a supplier of real property chooses to apply the margin scheme, the supplier may use a valuation method if the supplier acquired the real property before 1 July 2000 - (refer subsection 75-10(3)). Is a supplier of real property able to use the valuation method in subsection 75-10(3) in the following example?

    Example

    Fred is a GST registered builder. On 7 June 2000 Fred signed a contract to purchase a vacant block of land on vendor's terms. On the signing of the contract Fred paid a deposit of $1,000. The vendor granted Fred full and free immediate access to the land so that Fred could build a house on the land. On 8 June 2000, Fred commenced building a house on the land. By 30 June 2000 construction of the house was more than 50% complete.

    Settlement of the contract under which Fred purchased the land occurred on 22 September 2000.

    Fred chooses to apply the margin scheme on the sale of the property. Is he able to use a valuation method under S.75-10(3)?

    End of example

    NTAA view

    Fred will be able to use a valuation method under S.75-10(3) if he acquired the vacant land before 1 July 2000. Pursuant to subsection 6(3) of the GST Transition Act 1999 'a supply or acquisition of real property is made when the property is made available to the recipient'. In the above example, the property has been made available to Fred prior to 1 July 2000 because the vendor has granted Fred full and free access to the land to construct a house. Fred has full use and enjoyment of the property prior to 1 July 2000 and therefore it has been 'made available' to him prior to 1 July 2000 for the purposes of subsection 6(3) of the GST Transition Act 1999. Accordingly Fred acquired the land prior to 1 July 2000.

    As a result, Fred is able to use a valuation method under subsection 75-10(3) when he sells the completed house.

    ATO response

    Fred is unable to use a valuation method under subsection 75-10(3), as Fred did not own the freehold interest as at 1 July 2000.

    Subsection 75-5(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that where a vendor makes a taxable supply of real property by:

    • selling a freehold interest in land; or
    • selling a stratum unit; or
    • granting or selling a long term lease;

    the vendor may choose to apply the margin scheme in working out the amount of GST on the supply.

    You have to choose to apply the margin scheme at or before the making of the supply of real property. You cannot retrospectively choose to apply the margin scheme.

    The ATO position on when real property is 'made available' is set out in the Building and Construction Issues Log at 15.4.14:

    Under section 6(3) of the A New Tax System (Goods and Services Tax Transition) Act 1999 (Transition Act), the time of the supply of real property is when it is made available to the recipient. Real property takes the same meaning in the Transition Act as that given in the GST Act. Section 195-1 of the GST Act defines real property to include:

    (a) any interest in or right over land,

    (b) a personal right to call for or be granted any interest in or right over land, or

    (c) a licence to occupy land or any other contractual right exercisable over or in relation to land.

    As the definition of real property is very broad, it is necessary to identify the nature of the real property that is being supplied. A contract for the sale of real property may provide for separate supplies of different types of real property.

    Sale of land on builder's terms

    This involves two separate supplies of real property. One supply is the supply of the freehold interest in the land and the supply is made at the time of settlement of the contract. The other supply is the right to access and build on the land. The time of the supply of that right will be at the time provided for in the contract. Whether the supply of the right is made for consideration will depend on the terms of the contract. For the supply to be made for consideration it has to be identified as an amount separate to consideration for the freehold interest in the land.

    If the vendor makes a taxable supply of freehold interest in land to Fred, the vendor will have the option of choosing to use the margin scheme, and using a valuation under subsection 75-10(3). If Fred has purchased the land on which the vendor chose to use the margin scheme, he then can use the margin scheme when he sells the house and land package. Alternatively, if Fred purchases the land under a supply that is not a taxable supply (for example, vendor is not registered for GST), Fred can elect to use the margin scheme when he supplies the house and land package.

    Fred is selling the freehold interest in land. Fred acquired the freehold interest in land at the time of settlement of the contract with the original vendor (22 September 2000). As Fred did not acquire the freehold interest on which he was building the house before 1 July 2000, he will be unable to use the valuation method under subsection 75-10(3) to determine the margin in relation to the supply of the house. As Fred is registered for GST, he will be entitled to claim input tax credits for all his creditable acquisitions made to build the house on and after 1 July 2000.

    Fred will only be able to use subsection 75-10(2) when he sells the house and land package to a consumer, if he chooses to apply the margin scheme. The margin for the supply will be the amount by which the consideration for the supply (sale price to the consumer) exceeds the consideration for the acquisition of the interest (the price paid by Fred for the land on 22 September 2000).

    3.20 GSTR 2000/21 and the margin scheme

    Issue

    Where a taxpayer chooses to use the margin scheme and undertakes a valuation of the property on 1 July 2000, paragraph 20 of GSTR 2000/21 states the valuation process must be undertaken no later than the end of the tax period in which the GST payable on the supply is attributable. However, the ATO fact sheet 'How to use the margin scheme to work out GST when you sell real property that you acquired before 1 July 2000' states that the valuation process need not be undertaken until the BAS due date. Will the ATO be amending paragraph 20 of GSTR 2000/21 in line with the fact sheet?

    ATO response

    The fact sheet 'How to use the margin scheme to work out GST when you sell real property that you acquired before 1 July 2000' is a public document and notification of publication was issued on 6 June 2003.

    When the fact sheet issued, it was noted that paragraph 20 of GSTR 2000/21 was now obsolete. The fact sheet is a later public ruling which amends paragraph 20 of GSTR 2000/21.

    The answer to the question 'When do you need to undertake the valuation on which you wish to rely?' replaces paragraph 20. The fact sheet states ' as a general rule, if you have chosen to apply a valuation method to calculate the margin, you must have undertaken a valuation that satisfies the requirements of the Commissioner's determination (a 'valid valuation') by the due date for lodgment of your BAS for the relevant tax period to which GST on the supply is attributed'.

    3.21 Division 135 and the sale of a farm as a going concern

    Issue

    There is an issue concerning the application of Division 135 to the sales of farmland which qualify as GST-free under section 38-325 where there are residential premises on the farm which is to be included as part of the sale. The issue is illustrated by the following example:

    Jack, who is registered for GST, enters into an agreement to sell his farm. The farmland includes Jack's residential premises and is held on the one title. The sale is not GST-free under the farmland concession (section 38-480). If the sale of the farmland qualifies as a GST-free supply of a going concern under section 38-325 will a Division 135 adjustment be required by the purchaser?

    It is noted that if the farmland concession (section 38-480) had applied to the sale, the ATO has already indicated, in question 6.2.23 of the Primary Production Industry Partnership issues register, that Division 135 will not be applied. Will the same treatment be applied where the going concern concession (but not the farmland concession) applies?

    It is argued that the same result can be obtained on either of two bases:

    1. The residence never formed part of the supply of the going concern (because it was not 'necessary') and therefore Division 135 does not apply, or

    2. The residence did form part of the supply of the going concern but the essential characteristic of the land is that it is farmland being used to make taxable supplies and therefore Division 135 does not apply.

    ATO response

    Division 135 of the GST Act provides that a recipient of a GST-free supply of a going concern has an increasing adjustment if they intend that some or all of the supplies made through the enterprise to which the supply relates will be supplies that are neither taxable supplies nor GST-free supplies.

    In the example provided, if the residence is used by the supplier as their main residence, the residence must be excluded from the arrangement for the supply of the going concern. This is because the private residence is not a thing utilised in carrying on the enterprise of farming. As the residence is excluded from the arrangement, there will be no Division 135 adjustment.

    If the factual scenario was different and the residence was in fact used as part of the farming enterprise of the supplier (rather than being used as the suppliers main residence), then the supply of the residence will form part of the GST-free supply of the going concern. This may occur, for example, if the residence is leased to a manager of the entity operating the farm business. It would therefore be necessary to consider whether an adjustment is required under Division 135.

    In these circumstances, we consider that an adjustment is not required under Division 135 provided that the going concern is a farming business, the residence forms part of land that has the essential characteristics of farmland (as outlined in the primary production industry log at 6.2.1(a), previously 6.2.23), and the land maintains those characteristics ie the recipient continues to use the farmland as a whole for the purpose of operating a farming business.

      Last modified: 22 May 2014QC 28063