House of Representatives

Tax Laws Amendment (2005 Measures No. 2) Bill 2005

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello MP)

Chapter 6 - Goods and services tax and real property

Outline of chapter

6.1 Schedule 6 to this Bill amends the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) to:

remove unintended outcomes that arise from the interaction of various provisions of the Act, allowing property owners to reduce their goods and services tax (GST) liability on supplies of real property
ensure entities joining a GST group have appropriate adjustments to input tax credits, and
address certain aspects regarding the application of the margin scheme.

Context of amendments

6.2 The Australian Taxation Office (ATO) has identified a number of arrangements used by entities to reduce or eliminate their GST liabilities on the supply of real property. Some arrangements involve manipulating the interaction of provisions of the GST Act - such as supplies of GST-free going concerns or GST-free farm land, associates, GST groups, and GST joint ventures - with the margin scheme to avoid paying GST on the full value added to the real property. Other arrangements include using the grouping or joint venture provisions in an attempt to avoid paying GST on the sale of new residential property by transforming taxable sales of '... new residential premises...' into input taxed sales.

6.3 Under the GST Act, registered businesses can calculate GST payable on supplies of new residential or commercial property under the basic rules (GST is 1/11th of the GST-inclusive price) or, subject to certain conditions, under the margin scheme (GST is 1/11th of the margin). Use of the margin scheme generally ensures that GST only applies to the value added to real property held by registered owners on or after 1 July 2000.

6.4 Purchasers of real property under the margin scheme are not entitled to claim input tax credits for GST remitted by the supplier. Consistent with this, the margin scheme does not apply where the property has been acquired under the basic calculation of tax payable, as an input tax credit would generally have been claimed on the purchase of the property (and GST would effectively not have been collected).

6.5 The effect of many of the arrangements is that the value added to the real property before the arrangement is imposed is excluded for GST purposes. This is contrary to the policy intent that GST be collected on the value added to real property held by registered owners on or after 1 July 2000.

6.6 In addition to these arrangements, some entities are incorrectly including the value of acquisitions for developing or improving the real property in the '... consideration for your acquisition ...' of the property. By including these acquisitions, the margin on which GST is collected is reduced.

6.7 Entities are also uncertain about whether they are able to claim input tax credits on the acquisition of real property and in some cases are unaware of whether the margin scheme has been applied.

6.8 Further, contrary to the general policy regarding entitlements to input tax credits, input tax credits are effectively able to be claimed for acquisitions that will be used by a GST group to make input taxed supplies or be applied to private use.

6.9 Other amendments aim to provide more flexibility and certainty in the application of the margin scheme and ensure property that has been inherited is not overtaxed.

6.10 These amendments aim to ensure the appropriate amount of GST is collected on supplies of real property and they are consistent with the policy intent of the GST system.

Summary of new law

6.11 These amendments:

provide that the margin must be calculated with reference to the GST-inclusive market value of the property at 1 July 2000 if the property were acquired as a GST-free going concern or GST-free farm land
ensure that the grouping and joint venture provisions cannot be used to re-open eligibility to the margin scheme
ensure the grouping and joint venture provisions cannot be used to avoid paying GST on 'new residential premises' by converting otherwise taxable sales of 'new residential premises' into input taxed sales
introduce increasing and decreasing adjustments for a change to the extent of creditable purpose caused by an entity entering or exiting a GST group
calculate the margin under the margin scheme with the GST-inclusive market value as the consideration for a supply to an associate and the GST-inclusive market value as the consideration for an acquisition from an associate
ensure that property that has been inherited is not subject to unintended tax consequences under the margin scheme
allow entities to use the margin scheme even though they are selling amalgamated real property, providing those entities have an adjustment for input tax credits entitlements in respect of that part of the property that was purchased under the basic rules
clarify that for the purposes of the margin scheme, consideration for the acquisition of the property does not include any consideration for costs incurred in developing or improving the real property, including legal costs, renovation costs and statutory fees
require that the use of the margin scheme be agreed in writing by the supplier and recipient, and
ensure that when an entity sells a property on which they have not paid full consideration, the margin should be calculated with reference to the amount of consideration actually paid, rather than the sale price.

Comparison of key features of new law and current law

New law Current law
If the margin scheme is applied on a subsequent supply of real property that had been acquired as a GST-free going concern or GST-free farm land, the margin will be calculated with reference to the GST-inclusive market value of the real property on 1 July 2000. If the supplier chooses to apply the margin scheme on the subsequent supply of real property that had been acquired as a GST-free going concern or GST-free farm land, the margin is calculated with reference to the price paid for the going concern or farm land or the valuation at a particular date.
The margin scheme will only be available if a GST group member would have been eligible to use the margin scheme before the first intra-group sale of the real property.
Supplies of real property by a GST joint venture operator to a joint venture participant are subject to the basic rules. If eligible, the joint venture operator and participant may apply the margin scheme on taxable supplies of the property.
(These amendments clarify, rather than change, the existing law.)
Some people have raised doubts that the margin scheme will only be available if a GST group member would have been eligible to use the margin scheme before the first intra-group sale of the real property.
Supplies of real property by a GST joint venture operator to a joint venture participant are subject to the basic rules. If eligible, the joint venture operator may apply the margin scheme on taxable supplies of the property.
Intra-GST group sales of residential premises are not the first sale of new residential premises. They are subject to GST when they are supplied outside the group.
Supplies by a GST joint venture operator of new residential premises are taxable and subject to GST as new residential premises at this time.
(These amendments clarify, rather than change, the existing law.)
Some people have raised doubts that intra-GST group sales of residential premises are not the first sale of new residential premises.
Supplies by a GST joint venture operator of new residential premises are taxable and subject to GST as new residential premises at this time.
An increasing adjustment will arise if entities entering into a GST group have already claimed input tax credits on acquisitions that will be used by the group to make input taxed supplies or be applied to private use.
A decreasing adjustment will be available if entities were denied input tax credits before entering a GST group which makes taxable supplies.
An entity that has claimed input tax credits on its acquisitions is not required to make an increasing adjustment when it joins a GST group that makes input taxed supplies or applies it to private use.
An entity that was ineligible to claim input tax credits on its acquisitions is not entitled to a decreasing adjustment when it joins a GST group that makes taxable supplies.
For the purposes of the margin scheme, the margin on a supply to an associate will be calculated with reference to the GST-inclusive market value of the supply at the time the real property was supplied. The margin on a supply that was acquired from an associate will be calculated with reference to the GST-inclusive market value of the acquisition at the time it was acquired. Under the margin scheme, the margin is calculated with reference to the consideration actually paid even though they are associates.
The beneficiary's margin will be calculated with reference to an approved valuation at the time the real property (held by either the beneficiary or the deceased) enters the GST system. The sale of real property that was inherited is subject to GST on the full price, even if the margin scheme is used. This reflects that when calculating the margin the provisions could have the effect that the beneficiary's consideration is zero.
The margin scheme will be able to be applied in respect of amalgamated property even if some of the property were not purchased under the margin scheme or as a GST-free, input taxed or non-taxable acquisition. However, an increasing adjustment will arise to recover input tax credits claimed on the real property. Suppliers are only able to use the margin scheme if all of the real property which is the subject of the sale were purchased under the margin scheme or were a GST-free, input taxed or non-taxable acquisition.
Consideration paid under the margin scheme only includes the price paid for the real property and not the price paid for improvements, construction work or other expenses such as stamp duties and solicitors' fees.
(This amendment clarifies, rather than changes, the existing law.)
Consideration paid under the margin scheme only includes the price paid for the real property and not the price paid for improvements, construction work or other expenses such as stamp duties and solicitors' fees.
The supplier and the recipient of a taxable supply of real property will need to agree in writing to apply the margin scheme. This choice must be made at or before the day of supply (usually settlement) or within such further time as the Commissioner of Taxation (Commissioner) allows. The supplier can choose whether to apply the margin scheme. Currently, this choice can be made without informing the recipient (even though the recipient will be denied input tax credits if the margin scheme is used).
When suppliers sell real property on which the previous supplier did not receive the full sale price, the margin will be calculated with reference to the amount of consideration actually received by the previous supplier. When suppliers sell real property on which the previous supplier did not receive the full sale price, the margin is calculated with reference to the sale price.

Detailed explanation of new law

Calculation of the margin on supplies of real property acquired as a GST-free going concern or GST-free farm land

6.12 If real property is purchased as a GST-free going concern (Subdivision 38-J of the GST Act) or as GST-free farm land (Subdivision 38-O of the GST Act), the margin scheme can be applied on the subsequent supply of the property. However, to ensure that GST is collected on the value added to the real property since 1 July 2000 and to take into account that input tax credits may have been claimed for GST on prior sales of this property, a special rule applies for calculating the margin. A valuation date of 1 July 2000 has been chosen because, for such acquisitions, it is unlikely the recipient of the going concern or farm land would have sufficient information to be able to identify the date the property was first held by a registered entity on or after 1 July 2000 - particularly in future acquisitions. In these circumstances (unless you acquired the property from a member of the same GST group), the margin is calculated as the difference between the consideration for the supply and the GST-inclusive market value of the property on 1 July 2000. Alternatively, the supplier and recipient may calculate the GST payable under the basic rules. The use of this special calculation does not prevent GST being calculated under the normal margin scheme rules if the property is later resold. [Schedule 6, item 16, subsections 75-11(5) and (6)]

Example 6.1 Moira, Robert, Brian and Kaarina are property developers registered for GST.Moira purchases real property (which is not new residential premises) in December 1999 for $180,000. She then sells the property to Robert in September 2001 for $330,000 under the basic rules. Moira remits 1/11th of $330,000 (or $30,000) to the ATO on this supply. Robert claims an input tax credit of $30,000 in his next Business Activity Statement (BAS).After further developing the property, Robert decides to sell it as a going concern to Brian in April 2003. This supply meets the conditions for being a GST-free going concern. Brian purchases the going concern GST-free for $400,000.In December 2004, Brian decides to sell the property for $440,000 to Kaarina. Brian and Kaarina agree to apply the margin scheme. Because he has purchased this property as a GST-free going concern Brian must use special rules to calculate the margin on this supply. The margin will be the difference between the price for which he sells the property and the value of the property on 1 July 2000, which is valued at $220,000. That is, the margin will be

$440,000 - $220,000 = $220,000

Brian will remit GST of 1/11th of the margin ($20,000). Because the property was purchased under the margin scheme, Kaarina is not entitled to claim an input tax credit for the GST paid. However, Kaarina is eligible to apply the margin scheme on the subsequent supply of the property. The margin on this supply would be calculated in the usual manner with reference to the consideration paid ($440,000) rather than the value on 1 July 2000.In this example the net amount of GST collected by the ATO on this property is $20,000 (or 1/11th of the value added to the property since 1 July 2000). A similar treatment would apply to sales of GST-free farm land, providing the usual conditions for supplying GST-free farm land are met (such as a farm business being carried on for at least five years prior to the supply).

6.13 If you acquired the GST-free going concern or GST-free farm land from a member of the same GST group as you, instead of calculating the margin as detailed in paragraph 6.12, the margin on your supply of the property is calculated as detailed in paragraphs 6.16 and 6.17. [Schedule 6, item 16, paragraphs 75-11(5)(b) and 75-11(6)(b)]

6.14 However, if you acquired the farm land from a deceased estate and the deceased was not a member of the same GST group as you, the margin on your supply is calculated as detailed in paragraphs 6.29 and 6.30 rather than by reference to the GST-inclusive market value on 1 July 2000. [Schedule 6, item 16, paragraph 75-11(6)(b)]

GST groups and GST joint ventures cannot be used to re-open eligibility to the margin scheme

6.15 Property owners may be able to use the margin scheme to calculate tax payable on the sale of real property under a number of circumstances, including when it is purchased:

within a GST group, as supplies within a GST group are treated as if they were not taxable supplies (see Division 48 of the GST Act), or
by a joint venture participant from the joint venture operator if the property were not acquired through a taxable supply on which the GST was worked out without applying the margin scheme (see Division 75 of the GST Act).

6.16 However, the grouping provisions cannot be used to re-open eligibility to the margin scheme. The GST group is treated as a single entity for the purposes of the margin scheme. This means that when applying the margin scheme all transactions between members of a GST group are ignored. The margin scheme is only available to a member of a GST group if the 'original acquiring member' of the group could have used the margin scheme if they had supplied the property to an entity outside the GST group [Schedule 6, item 11, subsections 75-5(2) and (3)]. The margin on a supply of property to an entity outside the group is the difference between the consideration for the supply and the consideration paid by the 'original acquiring member' of the GST group [Schedule 6, item 16, paragraph 75-11(1)(c)]. (The original acquiring member is the member of the GST group who last acquired the property from an entity who was not a member of the same GST group at that time.)

6.17 If the original acquiring member had acquired the property from an associate on or after 1 July 2000, the margin is instead the difference between the consideration for the supply (assuming it is not being supplied to an associate) and the GST-inclusive market value at the time it was acquired by the original acquiring member [Schedule 6, item 16, paragraph 75-11(1)(d)]. If the original acquiring member purchased the property before 1 July 2000, the margin is calculated with reference to an approved valuation as at 1 July 2000 [Schedule 6, item 16, subsection 75-11(2)].

6.18 The basic rules apply to supplies of real property by a joint venture operator to a joint venture participant. That is, new residential or commercial property supplied by a joint venture operator is generally taxable. The supplier may be eligible to apply the margin scheme providing the previous supply was not a taxable supply on which GST was calculated as 1/11th of the price of the supply. [Schedule 6, item 8, subsection 51-30(2A)]

Example 6.2 Liv (who is registered for GST) purchased real property in October 2000 under the margin scheme for $660,000. She sells this property (which was not new residential premises) to Paul in August 2001 for $770,000 using the basic rules. Liv remits 1/11th of $770,000 ($70,000) to the ATO and Paul claims an input tax credit of $70,000 on his next BAS.In early 2002 Paul sells this property to Graeme for $800,000. Paul and Graeme are members of the same GST group. As this is a supply within a GST group it is treated as if it were not a taxable supply.After further developing the property, Graeme sells the property in late 2002 to Matt (who is not a member of the GST group) for $990,000. Graeme is unable to use the margin scheme on this supply because the supply of property from Liv to Paul was taxable under the basic rules and Paul therefore would not have been eligible to use the margin scheme. This is despite the previous supply of this property, which was within the GST group (from Paul to Graeme), being treated as if it were not a taxable supply.If, however, the supply from Liv to Paul had been made using the margin scheme (or it were a non-taxable supply or from an unregistered seller), Graeme would be eligible to use the margin scheme on the supply to Matt. The margin on such a supply would be the difference between the price for which he supplies the property to Matt ($990,000) and the price paid when the property last entered the GST group ($770,000), which is $220,000.

Example 6.3 In Example 6.2, if Paul and Graeme had instead been members of a GST joint venture (and Paul was the joint venture operator) subsection 51-30(2A) will mean that the supply of the property from Paul to Graeme will be taxable. Because the supply from Liv to Paul was taxable under the basic rules, Paul is not eligible to use the margin scheme in calculating GST payable on the supply of the real property to Graeme.If, however, the supply from Liv to Paul had been made using the margin scheme (or it were a non-taxable supply or from an unregistered seller), Paul would be eligible to use the margin scheme on the supply to Graeme if they so chose.

When are sales of real property within a GST group or GST joint venture taxed as 'new residential premises'?

6.19 Entities will be unable to use the grouping and joint venture provisions to turn taxable sales of new residential premises into input taxed supplies.

6.20 New residential premises do not lose their new status when they are supplied within a GST group. When the premises are supplied to an entity who is not a member of the GST group, the supply is treated as a supply of new residential premises and is subject to GST at this time (calculated either under the margin scheme or under the basic rules). [Schedule 6, item 2, subsection 40-75(2A)]

6.21 A supply by a joint venture operator to a joint venture participant is subject to the basic rules to the extent it is a supply of real property. Therefore, if this real property is 'new residential premises' it will be subject to GST at this time (calculated either under the margin scheme or under the basic (fully taxable) rules). [Schedule 6, item 8, subsection 51-30(2A)]

Adjustments will arise for input tax credits claimed by, or denied to, entities entering and exiting GST groups

6.22 An entity that makes input taxed supplies is generally not entitled to input tax credits for GST paid on their acquisitions. This ensures that these supplies are not completely free from GST. Consistent with this policy, subsection 48-55(1A) enables an increasing adjustment to be calculated to recover input tax credits if entities entering into a GST group have already claimed input tax credits on acquisitions that will be used by the group to make input taxed supplies or that will be applied to private use. [Schedule 6, item 3, subsection 48-55(1A)]

6.23 Similarly, subsection 48-55(1A) provides that if entities were denied input tax credits (before entering a GST group which makes taxable supplies) because they made input taxed supplies or applied the supplies to private use, the representative member of the GST group will be entitled to a decreasing adjustment under section 129-40 to account for the change in the extent of creditable purpose. [Schedule 6, item 3, subsection 48-55(1A)]

6.24 Consistent with this policy, entities must compare the extent of creditable purpose after they leave the GST group with the extent of creditable purpose which was used to calculate either:

the amount of input tax credit to which either they or the representative member of the GST group was entitled, or
the amount of any adjustment they or the representative member had under Division 129

whichever occurred most recently. [Schedule 6, item 4, paragraph 48-115(1)(a); item 5, subsection 48-115(1); item 6, paragraph 48-115(1)(c); item 7, paragraph 48-115(1)(d)]

6.25 If an entity purchased a thing before entering a GST group and ceases to be a member of the GST group before the representative member has had an adjustment under Division 129, when the entity calculates the amount of adjustment under Division 129 the entity must account for the extent of creditable purpose to which the thing was applied while they were a member of the GST group. [Schedule 6, item 4, paragraph 48-115(1)(a); item 5, subsection 48-115(1); item 6, paragraph 48-115(1)(c); item 7, paragraph 48-115(1)(d)]

6.26 These amendments apply not only to acquisitions of real property but also to other acquisitions an entity may make before entering a GST group.

Example 6.4 Heather is registered for GST. She purchases a van that is used for private purposes. Consequently, she is denied input tax credits for GST on the purchase of the vehicle. Shortly afterwards, Heather joins a GST group which makes (taxable) supplies of catering services. She uses the van in making these supplies. Subsection 48-55(1A) allows the representative member of Heather's GST group to have a decreasing adjustment under section 129-40. The amount of the decreasing adjustment is worked out with reference to the difference between the extent Heather used the van for a creditable purpose prior to joining the GST group and the extent to which the van is now used for a creditable purpose for the GST group.

Example 6.5 Rod is registered for GST. He purchases a van which is used entirely to make deliveries of flowers in the course of his business. He claims input tax credits for the GST paid on the purchase of this vehicle. He later joins a GST group which specialises in sales of (input taxed) residential properties. The van is used in the course of the activities of the group. Under subsection 48-55(1A), the representative member of Rod's GST group will have an increasing adjustment under section 129-40. The amount of the increasing adjustment is worked out with reference to the difference between the extent Rod used the van for a creditable purpose prior to joining the GST group and the extent to which the van is now used for a creditable purpose for the GST group.

Calculation of the margin on supplies of real property acquired from an associate or supplied to an associate

6.27 Division 72 of the GST Act includes special rules for supplies to associates for below market value where the recipient would not have been entitled to a full input tax credit. These rules are intended to ensure the supply is treated as if it had been made at market value, however, the terminology used in Division 72 differs from that used in Division 75 and therefore Division 72 is not effective in respect of the calculation of the margin under the margin scheme.

6.28 Subsection 75-11(7) provides that for a supply of real property that was acquired from an associate - unless the property was acquired as a GST-free going concern, GST-free farm land, from a fellow member of a GST group or from a deceased estate - the margin is calculated with reference to the GST-inclusive market value of the acquisition at the time it was acquired (if it were acquired on or after 1 July 2000) or with reference to the approved valuation as at 1 July 2000 (if it were acquired prior to 1 July 2000). Similarly, section 75-13 requires the margin on a supply to an associate to be calculated by referring to the GST-inclusive market value of the supply at the time it was supplied rather than the consideration for the supply. This ensures that where the property is sold for inadequate consideration under the margin scheme, the appropriate amount of GST is paid. It also ensures an entity cannot reduce the GST payable on a supply of property under the margin scheme by acquiring the property from an unregistered associate for consideration which is more than the GST-inclusive market value. [Schedule 6, item 16, subsection 75-11(7) and section 75-13]

Example 6.6 Kivacia Ltd purchases land after 1 July 2000 which is valued at $200,000. Kivacia Ltd is registered for GST. It then sells it to an associate, Vivacia Ltd, for $100,000. The GST-inclusive market value at the time of the sale is $250,000. Kivacia Ltd and Vivacia Ltd agree to apply the margin scheme and the margin is

$250,000 - $200,000 = $50,000.

GST is 1/11th of $50,000 (or $4,545.45).When Vivacia Ltd subsequently sells the property, Vivacia and the recipient agree to apply the margin scheme. Because the property had been purchased by Vivacia Ltd from an associate, the margin on this sale is calculated with reference to the GST-inclusive market value of the property at the time it was acquired rather than the consideration for the acquisition. Vivacia Ltd sells the property for $300,000. The margin is therefore

$300,000 - $250,000 = $50,000

and Vivacia Ltd remits GST of 1/11th of $50,000 (or $4,545.45) to the ATO on this supply.

Example 6.7 Alan is not registered for GST. He sells property to an associate, Lynn, for $500,000. The GST-inclusive market value of the property at the time of the sale is $300,000. Lynn is registered for GST and is eligible to apply the margin scheme on a subsequent sale of this property because no GST was payable on the purchase of this property. She sells the property a year later for $550,000 and she and the recipient of the property agree to apply the margin scheme. Because Lynn purchased the property from an associate she must use the GST-inclusive market value of the property at the time it was acquired rather than the consideration for the acquisition. The margin is therefore calculated as

$550,000 - $300,000 = $250,000

and Lynn remits GST of 1/11th of $250,000 (or $22,727.27) to the ATO on this supply.

Calculation of the margin on supplies of real property that have been inherited

6.29 When the margin scheme is applied to the supply of property that has been inherited, the beneficiary's margin is calculated with reference to an approved valuation at a particular time, rather than zero. If the property was held by the deceased on or after 1 July 2000 the relevant date is the date the deceased acquired the property. The valuations of the property in these circumstances broadly align with the valuations used in subsections 75-10(2) and (3). Otherwise, the relevant date is the date the property is first held by either of the registered deceased or registered beneficiary after 1 July 2000 [Schedule 6, item 16, subsections 75-11(3) and (4)]. These rules effectively treat the beneficiary and deceased as one entity and ensure that the beneficiary is not denied benefits of the margin scheme in terms of a generally lower GST liability than the GST liability due under the basic rules.

6.30 However, if you are a member of a GST group and the property were inherited from a member of the same GST group, instead of looking at the circumstances of the deceased, the margin is determined by looking at the approved valuation at the time the property last entered the GST group. [Schedule 6, item 16, paragraphs 75-11(3)(b) and 75-11(4)(b)]

6.31 The margin scheme is only available if the deceased would have been eligible to apply the margin scheme on a subsequent supply of the real property. [Schedule 6, item 11, paragraph 75-5(3)(b)]

Example 6.8 If the deceased were registered for GST on 1 July 2000 and held the property before 1 July 2000, the beneficiary's margin on the subsequent supply is the difference between the consideration for the supply and the approved valuation of the property at 1 July 2000.

Example 6.9 If the deceased held the property prior to 1 July 2000 but registered for GST after 1 July 2000, the beneficiary's margin on the subsequent supply is the difference between the consideration for the supply and the approved valuation of the property as at the day the deceased registered for GST.

Example 6.10 However, if the deceased held the property before 1 July 2000, was not registered for GST and the beneficiary was registered for GST, the beneficiary's margin on the subsequent supply is the difference between the consideration for the supply and the approved valuation of the property at the time the beneficiary inherited it.

Example 6.11 In the case that the deceased held the property before 1 July 2000, was not registered for GST and the beneficiary was not registered for GST at the time they inherited the property, the beneficiary's margin on the subsequent supply is the difference between the consideration for the supply and the approved valuation of the property at the time the beneficiary registered or was required to be registered for GST.

Example 6.12 If the beneficiary acquired the property before 1 July 2000, the beneficiary's margin is the difference between the consideration for the supply and the later of 1 July 2000 or the date the beneficiary registered or became required to be registered for GST. This is consistent with the treatment under subsection 75-10(3).

Example 6.13 If the deceased acquired the property on or after 1 July 2000, the beneficiary's margin on the subsequent supply is the difference between the consideration for the supply and the approved valuation of the property as at the day the deceased acquired it (regardless of when they or the deceased registered for GST). As the beneficiary is effectively adopting the consideration and eligibility of the deceased, this treatment is consistent with subsection 75-10(2).

Example 6.14 If, however, the deceased were a member of the same GST group as the beneficiary, the beneficiary's margin on the subsequent supply of the property is the difference between the consideration for the supply and an approved valuation of the property at the time it was last supplied (on or after 1 July 2000) by an entity who was not a member of the GST group to an entity who was a member of the GST group. If the property were owned by a member of the GST group before 1 July 2000, the relevant valuation date is 1 July 2000.

Expansion of the margin scheme to supplies of amalgamated land

6.32 Entities can use the margin scheme on the supply of amalgamated real property where some (but not all) of this property had been purchased as a taxable supply calculated under the basic rules (ie not under the margin scheme) [Schedule 6, item 11, subsection 75-5(2)]. However, if an entity chooses to use the margin scheme on such sales it will have an increasing adjustment under section 75-22 to recover any input tax credits that have been claimed. This adjustment is equal to the previously attributed input tax credit amount. (This is an amount of input tax credits that takes into account any adjustments under Subdivision 19-C, Division 21 or 129.) [Schedule 6, item 18, section 75-22]

6.33 Entities are also able to use the margin scheme on the supply of amalgamated land that they inherited where some of the property had been purchased by the deceased as a taxable supply calculated under the basic rules. If the beneficiary chooses to use the margin scheme on such supplies, it will have an increasing adjustment under subsection 75-22(2) equal to the deceased's previously attributed input tax credit amount. [Schedule 6, item 18, subsection 75-22(2)]

Consideration under the margin scheme does not include related acquisitions

6.34 For the purposes of the margin scheme, consideration for the acquisition of property does not include any consideration for improvements, construction or development costs of building work or additional costs such as solicitors' fees and stamp duty (as these would reduce the margin on which GST is calculated and input tax credits would generally have been claimed on these acquisitions). Any expenses or activities in bringing the interest, unit or lease into physical or legal existence are also ignored. [Schedule 6, item 16, section 75-14]

Agreement by parties to use the margin scheme must be in writing

6.35 The use of the margin scheme needs to be agreed in writing by the two parties. This requirement addresses uncertainty that had led some entities to claim input tax credits for GST paid even though they were not eligible because the property was purchased under the margin scheme. The agreement must be obtained by the day of supply (usually settlement). The Commissioner has discretion to extend the date by which the agreement in writing should be made, however, it is expected that most entities should have agreed whether to use the margin scheme by the date of settlement. It is not expected this will lead to significant additional compliance costs for entities that sell real property. [Schedule 6, item 10, subsections 75-5(1) and (1A)]

Margin on subsequent supply takes into account failure to pay full consideration

6.36 Sometimes an entity may sell property on which they have paid an amount which is less than the contract price for the acquisition of that property. Section 75-12 ensures that if the purchaser of the property sells the property under the margin scheme, they must calculate the margin with reference to the amount of consideration they actually paid rather than the sale price. Similarly, if the entity purchased it from a member of the same GST group, the consideration for the acquisition by the original acquiring member (see paragraph 7.16) is reduced by the amount of consideration that has not yet been paid. This ensures GST is collected on the full value added because, in most cases, the original supplier will have only effectively remitted GST on the amount of consideration they actually received. [Schedule 6, item 16, section 75-12]

6.37 If, after the subsequent supply of the property under the margin scheme, the supplier (or original acquiring member) makes an additional payment to the original supplier for the acquisition of the property, the supplier will be entitled to a decreasing adjustment under section 75-27. The amount of the decreasing adjustment is 1/11th of the extra payment. [Schedule 6, item 19, section 75-27]

Example 6.15 Gilmore Ltd and Newport Ltd are related parties. Gilmore Ltd sells land to Newport Ltd on a terms contract for $1.10 million. The margin on this supply is $550,000 and GST payable on the supply is 1/11th of the margin or $50,000. Newport Ltd pays only $460,000 of the sale price of $1.10 million. Newport Ltd then sells the land under the margin scheme for $1.12 million. Section 75-12 provides that the margin is calculated with reference to the amount actually paid ($460,000) rather than the sale price ($1.10 million). This results in GST being payable on a margin of

$1,120,000 - $460,000 = $660,000

therefore GST of $60,000 is payable.If Newport Ltd subsequently pays Gilmore Ltd an additional amount of $220,000, Newport Ltd will need to amend the calculation of GST payable under the margin scheme and will be entitled to a decreasing adjustment. The amount which Newport Ltd has now paid to Gilmore Ltd is

$460,000 + $220,000 = $680,000.

GST payable under the margin scheme should now have been

1/11th of $1,120,000 - $680,000 = 1/11th of $440,000 = $40,000.

The decreasing adjustment to which Newport Ltd is entitled is 1/11th of the additional consideration which is

1/11th of $220,000 = $20,000.

This results in Newport Ltd having effectively remitted $40,000 to the ATO in respect of the sale of this property.

Approved valuations

6.38 Under section 75-35, the Commissioner has the power to issue a written determination which specifies the requirements for a valuation to be an '... approved valuation ...' for the purposes of calculating the margin on real property supplied using the margin scheme. [Schedule 6, item 20, section 75-35]

Application and transitional provisions

6.39 The amendments made by Schedule 6, except items 9 and 10, apply from the date of introduction of this Bill into Parliament. This date was chosen rather than the date of Royal Assent because the majority of the measures are tax integrity measures which are consistent with the original policy intent. Any delay in their operation may allow some entities to bring forward sales of their properties in order to take advantage of the property arrangements prior to this Bill receiving Royal Assent. [Schedule 6, subitem 28(1)]

6.40 It is not expected that a start date of the date of introduction will cause significant compliance costs for property owners and recipients. Some measures, namely those relating to amalgamated land and inherited property and margin scheme, are beneficial to taxpayers.

6.41 The amendment that requires the supplier and recipient to agree in writing to apply the margin scheme (items 9 and 10) applies from the date this Bill receives Royal Assent. This date has been chosen to allow time for entities purchasing property to ensure they have written agreement where they wish to apply the margin scheme. It also ensures that those entities who settle on the sale of property on the date this Bill is introduced into Parliament are not unexpectedly denied the use of the margin scheme because they do not have written agreements. [Schedule 6, subitem 28(2)]

Consequential amendments

6.42 As a consequence of the change to subsection 75-5(1), the heading of section 75-5 is amended so that it no longer refers to choosing to apply the margin scheme. [Schedule 6, item 9, section 75-5]

6.43 Schedule 6 also makes a consequential amendment to subsections 75-10(2) and (3) to include a reference to margins calculated under section 75-11 and thereby ensure that the calculations of the margin under section 75-11 are not overridden by subsection 75-10(2). References to sections 75-11 to 75-14 are also added to section 75-15. Finally, the definition of 'margin' under section 195-1 is amended to refer to the margins calculated under section 75-11. [Schedule 6, item 12, subsection 75-10(2); item 13, subsection 75-10(3); item 17, section 75-15; item 27, section 195-1]

6.44 Amendments are also required to reflect the introduction of a defined term, 'approved valuation', in section 75-35. These amendments are to substitute this defined term in paragraph 75-10(3)(b) for the more expansive description. A savings provision is also inserted to ensure that any determinations previously issued by the Commissioner under paragraph 75-10(3)(b) are not affected by the determination-making power being moved to section 75-35. [Schedule 6, item 14, paragraph 75-10(3)(b); item 15, paragraph 75-10(3)(b); item 21]

6.45 The table in the definition of 'decreasing adjustment' is expanded to include a reference to an additional type of decreasing adjustment, which is available under section 75-27 for additional consideration paid on real property acquired on an earlier supply. [Schedule 6, item 24, section 195-1]

6.46 Similarly, the table in the definition of 'increasing adjustment' is expanded to include a reference to an additional type of increasing adjustment, which arises under section 75-22 in respect of entitlements for input tax credits on real property which has since been supplied under the margin scheme. [Schedule 6, item 25, section 195-1]

6.47 Additionally, the table in section 17-99, which lists special rules relating to net amounts or adjustments, is expanded to include a reference to the adjustments contained in Division 75. [Schedule 6, item 1, section 17-99]

6.48 The note at the end of the definition of 'consideration' is changed to include references to sections 75-12 to 75-14, which clarify the definition of consideration for your acquisition for the purposes of the margin scheme. [Schedule 6, item 23, section 195-1]

6.49 Finally, definitions of the terms 'approved valuation' and 'ineligible for the margin scheme' are inserted in the Dictionary in section 195-1. [Schedule 6, item 22, section 195-1; item 26, section 195-1]


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