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ATO Interpretative Decision

ATO ID 2002/30

Goods and Services Tax

GST and acquisition costs under the margin scheme
FOI status: may be released

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CAUTION: This is an edited and summarised record of a Tax Office decision. This record is not published as a form of advice. It is being made available for your inspection to meet FOI requirements, because it may be used by an officer in making another decision.

This ATOID provides you with the following level of protection:

If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.

Issue

Can the entity, a property developer that has purchased property, include an amount charged to it by the vendor of the property for land tax and council rates incurred by the vendor prior to settlement, as part of the consideration for the acquisition of the interest in the property under section 75-10 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), when it subsequently sells that property and chooses to apply the margin scheme?

Decision

Yes, the entity can include an amount charged to it by the vendor of the property for land tax and council rates incurred by the vendor prior to settlement, as part of the consideration for the acquisition of the interest in the property under section 75-10 of the GST Act, when it subsequently sells that property and chooses to apply the margin scheme.

Facts

The entity is a property developer. The entity acquired real property after 30 June 2000. Upon settlement, in accordance with the contract of sale, an adjustment to the purchase price was made in relation to council rates and land tax. As a result, the entity was required to pay an additional amount of consideration to the vendor of the property at settlement. This additional consideration represents that portion of the council rates and land tax paid in advance by the vendor of the property prior to settlement, that relate to the entity's period of ownership of the property after settlement.

The entity is now selling the property as a taxable supply. This supply satisfies the requirements in section 75-5 of the GST Act, and the entity is choosing to apply the margin scheme in working out the amount of goods and services tax (GST) payable on the supply.

The entity is registered for GST.

Reasons for Decision

Subsection 75-10(1) of the GST Act provides that if a taxable supply of real property is under the margin scheme, the amount of GST on the supply is 1/11 of the margin for the supply.

The margin for the supply is the amount by which the consideration for the supply exceeds the consideration for an entity's acquisition of the interest, unit or lease in question (subsection 75-10(2) of the GST Act).

As the entity purchased the property after 30 June 2000, the transitional rules in subsection 75-10(3) of the GST Act do not apply. Therefore, the consideration for the entity's acquisition of the interest in the property is the purchase price of that property.

In this case, the terms of the sale contract require the entity to pay an additional amount of consideration at the time of settlement. This additional amount or 'adjustment', is payment for that portion of the council rates and land tax paid in advance by the vendor of the property prior to settlement, that relates to the entity's period of ownership of the property after settlement. The adjustment represents an increase in the consideration for the supply of the property in accordance with the contract agreed to by both the vendor and the purchaser prior to settlement and is therefore considered to be part of the purchase price. The adjustment does not represent consideration for a separate supply to the entity; but rather, is a factor that must be taken into account in order to arrive at the final purchase price.

Therefore, the entity can include amounts charged to it by the vendor of the property for land tax and council rates incurred by the vendor prior to settlement, as part of the consideration for the acquisition of the interest in the property, under section 75-10 of the GST Act, when it subsequently sells that property and chooses to apply the margin scheme.

[Note: If, after settlement, the entity incurs additional amounts of land tax and council rates in relation to the property, these amounts will not be included in determining the consideration provided by the entity for the acquisition of the interest in the property. These amounts are not consideration for the entity's acquisition of the property; rather, they amount to consideration for the entity's acquisition of services from the Council and State government.]

Date of decision:  23 October 2001

Legislative References:
A New Tax System (Goods and Services Tax) Act 1999
   section 75-10
   subsection 75-10(1)
   subsection 75-10(2)
   subsection 75-10(3)

Related ATO Interpretative Decisions
ATO ID 2002/31

Other References:
Property and Construction Issues Register - Issue 15.4.1

Keywords
Goods & services tax
GST property & construction
GST margin scheme
GST sale of real property

Business Line:  GST

Date of publication:  24 January 2002

ISSN: 1445-2782

history
  Date: Version:
You are here 23 October 2001 Original statement
  25 January 2008 Archived

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