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Authorisation Number: 1013059994850
Date of advice: 25 August 2016
Subject: GST and supplies of real property
Is the entity entitled to input tax credits under section 11-20 of the A New Tax System (Goods and Services Tax) Act 1999 for the purchase of property?
No, as there was no GST on the sale of the property, entity is not entitled to any input tax credit.
How is the margin on the supply of each individual new residential premises determined for the purposes of section 75-10 of the A New Tax System (Goods and Services Tax) Act 1999?
The margin on the supply of each individual new residential premises is calculated as the sale price minus the corresponding proportion of the purchase price for each respective premises.
Relevant facts and circumstances
The entity entered into contract with an individual to purchase property.
In the course of carrying on its enterprise, the entity intends to construct and sell new residential premises on the property. The supplies will be taxable supplies and the supplier and the recipient will agree in writing that the margin scheme will apply. The entity will not make input taxed supplies (eg renting residential premises) of the property.
At the time of purchase, the property contained a two-story building which includes a fit-out for a commercial premises on the ground floor and two bedrooms, a kitchenette and bathroom on the first floor.
The contract states that the 'price includes GST.
Prior to settlement, a Deed of Variation of Contract was entered into between the entity and the individual. Essentially, this Deed varies the contract to ensure that the sale is not subject to GST and reduces the sale price accordingly.
The Deed of Variation of Contract also states that the individual will request that the Commissioner of Taxation cancel the Vendor’s registration for GST purposes prior to the date of completion. Furthermore, the Deed of Variation of Contract states:
If the Commissioner of Taxation cancels the Vendor’s registration for GST purposes, then the Vendor and the Purchaser acknowledge and agree that this contract is not a taxable supply because the sale is by a vendor who is neither registered nor required to be registered for GST.
As at the date of settlement, the individual was not registered for GST.
It is assumed that the individual is not carrying on an enterprise and is not required to be registered for GST.
Relevant legislative provisions
A New Tax System (Goods and Services Tax) Act 1999 section 11-20
A New Tax System (Goods and Services Tax) Act 1999 section 75-10
A New Tax System (Goods and Services Tax) Act 1999 section 75-15
Reasons for decision
Section 11-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that you are entitled to the input tax credit for any creditable acquisitions that you make. You make a creditable acquisition under section 11-5 of the GST Act if:
● you acquire anything solely or partly for a creditable purpose; and
● the supply of the thing to you is a taxable supply; and
● you provide, or are liable to provide, consideration for the supply; and
● you are registered, or required to be registered for GST.
The entity’s acquisition of the property was made for a creditable purpose because it was acquired in the course of carrying on an enterprise and it does not relate to any input taxed supplies that the entity may make.
Section 9-5 of the GST Act defines a taxable supply as:
● a supply that is made for consideration; and
● a supply that is made in the course or furtherance of an enterprise that the supplier carries on; and
● a supply that is connected with the indirect tax zone (ie Australia); and
● a supply that is made by an entity that is registered, or required to be registered; and
● a supply that is neither GST-free nor input taxed.
The supply of the property was by the individual and the original sale of land contract provides that the sale is a taxable supply which is subject to GST in full. However, the individual was not registered for GST and it is assumed that he/she was not required to be registered at the time of the supply. By itself, the sale of the property would not require the individual to become registered for GST as the sale is not in the course or furtherance of any enterprise carried on by the individual.
Furthermore, the deed of variation of the contract which was signed by the individual’s Attorney prior to settlement, alters the original contract to specifically state that the supply was not subject to GST and to reduce the sale price accordingly.
As the individual was not registered or required to be registered for GST at the time of the supply, the supply was not a taxable supply and no GST was payable on the sale.
Consequently, the entity is not entitled to any input tax credits on the purchase of the property.
Generally, you can choose to apply the margin scheme when you make 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. However, subsection 75-5(3) of the GST Act provides that the margin scheme is not available in certain circumstances (eg where the acquisition was a taxable supply by the vendor and the GST was calculated without applying the margin scheme). As none of the exclusions listed in subsection 75-5(3) of the GST Act apply to the acquisition of the property, the margin scheme can be applied on the subsequent sales of each of the new residential premises.
Under the margin scheme, the GST payable on the supply of real property is 1/11th of the margin for the supply. The margin for the supply is normally the amount by which the consideration for the supply exceeds the consideration for the acquisition of the real property. However, section 75-15 of the GST Act provides that, in circumstances where the taxable supply of real property relates only to part of the land which was acquired, the margin is calculated using only the corresponding proportion of the consideration for the acquisition. That is, the margin will be the difference between the price of each individual sale less the corresponding proportion of the purchase price of property that relates to the respective apartment.
Goods and Services Tax Ruling, Goods and services tax: the margin scheme for supplies of real property acquired on or after 1 July 2000 (GSTR 2006/8) provides guidance on how to determine the proportion of the purchase price which is attributable to each new premises and states at paragraph 58:
58. To ascertain the proportion of the purchase price that relates to the subdivided allotment or stratum unit, you may use any fair and reasonable method of apportionment. The method of apportionment used must result in the sum of the proportionate amount of the purchase price that relates to each subdivided allotment or stratum unit equalling in total, the actual consideration for the acquisition. You cannot change the method of apportionment after sales of allotments or stratum units have been made unless the changed method is applied to calculate the margin for all the sales.