ATO Interpretative Decision

ATO ID 2003/1171

Goods and Services Tax

GST and choosing to apply the margin scheme on supplies of real property previously existing as smaller blocks
FOI status: may be released
Status of this decision: Decision current

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Can the entity, a property developer, apply the margin scheme under section 75-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), when it sells four blocks of land that previously existed as five residential blocks at 1 July 2000?

Decision

Yes, the entity may apply the margin scheme under section 75-5 of the GST Act when it sells four blocks of land that previously existed as five residential blocks at 1 July 2000.

Facts

The entity is a property developer. The entity held a freehold interest in five residential blocks of land of equal area as at 1 July 2000. The entity enters into contracts to sell its freehold interest in each block of land after 29 June 2005. However, to increase the marketability of the land, the entity has reduced the number of blocks from five to four residential blocks of equal area.

The entity and the recipients of the supplies had agreed in writing before making the supply that the margin scheme is to apply.

The entity is registered for goods and services tax (GST) and the entity's supply of the blocks of land are taxable supplies under section 9-5 of the GST Act.

Reasons for Decision

Subsection 75-5(1) of the GST Act provides that the margin scheme applies in working out the amount of GST on a taxable supply of real property that an entity makes by:

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

if the entity and the recipient of the supply have agreed in writing that the margin scheme is to apply.

The entity in this instance, is selling the freehold interest in four residential blocks of land to several recipients. These sales of real property by the entity are taxable supplies. The entity and the recipient of the supplies had agreed in writing before making the supply that the margin scheme is to apply. The requirements of subsection 75-5(1) and 75-5(1A) of the GST Act are satisfied.

Subsection 75-5(2) of the GST Act, however, provides that the margin scheme does not apply if the entity acquired the entire freehold interest, stratum unit or long term lease through a taxable supply that was ineligible for the margin scheme if it is a taxable supply, on which the amount of GST was worked out without applying the margin scheme.

The entity, in this instance, held the four blocks of land prior to 1 July 2000. The entire freehold interest in the four blocks of land was not acquired through a taxable supply and paragraph 75-5(3)(a) of the GST Act does not apply. Although at the time of acquisition, the blocks of land existed in the form of five residential blocks, this does not change the fact that the land was not acquired through a taxable supply that was eligible for the margin scheme. Before 1 July 2000, the entity acquired and held the four blocks of land in the sense that it held the five blocks of land from which those four blocks were later carved out. Subsection 75-5(2) of the GST Act, therefore, does not exclude the entity from choosing to apply the margin scheme.

As such, the entity and the recipient of the supply may agree in writing to apply the margin scheme under section 75-5 of the GST Act when it sells the four blocks of land that previously existed as five residential blocks at 1 July 2000.

Note 1 - Subsection 75-10(1) of the GST Act provides that where the margin scheme is applied to a taxable supply of real property under the margin scheme, the amount of GST on the supply is 1/11th of the margin for the supply. Subsection 75-10(3) of the GST Act provides that, subject to section 75-11 of the GST Act, where the real property was acquired before 1 July 2000, the margin for the supply is the amount by which the consideration for the supply (sale price) exceeds the valuation of the freehold interest in the land. The fact that there is a difference between what the entity acquired (i.e. five blocks of land) and supplied (i.e. four blocks of land) does not exclude the application of subsection 75-10(3) to calculate the margin for the supplies (see the decision in Brady King Pty Ltd v Commissioner of Taxation [2008] FCAFC 118; 2008 ATC 20-034; 69 ATR 670). If, however, the entity acquired the blocks of land it sells under one of the circumstances specified in section 75-11, the margin is worked out in accordance with the relevant subsection which applies.

Note 2 - If the entity had made the supplies of the blocks of land under contracts entered into prior to the 29 June 2005 or pursuant to rights or options granted before that day the entity may have chosen to apply the margin scheme. An agreement in writing with the recipients of the supply that the margin scheme was to apply would not have been necessary.

Date of decision: 23 July 2003

Legislative References:
A New Tax System (Goods and Services Tax) Act 1999
   section 9-5
   section 75-5
   subsection 75-5(1)
   subsection 75-5(2)
   subsection 75-10(1)
   subsection 75-10(3)

Case References:
Brady King Pty Ltd v Commissioner of Taxation
   [2008] FCAFC 118
   2008 ATC 20-034
   69 ATR 670

Related Public Rulings (including Determinations)
Goods and Services Tax Ruling GSTR 2000/21

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

Siebel/TDMS Reference Number: 3661393

Business Line: Indirect Tax

Date of publication: 24 December 2003

ISSN: 1445-2782

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