Edited version of private ruling

Authorisation Number: 1011478460559

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Ruling

Subject: GST and the sale of strata units

Questions

1. Does the supply of your share of strata units (units) by the land owners (owners) to you, or to third party buyers on your behalf constitute a taxable supply from the owners under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer: Yes.

The supply of your share of the units by the owners to you, or to third party buyers on your behalf constitutes a taxable supply under section 9-5 of the GST Act.

2. Will the owners be able to apply the margin scheme to the supply of your share of units to you, or to third party buyers on your behalf?

Answer: Yes.

The owners will be able apply the margin scheme to the supply of your share of units to you, or to third party buyers on your behalf.

3. Will you be eligible to apply the margin scheme to the subsequent supply of your units to third party buyers, following the transfer of the unsold units to you?

Answer: Yes.

You will be eligible to apply the margin scheme to the subsequent supply of commercial units to third party buyers, following the transfer of them to you by the owners. However, you will not be eligible to apply the margin scheme to the subsequent supply of residential units to third party buyers, following the transfer of them to you by the owners.

Relevant facts and circumstances

'A' owns the property 'X'. 'A' and 'B' own the property Y as joint tenants. 'A and B' are married. 'X and Y' are adjoining properties. Each property was purchased by the owners prior to 1 July 2000.

The owners obtained a development approval for the construction and development of the property consisting of 'X and Y' (property).

Two years ago, you entered into a joint venture agreement (JV agreement) with the owners to develop the property. The project involved the demolition of existing buildings and erection of a number of residential and commercial units and a car park at the property.

Under the JV agreement, each of the joint venturers covenants and agrees with each other that the joint venture shall be conducted as a commercial venture.

A clause in the JV Agreement specifies the developer's responsibilities under the agreement. Such responsibilities include the demolition of the existing improvements on the property and constructing the specified units and the car park.

As per the JV agreement, the participants engaged a builder to construct the units pursuant to a building contract.

As per the JV agreement, after completing the construction work the owners will register a strata subdivision of the property. Thereafter, the owners will transfer approximately one half of the units to you and retain the balance. Each party will obtain title to the respective proportion of the units as set out in the agreement.

The JV agreement also provides that if you sell any of your proportionate interest before it has been transferred to you, the owners will at your direction execute the contracts of sale and account for the proceeds of the sale to the lender until the loan has been paid in full and thereafter to you.

Your intention was to sell all your units prior to the registration of the strata plan. Already the owners have sold a number of units on your behalf.

The builder charged construction costs inclusive of GST to you. You have claimed the relevant input tax credits.

The owners intend to retain their share of units and rent them. You will sell your share of unsold units, after the transfer of titles to you.

The project was not registered as a GST joint venture. The two properties were held by the owners as private assets until they entered into the JV agreement.

'A' is registered for GST as a property operator with effect from 1 July 2000. Further, the joint tenants, 'A and B' are registered for GST as a partnership of property operators after 1 July 2000.

Reasons for the decisions

Question 1

GST is payable on the taxable supplies. Section 9-5 of the GST Act states that you make a taxable supply if:

· you make the supply for consideration;

· the supply is made in the course or furtherance of an enterprise that you carry on;

· the supply is connected with Australia; and

· you are registered or required to be registered.

However, the supply is not a taxable supply to the extent that it is GST-free or input taxed.

Supply for consideration

You entered into the JV agreement with the owners in order to develop their property. The owners retained ownership over the property and they acquired property development services from you in order to develop their property.

Paragraph 9-10(2)(d) of the GST Act states that a supply includes a grant, assignment or surrender of real property. Therefore, the transfer of your share of the units to you or to third party buyers on your behalf constitutes a supply from the owners to you for the purposes of the GST Act. The property development services supplied by you to the owners constitute your consideration for this supply. Therefore, the owners make their supply for consideration.

Carrying on an enterprise

Subsection 9-20(1) of the GST Act defines an enterprise to include, amongst other things, an activity or series of activities done:

· in the form of a business; or

· in the form of an adventure or concern in the nature of trade; or

· on a regular or continuous basis in the form of a lease, licence or other grant of an interest in property.

Miscellaneous Taxation Ruling MT 2006/1 (MT 2006/1) provides guidance on the meaning of an entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number.

Paragraph 1 of Goods and Services Tax Determination GSTD 2006/6 provides that the guidelines in MT 2006/1 are considered to apply equally to the term 'enterprise' as used in the GST Act and can be relied upon for GST purposes.

Whether or not an activity, or series of activities, constitutes an enterprise is a question of fact and degree having regard to all of the circumstances of the case.

In your case, it is necessary to determine whether the owners carried on an enterprise and the supplies of units are being made in the course of that enterprise.

Paragraph 260 of MT 2001/6 states, assets can change their character but cannot have a dual character at the same time.

Paragraphs 262-263 and 265 of MT 2006/1 refer to isolated transactions and sales of real property:

262. The question of whether an entity is carrying on an enterprise often arises where there are 'one-off' or isolated real property transactions.

263. The issue to be decided is whether the activities are an enterprise in that they are of a revenue nature as they are considered to be activities of carrying on a business or an adventure or concern in the nature of trade (profit making undertaking or scheme) as opposed to the mere realisation of a capital asset…..

265. From the Statham and Casimaty cases a list of factors can be ascertained that provide assistance in determining whether activities are a business or an adventure or concern in the nature of trade (a profit-making undertaking or scheme being the Australian equivalent, see paragraphs 233 to 242 of this Ruling). If several of these factors are present it may be an indication that a business or an adventure or concern in the nature of trade is being carried on. These factors are as follows:

· there is a change of purpose for which the land is held;

· additional land is acquired to be added to the original parcel of land;

· the parcel of land is brought into account as a business asset;

· there is a coherent plan for the subdivision of the land;

· there is a business organisation - for example a manager, office and letterhead;

· borrowed funds financed the acquisition or subdivision;

· interest on money borrowed to defray subdivisional costs was claimed as a business expense;

· there is a level of development of the land beyond that necessary to secure council approval for the subdivision; and

· buildings have been erected on the land.

Example 31 of MT 2006/1 refers to an isolated property transaction, which amounts to carrying on an enterprise:

284. Prakash and Indira have lived in the same house on a large block of land for a number of years. They decide that they would like to move from the area and develop a plan to maximise the sale proceeds from their land.

285. They consider the best course of action is to demolish their house, subdivide their land into two blocks and to build a new house on each block.

286. Prakash and Indira lodge the necessary development application with the local council and receive approval for the plan. They arrange for:

· their house to be demolished;

· the land to be subdivided;

· a builder to be engaged;

· two houses to be built;

· water meters, telephone and electricity to be supplied to the new houses; and

· a real estate agent to market and sell the houses.

287. Prakash and Indira carry out their plan and make a profit. They are entitled to an ABN in respect of the subdivision on the basis that their activities go beyond the minimal activities needed to sell the subdivided land. The activities are an enterprise as a number of activities have been undertaken, which involved the demolition of their house, subdivision of their land and the building of new houses.

In your case, although the owners have held the relevant land as private assets for some considerable time, there has been a change of purpose for which the land is held. There has been a coherent plan to develop their property into strata units. They entered into a JV agreement with you, acquired property development services from you, obtained council approval for the development, allowed you to demolish the existing buildings and construct the new strata units including the car park. It has been a substantial property development project.

Based on the above example, we consider that the owners carried on a property development enterprise on their land through the joint venture, in the form of an isolated property transaction. Therefore, they are supplying your share of the units in the course or furtherance of an enterprise.

Connection with Australia

The supply is connected with Australia as the units are located within Australia.

Registered or required to be registered

Our records indicate that the owners are registered for GST. 'A' has been registered for GST since 1 July 2000. The joint tenants, 'A' and 'B' have been registered for GST as a partnership post 1 July 2000.

GST-free and input taxed supply

The supply of newly constructed units to you or to third party buyers on your behalf is not a GST-free or an input taxed supply under any provision of the GST Act.

Accordingly, when the owners supply your share of units to you or to third party buyers on your behalf, they satisfy all the requirements of section 9-5 of the GST Act. Therefore, the supply is taxable and subject to GST.

Decision 2

Application of the margin scheme to the supply of strata units

Section 75-5 of the GST Act refers to the application of the margin scheme. Under subsection 75-5(1) of the GST Act, the margin scheme applies in working out the amount of GST on a taxable supply of a stratum unit, if you and the recipient of the supply have agreed in writing that the margin scheme should apply. The agreement must be made on or before you make the supply or within such further period as the Commissioner allows.

Under subsection 75-5(3) of the GST Act, a supplier cannot use the margin scheme option, if GST was imposed when the property was acquired by the supplier and the GST was not worked out using the margin scheme. As the owners acquired the property before 1 July 2000, no GST was imposed when they acquired the property. Therefore, they may apply the margin scheme when the units are supplied to you or to third party buyers, on your behalf.

In your case, if the owners wish to apply the margin scheme to the supply of any unit, they are required to enter into a written agreement with the recipient on the application of the margin scheme to the supply. That agreement must be made on or before you make the supply or within such further period as the Commissioner allows. As explained below, a supply of property occurs at settlement. Therefore, the owners must enter into a margin scheme agreement, on or before the relevant settlement date.

If the settlement of a strata unit has already taken place without entering into an agreement with the purchaser to apply the margin scheme, the owners will have to apply in writing to the Commissioner, requesting a further period within which to enter into the margin scheme agreement, explaining the reasons for failure to enter into such an agreement prior to the settlement.

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

Subsection 75-10(2) of the GST Act states that the margin for the supply of a unit is the amount by which the consideration for the supply exceeds the consideration for your acquisition of the unit.

Valuation of the properties

Subsection 75-10(3) of the GST Act requires an approved valuation of the freehold interest, strata unit or long-term lease as at the day specified under the corresponding item in the third column of the table, provided under paragraph 75-5(3)(b) of the GST Act.

Under item 1 of the abovementioned table attached to paragraph 75-5(3)(b) of the GST Act, if a supplier acquired the property before 1 July 2000, and the items 2, 3, and 4 of the table do not apply, an approved valuation is to be made as at 1 July 2000. Under item 2 of that table, if a supplier does not become registered or required to be registered until after 1 July 2000, such a valuation of the property has to be obtained as at the date specified in the subsection.

'A' has acquired their property prior to 1 July 2000. Our records indicate that they are registered for GST on their own account effective from 1 July 2000. Therefore, under the provisions of subsection 75-10(3) of the GST Act, for margin scheme purposes, an approved valuation of that property has to be obtained as at 1 July 2000.

'A and B' have acquired their property as joint tenants, prior to 1 July 2000. They have been registered for GST as a partnership post 1 July 2000. Under the provisions of subsection 75-10(3) of the GST Act, for margin scheme purposes, an approved valuation of that property has to be obtained as at the effective date of their GST registration, or the date on which they applied for registration, if it is earlier.

GSTR 2006/7

Goods and Services Tax Ruling GSTR 2006/7 (GSTR 2006/7) refers to how the margin scheme applies to a supply of real property made on or after 1 December 2005 that was acquired or held before 1 July 2000.

Paragraph 44 of GSTR 2006/7 provides that for the sale of a stratum unit, the supply and the acquisition is made at settlement as this is when the purchaser obtains unconditional possession of a registrable instrument of transfer.

Paragraph 67 of GSTR 2006/7 provides that often the real property that is supplied was not in existence at the valuation date. An example of this is when strata units are built on the land.

Paragraph 68 of GSTR 2006/7 provides that if the real property that is supplied was not in existence at the valuation date but was subdivided from the interest that was in existence at that date, the valuation must be made as follows. First, a valuation of the interest, unit or lease in existence at the valuation date is undertaken. Thereafter, the valuation of that interest, unit or lease is apportioned on any fair and reasonable basis, to ascertain the part of the valuation that relates to the interest, unit or lease that you supplied. It is not necessary for the apportionment to be undertaken by a professional valuer, if the professional valuation method is used to value the real property.

As such, the owners have to obtain a valuation for each of the two properties separately and apportion the valuations to each strata unit supplied on any reasonable basis, in order to calculate the margin for each supply of a strata unit.

Input tax credits for acquisition of strata units

Under subsection 75-20(1) of the GST Act, an acquisition of a strata unit is not a creditable acquisition, if the supply of the strata unit was a taxable supply under the margin scheme.

Accordingly, if you acquire your share of strata units from the owners under the margin scheme, you are not entitled to claim any input tax credits for the GST included in the price of the supply. This is irrespective of whether the strata unit is residential or commercial. The same rule applies to third party buyers of your strata units from the owners.

Decision 3

Sale of strata units by you

Your intention is to sell all the unsold strata units, once the titles are transferred to you by the owners.

Section 40-65 of the GST Act refers to sale of residential premises. Subsection 40-65(1) of the GST Act states that 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, regardless of the term of occupation.

Subsection 40-65(2) of the GST Act states that the sale is not input taxed to the extent that the residential premises are new residential premises regardless of the term of occupation.

Subsection 40-75(1) of the GST Act states that residential premises are new residential premises if they have not previously been sold as residential premises and have not previously been the subject of a long term lease.

Accordingly, where the titles to the residential strata units are transferred to you, they will no longer be new residential premises. When you sell such a strata unit to a third party buyer, it will be an input taxed supply and therefore, the margin scheme has no application. You will not be entitled to claim input tax credits on any acquisitions made in respect of the sale of such a unit. For example, you will not be entitled to claim input tax credits in respect of legal expenses and agent's commissions incurred in the process of selling that unit.

If the unsold commercial strata units are transferred to you under the margin scheme and you decide to sell them to third party buyers, you may apply the margin scheme to the sale of such units. As mentioned above, you are not entitled to claim any input tax credits for the GST included in the purchase price of the unit.

However, you are entitled to claim the input tax credits for buying and selling expenses such as legal fees and agent's commissions in respect of the commercial strata units.

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