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Ruling

Subject: GST and margin scheme

Question 1

Is the margin scheme correctly applicable to the sales of four subdivided lots?

Answer

Yes, the margin scheme is applicable to the sales of the four subdivided lots.

Question 2

If so, what is the appropriate method to use to apportion the acquisition costs applicable to the subdivided lots?

Answer

To ascertain the proportion of the purchase price that relates to subdivided allotment, you can use any fair and reasonable method of apportionment as set out in GSTR 2006/8.

Question 3

Is the GST payable equivalent to 1/11^th of the difference between the sale price and the amounts calculated in Question 2 above?

Answer

Yes, the GST payable will be equivalent to 1/11^th of the difference between the sale price adjusted for settlement adjustments and the amounts calculated in Question 2 above.

Relevant facts and circumstances

Entity X (you) purchased a property (the Property) pursuant to a Contract of Sale (the Contract).

The Property consisted of land with a dwelling on it.

The vendor under the Contract was an individual who was not registered for GST, nor was he required to be registered for GST. As such, no GST was applicable to the purchase and you did not make any input tax credit claims in relation to the purchase of the Property.

You are in the process of subdividing and developing the Property into 4 lots together with a common property which comprises of a driveway.

Each lot will enjoy a 25% entitlement together with a 25% liability in relation to the common property. Each lot will also have a new residential premises constructed on it.

You have entered into four separate Contracts of Sale for the respective lots. Each contract of sale has a Special Condition in relation to the application of GST to the sale.

The settlement of each lot is to take place fourteen days after registration of the plan of subdivision and the issue of an Occupancy Permit.

Reasons for decision

Question 1

Is the margin scheme correctly applicable to the sales of the four subdivided lots?

Detailed reasoning

The margin scheme is an alternative method by which a supplier is able to calculate the amount of GST payable on a supply of property. Division 75 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) outlines the margin scheme and Section 75-5 of the GST Act states:

Applying the margin scheme

The margin scheme applies in working out the amount of GST on a taxable supply of real property that you make by:

(a)  selling a freehold interest in land; or

(b)  selling a stratum unit; or

(c)  granting or selling a long-term lease;

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

Goods and Services Tax Ruling GSTR 2006/8 Goods and services tax: the margin scheme for supplies of real property acquired on or after 1 July 2000 (GSTR 2006/8) deals with the application of the margin scheme under Division 75 of the GST Act.

Paragraph 13 of GSTR 2006/8 states:

13. 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 the amount by which the consideration for the supply exceeds the consideration for the acquisition of the real property unless subsection 75-10(3) or section 75-11 applies. Section 75-11 applies to supplies made on or after 17 March 2005.

Whether you can use the margin scheme depends on how and when you first purchased your property. You can use the margin scheme if you purchased the property before 1 July 2000 (the start of GST) or if it is purchased after 1 July 2000 from someone:

§ that was not registered or required to be registered for GST

§ who sold you existing residential premises

§ who sold the property to you as part of a GST-free going concern, or

§ who sold you the property using the margin scheme.

You cannot use the margin scheme if when you first purchased the property the sale to you was fully taxable and the margin scheme was not used.

The Property was acquired from an individual who was not registered for GST, nor was he required to be registered for GST and there was an existing residential premises on it at the time of the purchase. You have not made any claims for input tax credits in your activity statements in relation to your purchase of the Property.

You can only apply the margin scheme to the sale of property if the sale of the property is taxable. You have advised that the sale of the newly constructed residential properties on the four lots is in the course of furtherance of your enterprise and will therefore be considered to be taxable supplies.

Paragraphs 18 and 27 of GSTR 2006/8 state the following in relation to the margin scheme:

18. Subsection 75-5(1) provides that you may use the margin scheme if the supplier and the recipient have agreed in writing that the margin scheme is to apply. Subsection 75-5(1A) provides that the agreement must be made on or before making the supply, or within such further period as the Commissioner allows

27. Commonly, contracts specify that there is no GST payable on a supply, but that if the supply is taxable then the GST payable will be calculated under the margin scheme. In these circumstances, the Commissioner accepts that the requirements in paragraph 75-5(1A)(a) have been satisfied.

Sales of property using the margin scheme that are made from 29 June 2005 onwards require a written agreement between the seller and purchaser to use the margin scheme. As a seller you must agree in writing before the settlement date, with the purchaser to sell the property under the margin scheme.

You have advised that the sale of the four subdivided lots have been made subject to a special condition in the Contract of Sale whereby the Vendor is to apply the margin scheme as outlined in Division 75 of the GST Act.

Given paragraph 27 of GSTR 2006/8, we accept that the requirements of subsection 75-5(1) and paragraph 75-5(1A)(a) are met.

Therefore you may apply the margin scheme to your sales of the four subdivided properties.

Question 2

If so, what is the appropriate method to use to apportion the acquisition costs applicable to the subdivided lots?

Detailed reasoning

When you subdivide land and subsequently supply it as several smaller properties, you must apportion the cost of acquisition appropriately, for the purposes of the margin scheme.

Section 75-15 of the GST Act states that for the purpose of working out the margins for subdivided land:

……if the freehold interest … you supply only relates to part of land or premises that you acquired, the consideration for your acquisition of that part is the corresponding proportion of the consideration for the land or premises that you acquired.

You may use any reasonable method of apportionment to work out the proportion of the purchase price for a subdivided allotment or stratum title unit. If you purchase land and subdivide it, or build strata title units on it and later apply the margin scheme, the margin is the selling price less the corresponding portion of the price you paid for the property.

Paragraphs 58, 59 and 60 state the following in relation to apportionment methods.

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.

59. Examples of some methods that you may use are as follows:

§ area - the consideration for the real property acquired is apportioned on the basis of the proportion of the total saleable area of the development represented by the particular lot;

§ lots or sites - the apportionment is based on the number of lots or sites;

§ anticipated selling price - the consideration for the real property that you acquired is apportioned on the basis of the proportion of the total anticipated selling price of the development represented by the particular lot; and

§ total aggregated selling prices - the consideration for the real property that you acquired is apportioned on the basis of the proportion of the total aggregated selling prices of the development represented by the particular lot. This method is only suitable for a development where all the lots are sold in a time that allows the aggregated selling prices to be calculated by the time the relevant Activity Statements are due to be lodged.

60. The methods above may be used provided they give a fair and reasonable result. Use of 'lots or sites' as an apportionment method would not give a fair and reasonable result if the size or value of the lots or sites varied significantly.

You have proposed an apportionment method based on the number of lots or sites, that is as there are four lots, you propose to divide the purchase price by four giving an acquisition cost for each lot. However as per paragraph 60 of GSTR 2006/8 this may not provide a fair and reasonable result as the size of the lots and the sale price vary.

A preferred approach would be to apportion the purchase price in accordance with the area of the lots. As all lots have the same entitlements and liability to the common property, the common property can be divided by four and added on to the size of the lots. This will then be applied to the adjusted purchase price as a percentage of the total area. Note however, this calculation is proposed on the basis that the land areas involved are all of uniform or similar values.

Paragraph 47 of GSTR 2006/8 state the following in relation to the consideration for the supply and settlement adjustments:

47. The consideration for the supply and the consideration for the acquisition may be either monetary or non-monetary or both. The consideration for the supply or acquisition should take into account adjustments on settlement that are commonly made for rates, land tax and other outgoings. Goods and Services Tax Determination GSTD 2006/3 contains a detailed discussion on this topic.

Also you will need to consider paragraphs 48 and 49 of GSTR 2006/8 which state the following in relation to the consideration for the acquisition:

48. The consideration for the acquisition of the real property is the original purchase price after taking into account settlement adjustments. In the case of subdivided land or a stratum unit, the effect of section 75-15 is that the consideration for the acquisition is the corresponding proportion of the consideration for the real property that you acquired. If land that is part of the original broadacres is used for public purposes including roads, parklands or utilities ('lost land'), the acquisition consideration of the entire broadacres is apportioned to the total number of subdivided lots, so that the sum of the apportioned amounts equals the acquisition consideration for the broadacres (including the 'lost land').

49. The consideration for the acquisition does not include costs that the supplier had incurred that were associated with their purchase of the real property, such as their legal expenses and stamp duty. It also does not include costs incurred in developing the real property, prior to or after its acquisition.

As such the original purchase price of the Property will need to be adjusted for settlement adjustments made on settlement prior to being apportioned to the four individual lots. Furthermore, the purchase price should not include the costs of purchase such as legal expenses or stamp duty and the costs incurred in subdividing and developing the Property.

It is to be noted that the sale price used to calculate the margin will also need to take into account settlement adjustments as per paragraph 47 of GSTR 2006/8.

Question 3

Is the GST payable equivalent to 1/11^th of the difference between the sale price and the amounts calculated in Question 2 above?

Detailed reasoning

The amount of GST you must normally pay on a property sale is equal to one-eleventh of the total sale price. When you use the margin scheme, the amount of GST you must pay on a property sale is equal to one-eleventh of the margin.

Paragraphs 45 and 46 of GSTR 2006/8 states the following in relation to the calculation of the margin:

45. Under subsection 75-10(2), the margin for the supply is the amount by which the consideration for the supply exceeds the consideration for the acquisition of the real property.

46. If the consideration for the acquisition is equal to or greater than the consideration for the supply, then the margin for the supply is zero.

As discussed at Question 2, you must take into account settlement adjustments.

Your margin is the difference between the sale price and the amount you paid for the property.

Your margin is not:

§ the profit margin - unlike an accounting profit margin, the margin on the sale does not take into account costs you incurred to develop the new property or subdivide the land.

§ the selling price minus a valuation of the property for a property purchased after 1 July 2000.

§ worked out the same way as a capital gain - it is possible that you still pay GST under the margin scheme when you have no capital gain for income tax purposes.

As such the GST payable will be 1/11 of the difference between the sale price for each lot adjusted for settlement adjustments and the apportioned purchase price as determined in question 2 above.

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