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Ruling

Subject: GST and the sale of property

Question 1:

Is the sale of the lots to a developer, subject to GST?

Answer:

The sale of the lots to a developer is a mixed supply of residential premises (input taxed) and farm land (taxable) and therefore, only the taxable part of the sale will be subject to GST.

Question 2:

If yes, can the margin scheme be used to calculate the GST payable on the sale?

Answer:

The margin scheme can only be used if, at the time of the supply of the lots, all of the requirements for its use have been met.

Relevant facts and circumstances

You have been registered for GST since 1 July 2000.

You own property which consists of a number of lots on which you have conducted farming activities.

Each lot also has a house which is currently occupied. The occupants only have the house and its immediate surrounds for their personal use.

Any part of the lots that is not used for residential purposes is used or available for use for farming activities (that is, farm land).

Recently, you entered into negotiations with a developer to sell the lots for consideration. A sale contract is in the process of being drafted.

Once the sale contract is signed, the developer will have access to the lots so that the developer can do any work necessary for the development application to be submitted to Council. The developer intends to subdivide the lots into a number of blocks.

The developer has not indicated that he intends to carry on any farming activities on the lots after purchase.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Section 9-5

A New Tax System (Goods and Services Tax) Act 1999 Paragraph 9-5(a)

A New Tax System (Goods and Services Tax) Act 1999 Paragraph 9-5(b)

A New Tax System (Goods and Services Tax) Act 1999 Paragraph 9-5(c)

A New Tax System (Goods and Services Tax) Act 1999 Paragraph 9-5(d)

A New Tax System (Goods and Services Tax) Act 1999 Section 9-40

A New Tax System (Goods and Services Tax) Act 1999 Section 9-80

A New Tax System (Goods and Services Tax) Act 1999 Section 40-65

A New Tax System (Goods and Services Tax) Act 1999 Subsection 40-65(1)

A New Tax System (Goods and Services Tax) Act 1999 Section 38-480

A New Tax System (Goods and Services Tax) Act 1999 Division 75

A New Tax System (Goods and Services Tax) Act 1999 Subsection 75-5(1)

A New Tax System (Goods and Services Tax) Act 1999 Paragraph 75-5(1A)(a)

A New Tax System (Goods and Services Tax) Act 1999 Subsection 75-10(3)

A New Tax System (Goods and Services Tax) Act 1999 Section 75-11

A New Tax System (Goods and Services Tax) Act 1999 Section 195-1

Reasons for decision

Question 1:

Summary

The sale of the lots is a mixed supply of residential premises which are input taxed and farm land which is taxable. Therefore, only part of the sale, being the sale of the farm land, will be subject to GST.

Detailed reasoning

Section 9-40 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that you must pay GST on any taxable supply that you make.

The word 'you' used in the GST legislation applies to entities (individuals, companies, trusts, etc) generally.

You make a taxable supply where you satisfy the requirements of section 9-5 of the GST Act, which states:

You make a taxable supply if:

· you make the supply for *consideration; and

· the supply is made in the course or furtherance of an *enterprise that

· you *carry on; and

· 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.

(*Denotes a term defined in section 195-1 of the GST Act)

In this case, you will supply the lots for consideration. Therefore, paragraph 9-5(a) of the GST Act is satisfied.

In relation to paragraph 9-5(b) of the GST Act, the facts show that you are carrying on a farming enterprise and a leasing enterprise. However, the requirement in paragraph 9-5(b) of the GST Act is that the supply is made in the course or furtherance of an enterprise that is carried on. The term 'in the course or furtherance of' is not defined in the GST Act, but is broad enough to cover most supplies made in connection with an enterprise. As well, section 195-1 of the GST Act provides that carrying on an enterprise includes doing anything in the course of the commencement or termination of the enterprise.

Your sale of the lots will be done in the course of the termination of your farming and leasing enterprises. Therefore, the sale of the lots will be a supply made in the course or furtherance of the enterprises carried on by you. As such, the requirement in paragraph 9-5(b) of the GST Act is satisfied.

In addition, the requirements of paragraphs 9-5(c) and (d) of the GST Act are satisfied as the sale of the lots is connected with Australia as the lots are located in Australia and you are registered for GST.

Therefore, the sale of the lots will be a taxable supply and thus, subject to GST unless the sale of the lots, in whole or in part, is GST-free or input taxed.

GST-free supply

Of relevance to this case is section 38-480 of the GST Act which provides that a supply of a freehold interest in land is GST-free if:

· the land is land on which a farming business has been carried on for at least the period of five years preceding the supply, and

· the recipient of the supply intends that a farming business be carried on, on the land.

In this case, the proposed purchaser of the lots, a developer, has not indicated that he intends to carry on any farming activities on the lots after purchase. Rather, we have been advised that he intends to subdivide the lots into a number of blocks for sale.

Therefore, as the second requirement of section 38-480 of the GST Act has not been met, the sale of the lots is not a GST-free supply under section 38-480 of the GST Act. Nor, based on the information provided, is the sale of the lots GST-free under any of the other provisions in the GST Act.

Input taxed supply

As there are houses on each of the lots it is necessary to consider section 40-65 of the GST Act which deals with sales of residential premises.

In particular, subsection 40-65(1) of the GST Act provides 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.

The term 'residential premises' is defined in section 195-1 of the GST Act as land or a building that:

· is occupied as a residence or for residential accommodation, or

· is intended to be occupied, and is capable of being occupied, as a residence or for residential accommodation.

Based on the facts provided, all of the houses are currently being used for residential accommodation and as such, they will satisfy the definition of residential premises. Therefore, the sales of each of the houses will be an input taxed supply of residential premises.

However, the facts show that not all of the land on each lot is available for the personal use of the occupants of the houses.

In the definition of residential premises there is no specific restriction on the area of land that can be included with a building. Instead, the extent to which land forms part of residential premises to be used predominantly for residential accommodation is a question of fact and degree having regard to all of the circumstances of the case. Some of the factors to be considered are the use of the land, the area covered by any leases or rental agreements, access rights, etc.

In this case, most of the land on each lot has been used or available for use in your farming enterprise. As such, this part of each lot (that is, the farm land) is not land that is enjoyed along with each house and therefore, the farm land is not land or a building that is occupied or intended or capable of being occupied as a residence. Thus, the farm land is not an input taxed supply of residential premises. In addition, the farm land is not an input taxed supply under any of the other provisions in the GST Act.

Accordingly, the sale of the lots, as a whole, is not an input taxed supply. Rather, it is only that part of the sale of the lots which relates to the house and the portion of land that is attributable to each house that is an input taxed supply.

Therefore, as an input taxed supply is not subject to GST, you will not incur a GST liability with respect to the sale of each of the houses and any land associated with them.

However, the sale of that part of each lot that is farm land is subject to GST. This is because the sale of the farm land meets the requirements of section 9-5 of the GST Act and is not input taxed or GST-free.

Mixed Supply

Where a supply is a combination of taxable and non-taxable parts it is necessary to determine if the supply is a mixed supply or a composite supply.

A mixed supply is a supply which consists of at least one taxable and one non-taxable part, each of which is separately identifiable. Where this occurs, the consideration for a mixed supply needs to be apportioned between the taxable and non-taxable parts to find the consideration for the taxable part as GST is only payable on a mixed supply to the extent that the supply is taxable.

A composite supply is a supply that contains only one identifiable or dominant part but it also includes another part that is not recognised in its own right. That is, the other part is only integral, ancillary or incidental to the dominant part. Where this occurs, all of the parts of the supply are identifiable as being either wholly taxable, or wholly non-taxable. As such, there is no need to apportion the consideration for the supply as GST is only payable on a composite supply if the dominant part of the supply is taxable.

In this case, you are making a mixed supply as the sale of the lots is made up of two separately identifiable parts, being an input taxed supply of residential premises (the houses plus any associated land) and a taxable supply of farm land. Therefore, you will need to apportion the consideration for the supply of the lots in order to determine the consideration for the taxable supply of the farm land.

Section 9-80 of the GST Act deals with supplies that are partly taxable and partly GST-free or input taxed and describes how to work out the value of that part of the actual supply that is a taxable supply.

In addition, Goods and Services Tax Ruling GSTR 2001/8 provides guidance on how to apportion the consideration for a supply that includes both taxable and non-taxable parts.

In particular, GSTR 2001/8 explains that where there is no legislative provision specifying the basis for apportionment, you may use any reasonable method (direct or indirect) to apportion the consideration for a mixed supply. However, the apportionment must be fair and reasonable in the circumstances of the case and not just the method that gives the best result. Plus, you must keep records to explain the method used.

Question 2:

Summary

You are only eligible to use the margin scheme to calculate the GST payable on the taxable part of the sale of the lots (that is, the farm land) if you and the developer have agreed in writing, before the time of the supply, to use the margin scheme.

Detailed reasoning

Generally, the GST payable on a taxable supply is 1/11^th of the consideration received for that supply. However, Division 75 of the GST Act allows a vendor to use the margin scheme to calculate the GST payable on sales of real property if certain requirements are met.

This concession is also available to the taxable part of a mixed supply of real property as long as all of the requirements to use the margin scheme are met.

One of these requirements is that the vendor and the purchaser have agreed in writing that the margin scheme is to apply (subsection 75-5(1) of the GST Act).

Under paragraph 75-5(1A)(a) of the GST Act, this agreement must be made on or before the making of the supply which is usually the settlement date. While there is no set format for a written agreement, the written statement must make it clear that the vendor and the purchaser have agreed to use the margin scheme for the sale and it should identify the property being sold. In most cases, it is expected that this written agreement will form part of the sale contract.

Under the margin scheme, the amount of GST payable is 1/11^th of the margin for the supply.

According to subsection 75-10(3) 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 exceeds the approved valuation of that real property at the date specified in the table in this subsection, unless subsection 75-11 of the GST Act applies.

Based on the information provided, section 75-11 of the GST Act will not apply in this case.

Our records show that you were registered for GST from 1 July 2000 and therefore, the valuation date under subsection 75-10(3) of the GST Act is 1 July 2000.

As a general rule, the valuation as at the valuation date must be made by the due date for lodging the activity statement for the tax period to which the taxable supply of real property relates.

The three valuation methods for taxable supplies of real property made on or after 1 March 2010 are specified in the A New Tax System (Goods and Services Tax) Margin Scheme Valuation Requirements Determination MSV 2009/1. The three methods are:

· a valuation of the market value of the real property at the valuation date determined in writing by a professional valuer

· the purchase price in a contract entered into before 1 July 2000 by parties dealing at arm's length, or

· the most recent value (made before the valuation date) set by a State or Territory Government department for rating or land tax purposes.

In respect of mixed supplies, clause 10 of MSV 2009/1 provides that the valuation must be of the entire interest in real property that is in existence at the valuation date and then apportioned on a fair and reasonable basis to ascertain the part of the valuation that relates to the portion being supplied under the margin scheme.

At this stage no sale contract has been entered into between you and the developer for the sale of the lots and as such, there is no written agreement between the parties to use the margin scheme.

Therefore, if you and the developer enter into a written agreement to use the margin scheme before the lots are supplied, you will be eligible to use the margin scheme to calculate the GST payable on the taxable part of the sale, being the sale of the farm land.

If the margin scheme is used, you are not required to issue a tax invoice to the developer because a purchaser cannot claim an input tax credit for a sale made under the margin scheme. However, you may issue a receipt for the price paid.

It should be noted that if the margin scheme is not used to calculate the GST payable on the sale of the farm land, you will be required to issue a tax invoice showing the amount of GST relevant to the taxable part of the supply. However, in this situation, the developer will not be able to use the margin scheme for the subsequent sale of the subdivided blocks which are applicable to the farm land.

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