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Ruling

Subject: GST and increasing adjustment relating to input tax credits

Question (a)

Are you entitled to use the purchase price of a property as consideration for the purpose of applying the margin scheme?

Answer (a)

You are entitled to use the purchase price of the property as consideration for the purpose of applying the margin scheme.

However, before you can use the purchase price as consideration for the purpose of applying the margin scheme you will need to make an increasing adjustment for the part consideration amount, referred to as the first reimbursement amount, under subsection 75-22(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

Please refer to the reasons for decision for further details

Question (b)

Are you entitled to claim input tax credit for the payment of part consideration referred to as the first reimbursement in relation to the acquisition of the property?

Answer (b)

You are not entitled to claim input tax credit for the payment of part consideration referred to as the first reimbursement in relation to the acquisition of the property.

Question (c)

Are you required to repay to the Tax Office the amount of input tax credit claimed by you in relation to the payment of part consideration?

Answer (c)

Yes, you are required to repay the amount of input tax credit claimed by you in relation to the payment of part consideration by making an increasing adjustment under subsection 75-22(1) of the GST Act.

Question (d)

Are you required to make an increasing adjustment under subsection 75-22(1) of the GST Act in relation to the input tax credits claimed in relation to the amount paid as part of the consideration for the acquisition of the property, when you make a taxable supply of this property?

Answer (d)

Yes, you are required to make an increasing adjustment under subsection 75-22(1) of the GST Act in relation to the amount paid as part of the consideration for the acquisition of the property, when you make a taxable supply of this property

Relevant facts and circumstances

You are member of a group which is a developer of land for residential and other purposes.

You are registered for Goods and Services Tax (GST).

Your enterprise was established specifically with the intention of developing the property purchased by you.

An entity of a group of entities (the first entity) entered into an agreement with the vendors of the above property to acquire the land.

The first entity paid the original deposit and instalments of the purchase price to the vendors as per Particulars of Sale.

Pursuant to the terms of the contract of sale for the land, it was proposed that the first entity would nominate another entity (the second entity) in the group as the purchaser of the land prior to the settlement.

The background to the Nomination Agreement stipulates that the first entity:

· entered into a contract with the vendor to purchase the property;

· was entitled to nominate a nominee (the second entity) as substitute purchaser to accept a transfer of the property; and the nominee agreed to pay the reimbursement amount.

The second entity in the group was nominated as nominee to purchase the property.

The reimbursement amount described in the Definitions and Interpretation section of the Nomination Agreement includes the amount of part consideration paid for the property referred to as the first reimbursement amount and an amount paid for the working capital referred to as the second reimbursement amount.

According to the information provided the vendors were not registered for GST.

Under the second nomination agreement between you, the first entity and the second entity (nominee) you agreed as assignee to assume the rights and obligations of the nominee.

The nomination agreement between the group member and the nominee provides that the nominee must pay the reimbursement amount and the nomination amount to the group member.

As assignee you acquired the above property from the vendors

The second nomination agreement states that "the assignee is substituted for the nominee under the Nomination Agreement as if the Assignee had originally been named as a party to the Nomination Agreement instead of the Nominee".

According to the Nomination Agreement, the nominee is required to pay the reimbursement amount plus GST and the Nomination amount plus GST to the group member to acquire the Nomination Agreement.

You advised us that you have received tax invoices for the reimbursement amount and the Nomination amount from the group member. You have also claimed input tax credits for the Nomination amount, the First Reimbursement Amount and the Second reimbursement Amount.

According to information provided you have agreed to reimburse the group member with an amount representing the deposit and instalments of the purchase price already paid to the owners by the group member on behalf of the nominee.

You are in the process of developing the land for the construction of new residential premises for sale.

The sale of new residential premises will be taxable supplies and you intend to apply the margin scheme to the sale of the new residential premises.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 section 11-5

A New Tax System (Goods and Services Tax) Act 1999 section 11-15

A New Tax System (Goods and Services Tax) Act 1999 subsection 75-5(2)

A New Tax System (Goods and Services Tax) Act 1999 subsection 75-10(2)

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

A New Tax System (Goods and Services Tax) Act 1999 subsection 75-22(1)

Reasons for decision

Question (a)

Margin scheme

Under subsection 75-10(2) of the GST Act the margin for the supply is the difference between the consideration for the supply and the consideration for the acquisition of the interest, unit or lease.

Subsection 75-5(2) of the GST Act provides that the margin scheme does not apply if the entire freehold interest, stratum or long term lease is acquired through a supply that was ineligible for the margin scheme.

Among other things a supply is ineligible for the margin scheme if it is a taxable supply on which the GST was worked out without applying the margin scheme.

You advised us that the vendors of the property were not registered for GST and the supply of the property by the vendors was not a taxable supply and there was no GST included in the purchase price.

We do not have sufficient information to determine whether the vendors of the property are required to be registered for GST. If it is determined later that the vendors were required to be registered for GST then the vendors' supply will be considered as taxable.

However, in this case, based on the information provided by you we consider that the supply of the property by the vendors was not taxable.

Payment of part consideration to the supply of the property

According to the Particulars of Sale contract, the first entity was required to pay the deposit and instalments to the vendors.

The background to the Nomination Agreement stipulates that the first entity:

· entered into a contract with the vendor to purchase the property;

· was entitled to nominate a nominee (the second entity) as substitute purchaser to accept a transfer of the property; and the nominee to pay the reimbursement amount.

The information provided to us indicates that you have agreed to reimburse the deposit and instalments of the purchase price already paid to the owners by the first entity.

Although you have referred to this amount as first reimbursement amount, it should be considered as a part consideration for the acquisition of the property; which was not a taxable supply to you as explained above.

In this case we do not have any information showing either that the first entity acted as an agent for you or indicating that you authorised the first entity to make this payment on your behalf to the vendors. We believe that when this payment was made you were not yet a party to the transaction.

You were subsequently assigned to purchase the property only after the first entity paid this amount to the vendors. Therefore, it is our view that this amount is not a reimbursement amount to the first entity but rather is part consideration for your acquisition of the property.

You also advised us that you claimed input tax credits in relation to the payment made to the first entity.

The claiming of input tax credit for this amount indicates that you have treated part of the supply of the property as a taxable supply made to you.

Subsection 75-22(1) of the GST Act provides that you have an increasing adjustment if:

· you make a taxable supply of real property under the margin scheme; and

· an acquisition that you made of part of the interest, unit or lease in question was made through a supply that was ineligible for the margin scheme; and

· you were, or are, entitled to an input tax credit for the acquisition.

The amount of the increasing adjustment is an amount equal to the previously attributed input tax credit amount for the acquisition.

Therefore, part of the acquisition of the property will not be eligible for the purpose of applying the margin scheme under subsection 75-5(2) of the GST Act.

However, subsection 75-22(1) of the GST Act explains that you are required to make an increasing adjustment when you make a taxable supply under the margin scheme and the acquisition of the property was ineligible for the purpose of applying the margin scheme. The amount of the increasing adjustment would be the amount of input tax credits claimed in relation to the acquisition.

In this instance the amount of the increasing adjustment would be the amount you claimed as input tax credit in relation to the payment made to the group member.

Please note that the purchase price for the acquisition of the property will only be considered as a consideration for the purposes of applying the margin scheme after making the increasing adjustment.

Question (b)

You are entitled to claim input tax credits for your creditable acquisition.

You make a creditable acquisition under section 11-5 of the GST Act if you acquire anything solely or partly for a creditable purpose; the supply of the thing to you is a taxable supply; you provide, or are liable to provide consideration for the supply and you are registered or required to be registered for GST.

Section 11-15 of the GST Act explains the meaning of creditable purpose. You acquire a thing for a creditable purpose to the extent that you acquire it in carrying on your enterprise.

You acquired the property in carrying on your enterprise of property development. However, the supply of the property to you was not a taxable supply as the vendors of the property were not registered for GST.

Therefore, you are not entitled to claim input tax credit for the part consideration amount paid to the first entity as the acquisition of the property does not satisfy all of the requirements of a creditable acquisition under section 11-5 of the GST Act.

Consideration paid for the acquisition of the Nomination Agreement

You acquired the right to purchase the property (as assignee) from the first and the second entity (nominee).

The first and the second entity made the supply of the right (Nomination Agreement) for you to purchase the property for consideration; in the course of carrying on their enterprise; the supply is connected with Australia and they are registered for GST. Therefore, the supply made to you was a taxable supply.

In this case what needs to be determined is the amount of consideration you provided or are liable to provide for that taxable supply.

Under the Nomination Agreement the second entity has to pay a total amount that includes the nomination amount and the reimbursement amount plus GST.

Furthermore you have confirmed to us that the first entity has issued tax invoices to you in relation to the reimbursement amount and the nomination amount.

Therefore, based on the information provided, it is our view that the total consideration for your acquisition would be the total of reimbursement amount and the nomination amount. It is also our view that your acquisition satisfies all of the requirements of a creditable acquisition under section 11-5 of the GST Act. Consequently, you are entitled to claim input tax credits for the total consideration amount paid under the nomination agreement.

Additional Comments:

We consider, in this case, that there were two supplies made to you. The supply of the property was not a taxable supply to you as the vendors of the property are not registered for GST. The supply of the right to acquire the land as assignee was a taxable supply as explained above.

Please note that the consideration provided to these two supplies should be considered separately.

Based on the information provided by you, you have claimed input tax credits for the nomination amount, and the reimbursement amounts paid as part consideration to the acquisition of the property. The First Reimbursement Amount is the part consideration you paid for the acquisition of the property. Therefore, you are required to make an increasing adjustment for this amount as explained above.

Question (c)

As explained in question (b), the acquisition of the property was not a creditable acquisition to you. Therefore you are not entitled to claim input tax credit for the payment of part consideration for the acquisition of the property.

Question (a) explains the reasons for you to make an increasing adjustment under subsection 75-22(1) of the GST Act.

Therefore, as you intend to use the margin scheme in relation to your property enterprise, you are required to repay the amount claimed as input tax credit for the payment of part consideration to the first entity by way of making an increasing adjustment under subsection 75-22(1) of the GST Act.

Question (d)

Please refer to the question (a) for the reasons for decision.

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