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Ruling

Subject: GST and margin scheme

Question 1:

Is the Developer entitled to apply subparagraph 75-11(5)(e)(ii) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) for the purposes of determining its margin scheme base?

Answer:

Yes.

Question 2:

For the purposes of applying subparagraph 75-11(5)(e)(ii) of the GST Act may the consideration paid or provided by the Vendor be calculated as set out in the 'relevant facts' below?

Answer:

Yes.

Relevant facts and circumstances

The land in question originally comprised two lots. Prior to 1 July 2000, the land was used as farming land, but had been identified as a future residential development site.

The Vendor acquired the land prior to 2010 and in doing so provided consideration. There was not GST on the supply.

Pursuant to a Contract of Sale the Vendor agreed to sell a X% interest in the land to X as tenants in common, meaning the Vendor retained a Y% interest in the land. The Commissioner issued a private ruling stating that the sale of the Vendor's X% interest in the land to X was a GST-free supply of a going concern.

X and the Vendor simultaneously entered a Partitioning Agreement with respect to the land. Pursuant to the Partitioning Agreement, the land would be subdivided and partitioned. This process created two new lots (referred to as Lot A and Lot B). As a result of the partitioning arrangement, the Vendor become the sole proprietor of Lot A and X became the sole proprietor of Lot B. The Commissioner stated, in the private ruling that the supplies which the Vendor and X made to each other in respect of the partitioning arrangements were GST-free supplies of going concerns.

The supplies that the Vendor and X made to each other in respect of the sale of theX% interest and the partitioning arrangements were completed in 2007.

The Vendor proceeded to develop Lot A and began to sell some of the land as residential lots. The Vendor sold the balance of Lot A (i.e. being the majority of the interest, which had not been sold as residential lots) to the Developer, as a GST-free supply of a going concern, with the sale completing in 2011. This transaction was also ruled on by the Commissioner.

The Developer intends to sell the land that it has acquired from the Vendor which has been subdivided into residential lots, through taxable supplies under the margin scheme. As the Developer acquired the land from the Vendor as a supply of a going concern, it considers that subsection 75-11(5) will apply for the purposes of determining the margin on the subsequent sale of residential lots. As the Vendor acquired that land after 1 July 2000, the Developer considers that it is entitled under subparagraph 75-11(5)(e)(ii) of the GST Act to determine its margin scheme base by reference to the consideration that the Vendor paid or provided to acquire its interest in Lot A.

In the Developer's view, the Vendor acquired its interest in Lot A in two transactions. The first transaction involved its acquisition of former lots. The second transaction involved the Vendor reacquiring 68% of the interest sold to X as part of the partitioning arrangements.

Relevant legislative provisions

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

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

A New Tax System (Goods and Services Tax) Act 1999 section 48-40

Reasons for decision

Question 1:

Summary

The Developer is entitled to apply subparagraph 75-11(5) (e) (ii) of the GST Act for the purposes of determining its margin scheme base.

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 GST Act outlines the margin scheme. Subsection 75-5(1) of the GST Act states:

(1) 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.

Application of the margin scheme depends on how and when you first purchased your property. Broadly the margin scheme can be used where land was purchased from an entity:

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

· that sold you existing residential premises

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

· that sold you the property using the margin scheme.

In this instance, the Developer acquired the land that it is selling from the Vendor as the GST-free supply of a going concern. However, subsection 75-5(2) of the GST Act provides that the Developer is not able to apply the margin scheme if it acquired the entire freehold interest that it is selling through a supply that was ineligible for the margin scheme.

Subparagraph 75-5(3)(e) of the GST Act specifically deals with acquisitions of GST-free going concerns that are ineligible for the margin scheme. The subparagraph notes that a supply is ineligible for the margin scheme if:

(e) it is a supply in relation to which all of the following apply:

(i) you acquired the interest, unit or lease from an entity as, or as part of, a supply of a going concern to you that was GST-free under Subdivision 38-J;

(ii) the entity was registered or required to be registered, at the time of the acquisition;

(iii) the entity had acquired the entire interest, unit or lease through a taxable supply on which the GST was worked out without applying the margin scheme; …

We accept that the Vendor acquired its interest in the land in two transactions, firstly through a non-taxable supply. The Vendor's second acquisition was under the partitioning arrangements with X, which was a GST-free supply of a going concern.

As the Developer acquired the land from the Vendor as a GST-free supply of a going concern, we can deduce that the Vendor was either registered or required to be registered at the time. Further, the Vendor's acquisitions were not the acquisition of taxable supplies. Therefore Subparagraph 75-5(3)(e) of the GST Act will not make the Developer's subsequent supplies ineligible for the margin scheme; it is entitled to apply the margin scheme to its sale of the residential lots derived from the land that it purchased from the Vendor.

Section 75-11 of the GST Act sets out parameters for the 'margins' used for supplies of real property under the margin scheme in various situations. Paragraph 75-11(5) of the GST Act deals with the margin for the supply of real property acquired as a GST-free going concern or as GST-free farmland, as such it is the appropriate device for the Developer to refer to.

Where the Developer is in agreement with its customers to use the margin scheme it may use paragraph 75-11(5) of the GST Act to divine the margin. Paragraph 75-11(5) of the GST Act states:

(5) If:

(a) you acquired the interest, unit or lease in question from an entity as, or as part of:

(i) a supply of a going concern to you that was GST-free under Subdivision 38-J; or

(ii) a supply to you that was GST-free under Subdivision 38-O; and

(b) the entity was registered or required to be registered, at the time of the acquisition; and

(c) none of subsections (1) to (4) applies;

the margin for the supply you make is the amount by which the consideration for the supply exceeds:

(d) if that entity had acquired the interest, unit or lease before 1 July 2000 and on that day was registered or required to be registered:

(i) if you choose to apply an approved valuation to work out the margin for the supply an approved valuation of the interest, unit or lease as at 1 July 2000; or

(ii) if subparagraph (i) does not apply-the GST inclusive market value of the interest, unit or lease as at 1 July 2000; or

(e) if that entity had acquired the interest, unit or lease on or after 1 July 2000 and had been registered or required to be registered at the time of the acquisition:

(i) if the entity's acquisition was for consideration and you choose to apply an approved valuation to work out the margin for the supply-an approved valuation of the interest, unit or lease as at the day on which the entity had acquired it; or

(ii) if the entity's acquisition was for consideration and subparagraph (i) does not apply-that consideration; or

(iii) if the entity's acquisition was without consideration-the GST inclusive market value of the interest, unit or lease as at the time of the acquisition; or

(f) if that entity had not been registered or required to be registered at the time of the entity's acquisition of the interest, unit or lease (and paragraph (d) does not apply):

(i) if you choose to apply an approved valuation to work out the margin for the supply an approved valuation of the interest, unit or lease as at the first day on which the entity was registered or required to be registered; or

(ii) if subparagraph (i) does not apply-the GST inclusive market value of the interest, unit or lease as at that day.

As the Vendor was the recipient of a non-taxable supply under the special rules in the GST Act and a GST-free supply of a going concern at the times of its acquisitions of the land, we can deduce that it was registered or required to be registered at the relevant times. Further the Vendor acquired its interest in two transactions after 1 July 2000. These circumstances ensure that subparagraph 75-11(5)(e) is the appropriate margin for the Developer to use.

Under subparagraph 75-11(5)(e) if the Developer does not choose to apply an approved valuation to the calculation of the margin, it may use the consideration the Vendor paid for its acquisitions. As noted above, the Vendor made two acquisitions in order to own Lot A. Further, due to development and subdivision, the Vendor's acquisitions do not match exactly the land subsequently supplied to the Developer. As such the known consideration the Vendor paid to acquire Lot A should be ascribed in a fair and reasonable way across the land acquired by the Developer.

Question 2:

Summary

The consideration paid by the Vendor that forms the applicable cost base for the operation of subparagraph 75-11(5)(e)(ii) is the amount submitted by the applicant.

Detailed reasoning

The Vendor acquired the original lots for an aggregate amount and supplied a X% interest in these lots to X. The Vendor's interest in the land is to the extent of Y% of the lots it had paid Y% of the aggregate.

As part of the partitioning agreement, the Vendor subsequently supplied a X% interest in its Y% interest in the lots to X. Therefore, as a result of the partitioning agreement, the Vendor retained Y% of Y% the property that it originally acquired.

Consideration for the property acquired through the partition:

The Goods and Services Tax Ruling GSTR 2009/2 is concerned with GST and the partitioning of land. Paragraphs 86 to 98 of GSTR 2009/2 discuss whether a supply under a partition is made for consideration. In particular paragraph 92 states:

Although a partition ordinarily does not involve a monetary payment, consideration is not limited to a payment of money. It includes a payment in a non-monetary or in an 'in kind' form. This includes acts, forbearances and goods or property.

In the course of the partition the Vendor made a supply of Y% interest in Lot B for consideration of X% interest in Lot A. Conversely, X made a supply of X% interest in Lot A for consideration of Y% interest in Lot B.

Paragraph 97 of GSTR 2009/2 states:

The value of the consideration is the sum of the GST inclusive market value of all the other co-owners' interests in the part of the land acquired by the co-owner plus any owelty money received in respect of the partition.

In this case of the Vendor's supply of theY% interest in Lot B for non-monetary consideration of the X% interest in Lot A.

Total consideration:

The total consideration for Lot A held by the Vendor on the completion of the partitioning agreement is equal to the aggregate amount calculated by the applicant. Therefore this amount forms the cost base for the margin scheme calculations to be applied by the Developer in accordance with subparagraph 75-11(5)(e)(ii) of the GST Act and apportioned on a reasonable basis when selling residential lots from Lot A.

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