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Ruling

Subject: mixed supply of property

Questions:

1. How should I apportion the consideration between the part of the building used for the practice and the other part I use for residential purposes?

2. When do I have to attribute the GST for the taxable supply I would be making?

3. In the contract of sale should I state that the taxable supply I make is under the margin scheme?

Answers:

1. See below

2. See below

3. See below

This ruling applies for the following periods:

N/A

The scheme commences on:

N/A

Relevant facts and circumstances

· You are a sole trader and are registered for the goods and services tax (GST).

· You were accounting for GST on non-cash basis but you have advised the Tax Office to change it to cash basis of accounting.

· You own a property and part of the property is used as a practice and the other part is occupied by you as your private residence.

· The part used for the practice has the character of a clinic and surgery. The balance of the building is your private residence.

· You intend to sell the whole property to a property developer.

· Under the proposed contract of sale, the developer will make a non-refundable deposit amounting to a percentage of the consideration which is absolutely forfeited when it is paid on the contract date.

· The settlement of the property will take place over a year from the date of the contract.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 section 9-70

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

A New Tax System (Goods and Services Tax) Act 1999 section 29-5

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

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

Reasons for decision

1. Apportioning consideration for a mixed supply

Under section 9-70 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) the amount of GST on a taxable supply is 10% of the value of the taxable supply.

Subsection 9-80(1) of the GST Act states that where a supply (the actual supply) is only partly a taxable supply, the value of the part of the actual supply that is a taxable supply is the proportion of the value of the actual supply.

In this case you are selling a property which is part commercial premises and part residential premises. It is, therefore, a mixed supply. The supply of residential premises, other than new residential premises, is not a taxable supply. Hence only the supply of the part which is the commercial premises, consisting of the medical clinic and surgery, is the taxable supply.

Goods and Services Tax Ruling GSTR 2001/8 (GSTR 2001/8) provides the Tax Office view on apportioning the consideration for a supply that includes taxable and non-taxable parts. Paragraph 92 of GSTR 2001/8 states:

"Where…….there is no legislative provision specifying a basis for the apportionment, you may use any reasonable method to apportion consideration to the separately identifiable taxable part of a mixed supply. However, the apportionment must be supportable by the facts in the particular circumstances and be undertaken as a matter of practical commonsense."

Further, paragraphs 93 - 96 of the GSTR 2001/8 state:

93. What is a reasonable method of apportioning the consideration for a mixed supply depends on the circumstances of each case. In some cases, there will be only one reasonable method you may use.

94. Depending on your circumstances, you may use a direct or indirect method when apportioning the consideration for a mixed supply.

95. The method you choose should be based on a consideration of all the circumstances and not because it gives you a particular result. You may need to use different methods, or a combination of methods, for different supplies to ensure the appropriate amount of GST is payable. You need to keep records that explain all transactions and other acts you engage in that are relevant to supplies you make, including supplies that are GST-free and input taxed.

96. Where consideration is apportioned in a manner that cannot be justified in terms of reasonableness, the general anti-avoidance provisions of the GST Act may have application. (Emphasis added)

A direct method of apportionment gives the most accurate measure of consideration for the calculation of the taxable part of a supply. Paragraph 97 of GSTR 2001/8 states:

97. Direct methods use relevant variables that measure the connection between what is supplied (the taxable and non-taxable parts) and the consideration for the actual supply. A direct method usually gives you the most accurate measure of the consideration for (and therefore, the calculation of the value of) the taxable part of the supply you make (that is, the value of the taxable supply). Such methods may include:

· …..

· the comparative price of each part if it were supplied on its own, relative to the whole payment received….;

· …..

· …..

· ……

GSTR 2001/8, at paragraphs 107 to 108A provides an example which may be of relevance in this case.

Example 17 - commercial and residential premises

107. Warren rents out a property to Josef for $ 2, 000 per month. The property is comprised of residential and commercial premises. The floor area of the residential part is 160 square metres and the commercial part is 80 square metres. In the locality, the rental of commercial space is worth twice as much as residential space.

108. It would be reasonable for Warren to base the taxable proportion of the supply on the floor area of the commercial part as a proportion of the combined floor area of the commercial and residential parts. However, he also needs to take into account the difference in the relative value of the commercial and residential floor space. Warren may reasonably apportion the consideration equally between the commercial and the residential parts (Emphasis added).

108A. The taxable proportion is therefore 50 %. Applying the formula in section 9-80, the taxable value of the actual supply is calculated as ($ 2000 x 10 )/( 10 + 0.5). The value of the taxable part is $952.38 and the GST payable is $95.23.

It will be seen from the above that it is up to you to decide how to apportion the consideration for the part of the supply that is a taxable supply depending on the circumstances that can be justified as reasonable.

Deposit

Subsection 99-5(1) of the GST Act states that a deposit held as security for the performance of an obligation is not treated as consideration for a supply, unless the deposit:

(a) is forfeited because of a failure to perform the obligation; or

(b) is applied as all or part of the consideration for a supply.

Goods and Services Tax Ruling GSTR 2006/2 (GSTR 2006/2) provides the Commissioner's views on the operation of Division 99 of the GST Act. It provides the meaning of a deposit in relation to this Division.

Paragraph 20 of the GSTR 2006/2 states that for a payment to be considered a 'security deposit' for the purpose of Division 99, it should, among others, have the following characteristics:

· be held as a security for the performance of an obligation;

· the contract, conduct and intent of the parties to the contract must be consistent with the payment being a security deposit; and

· be at risk of forfeiture upon failure to perform the obligation.

Paragraphs 21-24 of the GSTR 2006/2 further state:

21. For Division 99 to apply, the deposit must be 'held' as security for the performance of an obligation. However, the GST Act does not explain the concept of a deposit that is 'held'.

22. A deposit is 'held' when it is paid to a person in the capacity of stakeholder. Normally, in commercial situations, the supplier will be the holder of the security deposit. It makes no difference who holds the deposit, provided it is 'held' for the benefit of the supplier to secure the recipient's obligations.

23. An amount ceases to be a security deposit when that amount is applied as consideration, or forfeited, regardless of whether it is held by the supplier or a third party at that time. However, there are occasions where a deposit may be released without it being considered to be applied.

24. The accounting treatment may be evidence that a deposit has been either forfeited or applied as consideration for a supply. For example, a deposit that is recognised as revenue because it is no longer refundable is indicative of a deposit that is no longer held as security because it has been applied as consideration for a supply.

GSTR 2006/2 explains the difference between a part payment and a deposit at paragraphs 31 to 34:

31. In analysing contracts, the courts have commonly described a deposit as an 'earnest' that is paid 'to bind the bargain'. A payment made as an earnest has been said to be 'a portion of something, given or done in advance as a pledge of the remainder'. This can be distinguished from paying the first instalment of the total price in a purchase contract, which is to be paid over a period of time, that is, an initial instalment payment, or a part payment.

32. In Howe v. Smith (Howe), Fry, LJ described a deposit in the following terms:

It is not merely a part payment, but is then also an earnest to bind the bargain so entered into, and creates by the fear of its forfeiture a motive in the payer to perform the rest of the contract.

33. This view has been adopted by the Commissioner in Goods and Services Tax Ruling GSTR 2000/28, in relation to standard land contracts. In that Ruling, the Commissioner takes the view that:

A deposit paid under a standard land contract serves a number of purposes. If the contract goes through to completion, the deposit goes against the purchase price. But its initial purpose is as security for the performance of the contract.

34. A payment that is not intended to act as an earnest to ensure the contract is completed is not a security deposit.

On the issue of forfeiture of deposits, GSTR 2006/2 states at paragraph 51 as follows:

51. A fundamental requirement of a security deposit is that the parties to a contract clearly understand at its commencement, either through an express term, or by implication, that the deposit may be forfeited if the recipient fails to perform the secured contractual obligations. It is necessary, in the Commissioner's view, that there be a mutual intention by the contracting parties to make the deposit subject to forfeiture. If this intention is not present, the deposit is not a security deposit.

In this case the 'deposit' is forfeited when it is paid on the date of the contract. It is not held to secure the performance of the contract by the purchaser. As it will be seen from the above, it is therefore not a security deposit. Hence, subsection 99-5(1) of the GST Act does not apply in this case.

We are of the view that the 'deposit' that is paid when the contract of sale is entered into, which is then immediately 'forfeited', is a part payment for the property. Thus, it becomes consideration for the supply you make and is attributable in the tax period the 'deposit' is paid to you and 'forfeited'.

2. Attribution

Paragraph 29-5(1)(a) of the GST Act states that the GST payable by you on a taxable supply is attributable to the tax period in which any of the consideration is received for the supply.

However, if you account on a cash basis, then, paragraph 29-5(2)(b) of the GST Act applies to you. It states that, if in a tax period part of the consideration is received, then GST on the supply is attributable to that tax period, but only to the extent that the consideration is received in the tax period.

Which means that if you were to be on non-cash basis of accounting at the time the 'deposit' is paid and 'forfeited', then, you are liable to pay the whole of the GST you have to pay on the taxable part of the supply you make in that tax period. However, if you were on a cash basis of accounting at that time, then the GST is payable only to the extent of the 'forfeited' amount.

3. Margin Scheme

Division 75 of the GST Act allows you to use the margin scheme to the taxable supplies of freehold interests in land, of stratum units and of long-tem leases you make. It is a matter for you to decide whether you wish to apply the margin scheme to the supply you are making provided you are eligible to do so.

Our role is to advice taxpayers on how the tax legislation applies to a set of facts and circumstances. We cannot provide tax advice to taxpayers in relation to the conduct of their business.

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