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Edited version of your private ruling
Authorisation Number: 1012522785813
Ruling
Subject: Revoking Agreement to Apply the Margin Scheme
Question
Can the Vendor and the Purchaser in relation to a supply of real property, enter into an agreement to utilise the margin scheme under subsection 75-5(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) revoke that agreement (by virtue of a Deed) after settlement of the supply of that real property?
Answer
No, the Vendor and Purchaser are not able to revoke an agreement to apply the margin scheme under subsection 75-5(1) of GST Act, after settlement of the supply of the real property.
Relevant facts and circumstances
The Vendor is carrying on an enterprise in property development and is registered for the goods and services tax (GST).
The Purchaser is a public benevolent institution and a deductable gift recipient endorsed by the Australian Taxation Office (ATO).
The Purchaser is carrying on an enterprise of providing accommodation at 75% less than the GST inclusive market value of the supply.
The Purchaser entered into a contract of sale (Contract of Sale) with the Vendor for the sale of a property.
The sale comprised residential apartments sold off the plan.
Under a clause in the Contract of Sale, the sale was to be under the margin scheme.
The Property was settled, at which time the Purchaser took possession of the completed apartments.
Vendor lodged the activity statement and treated the supply as being made under the margin scheme and remitted the appropriate GST.
Subsequent to the settlement of the Contract of Sale, both the Vendor and the Purchaser instructed their respective solicitors to prepare a Deed of Rectification (the Deed) to change the original Contract of Sale to be one where the sale is not under the margin scheme.
The Deed confirms that the original Contract of Sale incorrectly provided for the application of the margin scheme to the supply of the Property. The Deed also provides for the Contract of Sale to be amended with effect from the original date it was signed to state that the margin scheme does not apply to the sale.
In its Business Activity Statement, the Vendor reported the sale of this property as a taxable supply and remitted GST on that taxable supply on the basis that the margin scheme applied.
The Vendor has written to the Purchaser that it supports the application of this private ruling. Subject to ATO allowing the sale to be treated as a taxable supply without the application of the margin scheme, the Vendor will execute the Deed.
Relevant legislative provisions
A New Tax System (Goods and Services Tax) Act 1999.
Division 75
Section 75-5
Subsection 75-5(1)
Subsection 75-5(1A)
Reasons for decision
Subsection 75-5 (1) of the GST Act states:
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.
ATOID 2010/83 Goods and Services TAX, GST: revoking agreement to apply the margin scheme (ATOID 2010/83) deals with similar factual circumstances of this case. The relevant paragraphs under the Reasons of Decision in ATOID 2010/83 states:
One of the requirements in subsection 75-5(1) of the GST Act is that the supplier and the recipient of the supply have agreed in writing that the margin scheme is to apply. In accordance with subsection 75-5(1A) of the GST Act, this agreement must be made on or before the making of the supply or within such further period as the Commissioner allows.
Accordingly, the written agreement to apply the margin scheme must be made on or before the time of settlement (if the agreement is made at a later time, it is subject to the exercise of a discretionary power by the Commissioner under subsection 75-5(1A) of the GST Act). As the supplier and recipient have entered into a written agreement to apply the margin scheme on or before that time, and the other requirements of section 75-5 of the GST Act are met, GST payable on the taxable supply of the real property has been worked out in accordance with Division 75 of the GST Act.
Once the requirements for the operation of subsection 75-5(1) of the GST Act have been met, including the key requirement that a timely written agreement be in place between the parties, there is nothing in the words of the provision that allows its operation to be unwound. The fact that the parties to the written agreement subsequent to settlement consent to revoke that agreement is irrelevant.
This view is further supported by the context in which the provision operates. Under the provision, the supplier and recipient have alternative courses of action available to them; that is, they can choose to apply the margin scheme or not in working out the GST payable on the taxable supply. In making that choice, the parties would necessarily have regard to likely future events and circumstances that may affect them at the time of making the supply. If the choice, once made, is capable of being altered after that time, it would enable the parties to the supply to enjoy the benefit of hindsight. This is contrary to the purpose and intent of the provision which is there to provide certainty to the parties at the time of supply (see paragraph 6.38 of the Revised Explanatory Memorandum to the Tax Laws Amendment (2005 Measures No. 2) Bill 2005).
If the provision envisaged that the parties to the supply could alter their choice at a later time, there would have been express provision for it in the legislation. The absence of such a provision provides further contextual support for the view that there is no capacity for the supplier and recipient to revoke the written agreement after the making of the supply.
Also, while subsection 75-5(1A) of the GST Act permits a discretion for the Commissioner to allow a further time in which an agreement may be made, it does not permit a discretion for the Commissioner to allow an entity to revoke an agreement that was in place at the time of settlement.
The Vendor and Purchaser in this case entered into an agreement to utilise the margin scheme. Importantly, this agreement was put in place in writing and before settlement (or supply) took place. Accordingly, for GST purposes as outlined in section 75-5 GST Act the requirements to use the margin scheme were properly in place. Additionally, the Vendor remitted GST in its BAS according to the margin scheme thus abiding by the terms and conditions of the Contract for Sale.
Based on the Commissioner's views expressed in ATIOID 2010/83, the Vendor and Purchaser are not able to revoke this agreement with the Deed. Accordingly, the Vendor and Purchaser cannot calculate the GST payable on the taxable supply in accordance with the basic rules in the GST Act. The GST payable must be calculated in accordance with the rules in Division 75 of the GST Act.
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