Edited version of your private ruling

Authorisation Number: 1012565644206

Subject: GST and margin scheme

Question 1

Is the sale of the subdivided lots by you a taxable supply?

Question 2

If the sale of the subdivided lots is a taxable supply, will you be able to apply the margin scheme to calculate GST on the sale of the subdivided lots under section 75-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Question 3

If you are able to apply the margin scheme on the sale of the subdivided lots, how is the margin calculated on the sale of the subdivided lots under Division 75 of the GST Act?

Answer 1

Yes, your sale of the subdivided lots is a taxable supply under section 9-5 of the GST Act.

Answer 2

Yes, you may choose to apply the margin scheme under subsection 75-5(1) of the GST Act when you sell the subdivided lots provided you and the purchaser agree in writing on or before the sale that the margin scheme is to apply.

Answer 3

Please refer to reasons for decisions for question 3.

Relevant facts and circumstances

Issue 1

You own two adjoining vacant blocks ('properties') in Australia.

You are subdividing the properties into several residential lots with estimated gross proceeds of $X to $X million when all sold. You will incur significant development costs of approximately $X,XXX,XXX.XX to subdivide the properties.

The application to subdivide the properties has been lodged with the Council.

You have an Australian business number and are registered for GST. You are registered for GST because your intention is to develop and subdivide the above properties and also another parcel of land which was also inherited from deceased person. You are carrying on an enterprise of property development and selling the properties in Australia.

The properties were originally purchased by the deceased person, prior to your marriage. The intention of the use of the land at that time is unclear. You do not know the purchase price for the deceased person's acquisition of the properties.

The properties were not used to carry on any business activities by deceased or you.

The deceased person did not have an ABN and also was not registered for GST.

The properties were transferred to you pursuant to transmission application after the Supreme Court granted your letter of administration.

The properties have always been held as vacant land since the acquisition date to date. The properties were not leased or rented out during the deceased person's or your ownership. You or the deceased person did not use the properties to carry on any income producing business activities.

The properties have been held as vacant bush blocks until a subdivision application was lodged with the Council.

You have not prepared any business plan for the subdivision of the properties.

You have not claimed any deductions for expenses incurred in relation to the properties in your tax return.

Currently, you are developing some other vacant land in Australia. This property was also inherited by you from the deceased person. The sales of subdivided blocks on this property are not expected until after the subdivided blocks on the above properties are sold. This is the only other development activity you have been involved in.

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 Section 75-5

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

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

A New Tax System (Goods and Services Tax) Act 1999 Section 75-35

Reasons For Decisions

GST is payable on a taxable supply. Section 9-5 of the GST Act states: 

You make a taxable supply if:

(a) you make the supply for *consideration; and

(b) the supply is made in the course or furtherance of an *enterprise that you *carry on; and

(c) the supply is *connected with Australia; and

(d) 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 defined term in section 195-1 of the GST Act)

Your supply of the subdivided lots will be taxable if all the requirements in section 9-5 of the GST Act are satisfied.

From the facts given, your supply of the subdivided lots satisfies paragraphs 9-5(a) to (d) of the GST Act, as follows:

(a) you make the supply of the subdivided lots for consideration by way of payments;

(b) you make the supply in the course of carrying on your land development business;

(c) the supply is connected with Australia as the subdivided lots are located in Australia; and

(d) you are registered for GST in Australia.

However, a supply is not a taxable supply to the extent that it is GST-free or input taxed.

GST-free and input taxed supply

The sale of the subdivided lots is not GST-free under any provisions of the GST Act or any other legislation.

Under section 40-65 of the GST Act, a sale of property is an input taxed supply if the property is residential premises to be used predominantly for residential accommodation unless the premises are:

(a) commercial residential premises, or

(b) new residential premises other than those used for residential accommodation before 2 December 1998.

The supply of the subdivided lots will not satisfy the requirements to be an input taxed supply under section 40-65 of the GST Act.

Accordingly, your supply of the subdivided lots will be a taxable supply as all the requirements in section 9-5 of the GST Act are satisfied.

Division 75 of the GST Act is therefore relevant to consider in relation to your supply of subdivided lots.

Issues 2

Division 75 of the GST Act grants the option of applying the margin scheme in some circumstances to reduce your GST liability on the taxable supply.

The margin scheme cannot be used if a property is acquired through a taxable supply where GST was calculated without using the margin scheme.

Under subsection 75-5(1) of the GST Act, where you make a taxable supply of real property by:

· selling a freehold interest in land; or

· selling a stratum unit; or

· granting or selling a long term lease,

you may apply the margin scheme in working out the amount of GST on that supply, if you and the recipient have agreed in writing that the margin scheme is to apply.

As stated in reasons for decisions to issue 1, your sale of the subdivided lots will be a taxable supply under section 9-5 of the GST Act. Accordingly you may choose to apply margin scheme on the sale of the subdivided lots if all the requirements in section 75 of the GST Act are satisfied.

Goods and Services Tax Ruling GSTR 2000/21 provides guidance on the margin scheme for supplies of real property held prior to 1 July 2000.

Paragraph 75-5(1)(a) of the GST Act provides that the agreement in writing must be made on or before making the supply or within such period as the Commissioner allows.

However, subsection 75-5(2) of the GST Act provides that the margin scheme does not apply if you acquired the entire freehold interest in land through a supply that was ineligible for the margin scheme. Paragraph 75-5(3)(b) of the GST Act provides that a supply is ineligible for the margin scheme if it is a supply of a thing you acquired by inheriting it from a deceased person, and the deceased person has acquired all of it through a supply that was ineligible for the margin scheme.

Based on the facts, the deceased person purchased the properties prior to the introduction of the GST on 1 July 2000. Therefore, the acquisition of the properties was not by way of a taxable supply. Hence, subsection 75-5(2) of the GST Act does not exclude you from choosing to apply the margin scheme on the taxable sale of the subdivided lots.

As such, you may choose to apply the margin scheme under subsection 75-5(1) of the GST Act when you sell the subdivided lots provided you and the purchaser agree in writing on or before the sale that the margin scheme is to apply. The decision to apply the margin scheme must be made at or before the making of the supply of the subdivided lots.

Issues 3

How is margin calculated?

Margin for the supply of real property acquired from a deceased estate

Subsections 75-11(3) and (4) of the GST Act address, how the margin scheme applies when you supply real property that you acquired by inheriting it. Section 195-1 of the GST Act specifies the manner in which real property can be inherited. It states that you inherit a freehold interest in land, a stratum unit or a long-term lease if you become an owner of the interest, unit or lease:

(a) under the will of a deceased person, or that will as varied by a court order; or

(b) by operation of an intestacy law, or such a law as varied by a court order; or

(c) because it is appropriated to you by the legal personal representative of a deceased person in satisfaction of a pecuniary legacy or some other interest or share in the deceased person's estate; or

(d) under a deed of arrangement if:

(i) you entered into the deed to settle a claim to participate in the distribution of the deceased person's estate; and

(ii) any consideration given by you for the interest, unit or lease consisted only of the variation or waiver of a claim to one or more other assets that formed part of the estate.

Goods and Services Tax Ruling GSTR 2006/7 provides guidance on how the margin scheme applies to a supply of real property made on or after 1 December 2005 that was acquired or held before 1 July 2000.

There are two methods you can use to work out the margin:

· the consideration method; and

· the valuation method

Consideration method

Paragraphs 49 to 52 of GSTR 2006/7 state:

49. Subsection 75-11(3) applies if the deceased acquired the real property before 1 July 2000, while subsection 75-11(4) applies if the deceased acquired the property on or after that date.

50. If you supply real property that you inherit, and the deceased acquired it before 1 July 2000, then paragraph 75-11(3)(ca) allows you to choose to use the consideration for the deceased's acquisition of the real property when calculating the margin for the supply. However, paragraph 75-11(3)(ca) can only apply if:

· you know the amount of the consideration for the deceased's acquisition of the property; and

· you choose to use this amount when calculating the margin for the supply.

51. Under paragraph 75-11(3)(ca) the margin for the supply is the amount by which consideration for the supply you make exceeds the consideration for the deceased's acquisition of the property.

52. If you do not know the consideration for the deceased's acquisition of the real property, or you do not choose to calculate the margin for the supply under paragraph 75-11(3)(ca), then the margin is calculated under paragraph 75-11(3)(d) or 75-11(3)(e).

Based on the facts provided, you inherited the properties from the deceased person and the deceased person acquired the properties before 1 July 2000. Therefore, you will be allowed to choose to use the consideration method for the deceased person's acquisition of the properties when calculating the margin for the supplies of the subdivided lots if you know the amount of consideration for the deceased person's acquisition of the properties. However, you advised us that you do not know the amount of consideration for the deceased person's purchase of the properties. Therefore you cannot use the consideration method for calculating the margin. You are required to use the valuation method.

Valuations method

You can generally only use the valuation method to work out the margin if you originally purchased your property before 1 July 2000. Using the valuation method, the margin is the difference between the selling price and the value of the property (usually as at 1 July 2000). That is, the sale price less the value of the property (usually as at 1 July 2000) equals the 'margin'.

Where you are using the valuation method to calculate the margin for the supply, the valuation must be undertaken by the due date for lodgement of your activity statement for the relevant tax period to which GST on supply is attributed.

Valuation date

Valuations are required to work out the margin for supplies of real property in particular circumstances under section 75-11 of the GST Act.

Paragraph 53 of GSTR 2006/7 states:

53. Paragraph 75-11(3)(d) applies if, immediately before the time that you inherited the real property, the deceased was neither registered nor required to be registered. If paragraph 75-11(3)(d) applies, the margin for the supply is the amount by which the consideration for the supply exceeds an approved valuation of the real property as at the latest of:

· 1 July 2000;

· the day on which you inherited the real property; or

· the first day on which you were registered or required to be registered for GST.

As you inherited the properties from the deceased person who was not registered or required to be registered for GST, paragraph 75-11(3)(d) of the GST Act applies and the valuation must be made at the date specified above.

Additionally, the valuation must comply with all requirements determined in writing by the Commissioner for making valuations for the purposes of Division 75 of the GST Act.

The Commissioner has made two determinations in relation to requirements for making valuations of real property held prior to 1 July 2000. Details regarding valuation of 'completed premises' are contained in the A New Tax System (Goods and Services Tax) Margin Scheme Valuation Requirements Determinations (No. 1) 2000 in Schedule 1 of Goods and Services Tax Ruling GSTR 2000/21 (Schedule 1). Details regarding valuation of 'partly completed premises or land subdivisions' are contained in the A New Tax System (Goods and Services Tax) Margin Scheme Valuation Requirements Determinations (No. 2) 2000 in Schedule 2 of GSTR 2000/21 (Schedule 2).

Schedule 1 provides three valuation methods for determining the value of completed land and buildings or land subdivisions. Schedule 2 provides two valuation methods for valuing land and buildings or land subdivisions that are partly completed as at the valuation date.

Based on the facts provided, the property was in a completed state as at 1 July 2000 and hence you are required to use one of the valuation methods available for completed premises contained in Schedule 1.

The three methods available to you under Schedule 1 are:

Method 1: the market value of the property determined in writing by a professional valuer; or

Method 2: the value of the consideration provided by a purchaser in a contract for the sale and purchase of real property executed or exchanged prior to 1 July 2000 by parties dealing at arm's length; or

Method 3: the most recent value as determined by the State Government or Territory Government Department as the unimproved value, the site value, or the capital value of the land made prior to 1 July 2000.

If the first method of valuation is used, paragraph 5 of Schedule 1 provides that the valuation provided by a professional valuer, must include a valuation of the real property having regard to comparable sales data, if appropriate. If it is the expert opinion of the valuer that the comparable sales data is not appropriate, the valuation must be made using another acceptable method of valuation, such as, summation, capitalization, and discounted cash flow.

Working out the margin on subdivided land

Paragraphs 126 to 129 of Good and Services Tax Ruling GSTR 2006/8 provide guidance on what is the real property that you value.

What is the real property that you value?

126. If any of the provisions of section 75-11 require you to obtain an approved valuation, the real property that you value is the real property that is in existence at the valuation date. This will not always be the real property that is supplied.

127. Often the real property that is supplied was not in existence at the valuation date.

Examples of this are:

· land that is acquired as broadacres and is later subdivided and sold; and

· land on which strata units (or group title) are built.

128. If the real property that is supplied was not in existence at the valuation date but is part of the real property that was in existence at that date, the valuation must be made as follows:

(a) a valuation of the real property in existence at the valuation date; and

(b) the valuation of the real property is apportioned on any fair and reasonable basis, to ascertain the part of the valuation that relates to the real property that you supplied. If the professional valuation method is used, it is not necessary for the apportionment to be made by a professional valuer.

Example 13: valuing real property that is subdivided after the valuation date

129.

Lot 3 Area 25 Hectares
	Lot 100 Area 100 Hectares

· At 1 July 2000, Lot 100 with an area of 100 hectares had a market value of $100,000. After 1 July 2000, Lot 100 was subdivided creating Lot 3 with an area of 25 hectares.

· The value of Lot 3 is the proportion of the valuation of the interest you acquired that is in existence as at 1 July 2000, that is, Lot 100. In the context of the diagram above, this proportion is $25,000 (1/4 of $100,000 on the assumption that the land is of approximately uniform value per square metre).

Based on the facts provided, you are planning to subdivide the properties which you inherited into number of lots and sell the subdivided lots individually. To determine the value of each lot as at the valuation date, you will need to apportion the value of the properties as at the valuation date between the numbers of subdivided lots on a reasonable basis. This will provide the value of each lot as at the valuation date.

You may use any reasonable method of apportionment to work out the proportion of the purchase price for a subdivided allotment or stratum title unit.The method used to apportion the valuation is at your discretion. You should keep records to be able to substantiate the basis of apportionment.

Once you have determined a value for each lot, the margin for the supply of each lot is the amount by which the consideration received for the supply of that lot exceeds the value of that lot as at the valuation date. Pursuant to subsection 75-10(1) of the GST Act, the GST payable on the supply of each lot is 1/11 of the margin for the supply.

For more information, on reasonable apportionment methods please refer to paragraphs 58-68 of GSTR 2006/8.

Record Keeping

As you are subdividing land, you must keep records showing how you worked out the margin for each subdivided allotment.

For example you should keep records on how you apportioned:

· a valuation of land you held at 1 July 2000 which has now been subdivided or developed into stratum units, or

· the purchase price of land acquired after 1 July 2000 which has been subdivided or developed into stratum units.

For your information GSTR 2000/21, GSTR 2006/7 and 2006/8 are available on our website at www.ato.gov.au.

The rulings in the register have been edited and may not contain all the factual details relevant to each decision. Do not use the register to predict ATO policy or decisions.

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