Edited version of private advice

Authorisation Number: 1012623491745

Ruling

Subject: GST and the margin scheme

Question 1

What is the consideration for the Property in the calculation of the margin for the supply?

Answer

Please refer to the Reason for decision.

Relevant facts and circumstances

• You are registered for goods and services (GST).

• You loaned $XXXX to another entity (A to acquire a residential property (the Property) located in Australia.

• Both parties entered a charge and a notification of details of a charge was sent to ASIC notified that under the Charge the liability (whether present or prospective) secured by the charge is all money owed by the Charger to the Chargee.

• You became the mortgagee in possession on xx/yy/zzzz. At that date, A owed you $YYYY.

• The Property was offered for sale by auction. The highest bid at the auction was less than the outstanding debt at that time. You elected not to sell the Property as mortgagee in possession at the auction.

• On aa/bb/cccc you applied for foreclosure of the Property. At that time, a statement of accounts provided that the total amount due to the mortgagee was increasing to $SSSS.

• The Authority granted an order for foreclosure allowing you to become the registered owner of the Property.

• As at that date, A owed you $PPPP.

• The Property has since been developed into a number of strata titled units.

• Some of them have been sold and settled.

Relevant legislation in relation to the foreclosure of the Property

Of relevance are certain sections of the State law which stipulate that on an order absolute for foreclosure the mortgagee or chargee shall be deemed to have taken the property mentioned in such order, in full satisfaction of the mortgage debt or amount secured by the charge, and the mortgagee or chargee's right or equity to bring any action or to take other proceedings for the recovery of the mortgage money or amount secured by the charge from the debtor, surety, or other person, shall be extinguished, and all collateral securities for the debt or amount secured by the charge which have not previously been enforced shall be released, and the right or equity of the mortgagor to redeem the said property shall also be extinguished.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999

Section 9-5

Section 9-15

Section 75-5

Section

Real Property Act 1900 (NSW)

Section 61

Section 62

Conveyancing Act 1919 (NSW)

Section 100

Reasons for decision

It is not disputed that the supply of strata tiled units is taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) 1999 (GST Act). The GST payable for the supply is 1/11 of the consideration for the supply (the sale price of the strata titled unit).

However, Division 75 of the GST Act allows the supplier to use the margin scheme to work out the amount of GST on a taxable supply of real property.

Section 75-5 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;

2. The agreement must be made:

(a)  on or before the making of the supply; or

(b)  within such further period as the Commissioner allows

The asterisk denotes a defined term in the GST Act.

The amount of GST payable under the margin scheme in provided under section 75-10 of the GST Act which states:

1. If a *taxable supply of *real property is under the *margin scheme, the amount of GST on the supply is 1/11 of the *margin for the supply.

2. Subject to subsection (3) and section 75-11, the margin for the supply is the amount by which the *consideration for the supply exceeds the consideration for your acquisition of the interest, unit or lease in question.

The margin for the supply is the amount by which the consideration for the supply (the sale of the new residential premises built on the land) exceeds the consideration for the acquisition of the land.

We need to consider initially whether your supply of the units is eligible to apply the margin scheme.

You have provided your debtor (A) acquired a residential house located in (the Property).

The Property (residential house) was acquired by A without GST (the supply to A was input taxed under section 40-65 of the GST Act).

When you acquired the Property under the Order for Foreclosure dated aa/bb/cccc, the Property remained a residential house. The supply of the residential premises to you was also input taxed under section 40-65 of the GST Act.

Therefore, the exceptions under subsection 75-5(3) of the GST Act do not apply to prevent you to apply the margin scheme to the supply of the units.

The supply of each stratum titled unit only relates to a part of the land that you acquired. Section 75-15 of the GST Act applies so that in working out the margin for the margin for the taxable supply you only use the corresponding proportion of the consideration for the acquisition of the whole land.

In summary, the margin of each supply of new residential premises is the difference between:

• The consideration for the acquisition of that part of the land is the corresponding proportion of the consideration for the acquisition of the whole Property (the consideration for the allotment).

• The consideration for the supply of the new stratum titled unit on the allotment.

The following steps need to be ascertained to work out the apportioned consideration for the allotment:

• The consideration for the acquisition of the land (so that the apportionment method can be applied upon)

• The apportionment method.

The consideration for the acquisition of the land

Where the acquisition of the land occurred after 1 July 2000, generally the consideration for the acquisition is the original purchase price for the land after taking into account adjustments on settlement that are commonly made for rates, land taxes and other outgoings.

However, there was no agreed purchase price in relation to the Property, there was no sale contract that stipules the price of the Property.

The issue is how to work out the consideration for the acquisition of the Property in the first place.

You have provided that in accordance with a section of a State Act:

• A defaulted in the payment of the principal and interest secured by the charge,

• The Property charged has been offered for sale at a public auction by a licensed auctioneer after notice has been given in accordance with the Act,

• The amount of the highest bid at that sale was not sufficient to satisfy the money secured by the Charge, together with the expenses of the sale, and

• Notice in writing of the intention to make the application has been served on the person whose land is subject to the Charge in the manner prescribed by the Act,

You, as the Chargee, made application to the Court for an order for foreclosure. The effect of an order for foreclosure made under this section has the effect of vesting in you all the estate and interest in that Property of the person whose property was subject to the Charge.

Where an order for foreclosure is granted we need to look at the consequence of the decision to grant the foreclosure in relation to debt. Under a section the a relevant State Act on an order absolute for foreclosure the mortgagee or chargee shall be deemed to have taken the property mentioned in such order, in full satisfaction of the mortgage debt or amount secured by the charge, and the mortgagee or chargee's right or equity to bring any action or to take other proceedings for the recovery of the mortgage money or amount secured by the charge from the debtor, surety, or other person, shall be extinguished, and all collateral securities for the debt or amount secured by the charge which have not previously been enforced shall be released, and the right or equity of the mortgagor to redeem the said property shall also be extinguished.

Following the Order, under that section, the outstanding debt of $PPPP has been extinguished. You are deemed to take the Property in full satisfaction of the debt. Your rights under the Charge are also extinguished.

Therefore, it is considered that you have received the Property in returned for the amount of the outstanding debt as at the date of the grant of the Order. That is, $PPPP. Section 9-15 of the GST Act explains the meaning of 'consideration' for GST purposes. This section states:

1. Consideration includes:

(a) any payment, or any act or forbearance, in connection with a supply of anything; and

(b)  any payment, or any act or forbearance, in response to or for the inducement of a supply of anything.

2. It does not matter whether the payment, act or forbearance was voluntary, or whether it was by the *recipient of the supply.

2A It does not matter:

(a) whether the payment, act or forbearance was in compliance with an order of a court, or of a tribunal or other body that has the power to make orders; or

(b) whether the payment, act or forbearance was in compliance with a settlement relating to proceedings before a court, or before a tribunal or other body that has the power to make orders.

3. …

In accordance with the definition under section 9-15 of the GST Act above, the consideration in your circumstance is $PPPP.

Apportionment of the consideration

You have provided that there area number strata titled units in the development on the Property. You need to apportion the consideration for each of the units (part of land that relates to each unit).

The Tax Office accepts any apportionment method that is reasonable in the circumstances. However, you need to record the apportionment method and how you come up with the apportionment method.

To assist you with the apportionment, we have attached goods and service tax ruling GSTR 2001/8. Although the ruling discusses the issue of apportioning the consideration for a supply that includes taxable and non-taxable parts, the principles in this ruling may also be of assistance to the apportionment of consideration for the purposes of the margin scheme. A copy of GSTR 2001/8 is attached.

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