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Edited version of private advice
Authorisation Number: 1012624187431
Ruling
Subject: GST and the margin scheme
Question
Are the following costs included in the calculation of the margin under section 75-10 of the A New Tax System (Goods and Services Tax) Act 1999 :
• council headwork charges;
• council priority infrastructure payments;
• charges on money borrowed;
• water and sewerage rates;
• land tax;
• stamp duty?
Answer
No, the margin is calculated using only the cost of the land and not any improvements or other expenses incurred.
Relevant facts and circumstances
You acquired property through a supply that was not a taxable supply.
In the course of subdividing the property into a number of lots, you have incurred costs which are not subject to GST. These include:
• council headwork charges;
• council priority infrastructure payments;
• charges on money borrowed;
• water and sewerage rates;
• land tax;
• stamp duty.
Contentions
You contend that costs which are not subject to GST should be included in the margin scheme calculation (as part of the consideration for the acquisition of the property).
Assumptions
It is assumed that the sales were supplies in which the margin scheme was eligible to be applied.
It is assumed that you and the purchaser have agreed in writing that the margin scheme is to apply.
Relevant legislative provisions
A New Tax System (Goods and Services Tax) Act 1999 Division 75
A New Tax System (Goods and Services Tax) Act 1999 section 75-10
A New Tax System (Goods and Services Tax) Act 1999 section 75-14
A New Tax System (Goods and Services Tax) Act 1999 section 75-15
Reasons for decision
Generally, the GST payable on a taxable supply is 10% of the GST exclusive value of a supply. This is calculated as 1/11th of the GST inclusive price. However, Division 75 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that the 'margin scheme' may be used to determine the GST payable on certain taxable supplies of real property.
Section 75-10 of the GST Act provides that the amount of GST on a taxable supply under the margin scheme is 1/11th of the margin for the supply. The margin is defined as the amount by which the consideration for the supply exceeds the consideration for your acquisition.
In the case of sub-divided land, section 75-15 of the GST Act provides that the consideration for your acquisition is apportioned amongst all of the lots.
Section 75-14 of the GST Act explains that amounts expended in subdividing (or building) are not included in the 'consideration for your acquisition':
75-14 Consideration for acquisition of real property not to include cost of improvements etc.
(1) To avoid doubt, in working out the consideration for an acquisition for the purposes of applying the margin scheme to a taxable supply of real property, disregard:
(a) the cost or value of any other acquisitions that have been made by you, or any work that has been performed, in relation to the real property; and
(b) the cost or value of any other acquisitions that are intended to be made by you, or any work that is intended to be performed, in relation to the real property after its acquisition;
including acquisitions or work connected with bringing into existence the interest, unit or lease supplied.
Goods and services tax ruling, the margin scheme for supplies of real property acquired on or after 1 July 2000 (GSTR 2006/8) explains the operation of the margin scheme and, at paragraphs 48 and 49:
Consideration for the acquisition
48. The consideration for the acquisition of the real property is the original purchase price after taking into account settlement adjustments. In the case of subdivided land or a stratum unit, the effect of section 75-15 is that the consideration for the acquisition is the corresponding proportion of the consideration for the real property that you acquired. If land that is part of the original broadacres is used for public purposes including roads, parklands or utilities ('lost land'), the acquisition consideration of the entire broadacres is apportioned to the total number of subdivided lots, so that the sum of the apportioned amounts equals the acquisition consideration for the broadacres (including the 'lost land').
49. The consideration for the acquisition does not include costs that the supplier had incurred that were associated with their purchase of the real property, such as their legal expenses and stamp duty. It also does not include costs incurred in developing the real property, prior to or after its acquisition.
In developing the property, you incurred costs which are not subject to GST. These include:
• council headwork charges;
• priority infrastructure payments;
• water and sewerage rates;
• land tax;
• stamp duty; and
• finance charges.
You contend that these costs should be included in the margin scheme calculation (as part of the consideration for the acquisition of the property) in order to ensure that these costs are not subject to GST.
Any supplies made in return for these costs are not being on-supplied by you when you sell the subdivided lots. You are supplying real property in the form of the lots. That the costs have been incurred by you in developing the property in preparation for the sales, or in bringing the property into legal or physical existence, does not mean that you are on-supplying the things. For example, you have incurred charges when you borrowed money from a financier. The financier has supplied you with a loan. You are not on-supplying that loan when you sell the property, you are merely selling real property. Even though you may have priced the property to take into account the costs you have incurred, you are not supplying these things.
You therefore do not include the abovementioned costs when calculating the margin under section 75-10 of the GST Act.
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