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Edited version of your written advice
Authorisation Number: 1012769955635
Ruling
Subject: GST and eligibility to apply the margin scheme
Question
Are you eligible to use the margin scheme on the sale of a property?
Answer
No.
This ruling applies for the following periods:
Not applicable
The scheme commences on:
Not applicable
Relevant facts and circumstances
• Entity A is registered for goods and services tax (GST).
• Entity A provided a loan facility to a property developer entity B by mortgaging a property of a vacant land.
• The property was owned by four joint owners.
• The joint owners have assigned the property to the property developer for development purposes.
• The property developer went into bankruptcy and the joint owners have transferred the property to entity A under the terms and conditions of the mortgage.
• Entity A did not claim any GST credits for the acquisition of the property which was acquired through bad debt recovery.
• Entity A does not have information of whether the joint owners were registered or required to be registered for GST.
Relevant legislative provisions
A New Tax System (Goods and Services Tax) Act 1999 - Section 75-5.
Reasons for decision
Subsection 75-5(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) states that the margin scheme applies in working out the amount of GST on a taxable supply of real property that you make by selling a freehold interest in land where you and the recipient of the supply have agreed in writing that the margin scheme is to apply.
However, under subsection 75-5(2) of the GST Act the margin scheme cannot be used if the property was acquired through a supply that was ineligible. Subsection 75-5(3) of the GST Act defines what is an ineligible supply. For example, a property acquired as a taxable supply without applying the margin scheme would be an ineligible supply.
It is necessary to determine whether the property acquired by entity A through bad debt recovery from the joint owners of the property was eligible for the use of margin scheme when entity A sell this property. In this case, the GST status of the supply of the property to entity A has not been established. That is, whether the joint owners were registered or required to be registered for GST when they transferred the property to entity A was not known.
Section 9-5 of the GST act provides that an entity makes a taxable supply if it makes the supply for consideration; made in the course or furtherance of an enterprise that the entity carries on; the supply is connected with Australia and the entity is registered or required to be registered for GST. However, the supply is not a taxable supply to the extent that it is GST-free or input taxed.
The supply of the property by the joint owners to entity A would satisfy all of the requirements of section 9-5 of the GST act provided they were registered or required to be registered for GST. The property is a vacant land and supply of vacant land would be a taxable supply provided the supply satisfies all of the requirements of section 9-5 of the GST Act.
As explained above, a supply is ineligible for the margin scheme where the acquisition of which was a taxable supply on which the GST was worked out without applying the margin scheme. As the GST status of the supply of the property to entity A by the joint owners was not evidently established, we cannot rule that entity A is entitled to apply the margin scheme to the sale of this property by you.
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