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Edited version of your written advice

Authorisation Number: 1012988387573

Date of advice: 4 April 2016

Ruling

Subject: GST and valuation date for use of the margin scheme

Question

As of what date should the valuation of the property be made for GST Margin Scheme purposes?

Answer

The margin scheme applies in working out the amount of GST on a taxable supply of real property that an entity makes. Where a supply is not taxable an entity cannot use the margin scheme.

According to the facts of this case your supply of real property will not be taxable; consequently the margin scheme will not be available to you.

Relevant facts and circumstances

You purchased a rental property (house) prior to 2000.

The property has been rented out from that day onwards and has never been your personal private residence.

You began thinking of selling the property some years ago and after some research realised that you would probably get a higher value if the property was sold with a planning permit.

You put in the Town Planning Application and the plans were approved by Council.

You finally had the go ahead to try and sell the property as it was along with an approved planning permit.

While you were speaking with agents you came to the conclusion that based on the current property prices you would keep the property and pay to get the property developed yourself.

The old house was demolished and you started building numerous units on the land; each with its own title.

The construction of the units is almost completed. You intend to start renting the units out.

To date you have made no supply in relation to the development.

You plan on keeping the units as rental properties. If you are unable to maintain the level of debt then you will have to start selling them after a period of renting, until you reach a debt level you can maintain. You will then keep the remaining properties as rentals.

If you have to sell any units in the future you will use a real estate agent and use what is the best method to sell at the time. You will not try to sell them yourself.

You are not currently registered for GST.

You currently do not carry on and do not intend to carry on any other enterprise apart from the leasing of the residential units.

Relevant legislative provisions

A New Tax system (Goods and Services Tax) Act 1999:

section 9-20; section 188-25; and subsection 75-10(3).

Reasons for decision

The term 'enterprise' is defined in section 9-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) to include, among other things, an activity, or series of activities, done on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property.

You purchased the property prior to 2000 and have rented it from that day onwards. The house was demolished and construction of numerous units is almost completed. Though to date you have made no supply in relation to the development, you intend to start renting the units out soon. Therefore, your intention is to continue your leasing enterprise.

Will you make a taxable supply if you sell one of the units?

Goods and Services Tax Ruling GSTR 2001/7 Goods and services tax: meaning of GST turnover, including the effect of section 188-25 on projected GST turnover deals with the effect of section 188-25 of the GST Act on the calculation of the projected GST turnover. Paragraphs 29-30 of GSTR 2001/7 have been reproduced below:

In relation to 'capital assets', paragraphs 31-36 of GSTR 2001/7 state:

Miscellaneous Taxation Ruling MT 2006/1The New Tax System: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number provides some guidance on whether an asset is considered as a trade or an investment asset.

Paragraph 247 of MT 2006/1 provides that if the property acquired provides either an income or personal enjoyment to the owner it is more likely to be an investment than a trading asset.

Paragraph 258 of MT 2006/1 provides that assets purchased with the intention of holding them for a reasonable period of time, to be held as income producing assets or to be held for the pleasure or enjoyment of the person, are more likely not to be purchased for trading purposes.

Paragraphs 259 & 261 of MT 2006/1 have been reproduced below:

You plan on keeping the units as rental properties and your intention is to use them as part of your long term retirement plan. If you are unable to maintain the level of debt then you will have to start selling them after a period of leasing, until you reach a debt level you can maintain. You will then keep the remaining properties as rentals.

We consider that the sale of a unit that has been used for leasing will be the sale of a capital asset. As discussed above, such sale will not form part of your projected GST turnover.

You are currently not registered or required to be registered for GST. As the sale of a unit will be a sale of a capital asset, it will not be part of your projected GST turnover. Consequently, you will not be required to be registered for GST. Therefore, the sale of your capital asset will not be taxable.

Where a supply is not taxable an entity cannot use the margin scheme. Therefore, under the facts provided there is no need to consider the valuation date for the purposes of the margin scheme.


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