Edited version of your written advice

Authorisation Number: 1013047594555

Date of advice: 12 July 2016

Ruling

Subject: Goods and services tax (GST) and property

Question 1

Will you ("purchaser"), be entitled to an input tax credit for the acquisition of property at X ("the property") from the Vendors where the Vendors are not registered or required to be registered for GST at the time of the supply?

Answer

No.

Question 2

How is your GST liability calculated on the sale of new residential premises to a new purchaser where:

i. The Vendors are not registered or required to be registered for GST at the time of the supply; and

ii. You develop the property into new residential premises; and

iii. The subsequent supply of new residential property by you to a "new purchaser" is a supply made under the margin scheme. An agreement is made in writing prior to settlement that the margin scheme is to apply.

Answer

The amount of GST payable by you on the supply of the new residential premises is 1/11 of the margin for that supply.

Question 3

How is your GST liability calculated on the sale of new residential premises to a new purchaser where:

i. The Vendors are registered or required to be registered for GST at the time of the supply of the property; and

ii. The Vendors charged GST on the supply of the property and issued you with a tax invoice (assuming they did not want to use the margin scheme if they were eligible to do so); and

iii. You are entitled to an input tax credit for your acquisition of the property; and

iv. you develop the property into new residential premises; and

v. The subsequent supply of new residential property by you to a "new purchaser" is made (noting the margin scheme is not available because you acquired the property as a taxable supply).

Answer

You have to remit GST of 1/11^th of the selling price of each residential premise sold to a new purchaser.

Question 4

If the GST liability for you on a supply of new residential premises to a new purchaser (as per question 2 above) is compared with the GST liability in question 3 above, is the difference equal to 1/11th of the consideration for the acquisition of the property from the Vendor, assuming the acquisition was a taxable supply?

Answer

Yes

Relevant facts and circumstances

You are a company registered for GST.

On dd/mm/yy the Vendors entered into a contract with you to sell their property.

At the time of entering into this contract the Vendors were not registered or required to be registered for GST.

On dd/mm/yy the Vendors entered into a Deed of Variation of Contract.

The Deed of Variation of Contract includes the following changes to the original contract including the following stated in Clause 2.1:

• Supply made by a Vendor who is neither registered nor required to be registered for GST (Section 9-5(d));

• The Price is $X;

• Completion date is dd/mm/yy.

On dd/mm/yy a Deed amending the Deed of Variation of Contract was entered into by the Vendors and you which included the following changes:

• Supply made by a Vendor who is neither registered nor required to be registered for GST (Section 9-5(d));

• The Price is $X;

• Completion date is the earlier of:

• dd/mm/yy; and

• x day(s) after the vendor services on the purchaser notice requiring earlier completion (and the vendor cannot serve this notice earlier than dd/mm/yy).

The vendors will not be registered nor will they be required to be registered at the time of supply (i.e. settlement).

In subsequent years you intend to develop the property into new residential premises. You intend to sell these new residential premises once developed. They are not intended to be used by you for deriving rental income, but will be actively marketed for sale.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 section 11-5

A New Tax System (Goods and Services Tax) Act 1999 section 11-20

A New Tax System (Goods and Services Tax) Act 1999 paragraph 75-(3)(a)

A New Tax System (Goods and Services Tax) Act 1999 subsection 75-10(1)

A New Tax System (Goods and Services Tax) Act 1999 subsection 75-10(2)

A New Tax System (Goods and Services Tax) Act 1999 section 9-70

A New Tax System (Goods and Services Tax) Act 1999 section 9-75

Reasons for decision

Question 1

Section 11-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that you are entitled to the input tax credit for a creditable acquisition that you make.

Under section 11-5 of the GST Act, you make a creditable acquisition if:

(a) you acquire anything solely or partly for a *creditable purpose; and

(b) the supply of the thing to you is a *taxable supply; and

(c) you provide, or are liable to provide, *consideration for the supply; and

(d) you are *registered, or *required to be registered.

For the supply of the thing (the property) to you to be a taxable supply, the Vendors would need to be registered or required to be registered for GST as this is a requirement of a taxable supply under section 9-5 of the GST Act.

Since the Vendors are not registered or required to be registered for GST, their supply to you won't be a taxable supply. This means you will not make a creditable acquisition of the property and as a result will not be entitled to claim an input tax credit for the acquisition.

Question 2

You will be making a taxable supply and will be entitled to use the margin scheme on this scenario.

Subsection 75-10(1) of the GST Act states that if a taxable supply of real property is under the margin scheme the amount of GST on the supply is 1/11^th of the margin for the supply.

Subsection 75-10(2) of the GST Act provides that the margin for the supply is the amount by which the consideration for the supply exceeds consideration for the acquisition of the interest. GST is then calculated as 1/11 of the margin for the supply.

For example, if the consideration for the supply is $220,000 and the consideration for the acquisition is $110,000 then the margin is $110,000 (the difference between consideration for the supply and consideration for the acquisition). The GST on the margin would be $10,000 (1/11 x $110,000).

The above example is where there is only one new residence constructed on the property. If there are more than one, keep in mind that under the margin scheme, the sale price of each unit is worked out on the proportional value of each block of land. Example 6 in Goods and Services Tax Ruling GSTR 2006/8 Goods and services tax: the margin scheme for supplies of real property acquired on or after 1 July 2000 demonstrates how this is done.

Question 3

The supply of the new residential premises in this scenario will be a taxable supply for which the margin scheme will not be available as under paragraph 75(3)(a) of the GST Act, a supply is ineligible for the margin scheme if it is a taxable supply on which the GST was worked out without applying the margin scheme.

Under section 9-70 of the GST Act, the amount of GST on a taxable supply is 10% of the value of the supply which is defined as 'Price x 10/11' under section 9-75 of the GST Act. This means a supplier has to remit 1/11^th of the price of a taxable supply as GST.

Question 4

As stated above, under the margin scheme, GST is only applied to the margin between the sale and acquisition. The effect in this scenario is that the GST payable on the supply of the new residential premises is equal to 1/11^th of the consideration for the acquisition and is a lower amount compared to the scenario where the margin scheme is not used.

Note that this does not take into account the entitlement to claim input tax credit if the original acquisition was a taxable supply which may impact on your net position.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).