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Edited version of your written advice

Authorisation Number: 1013104375832

Date of advice: 13 November 2017

Ruling

Subject: GST Property

Question 1

Is X (you), Receiver and Manager appointed to Entity B and Entity C, entitled to apply the margin scheme to the supply of the property?

Answer

Yes, you are entitled to apply the margin scheme where the supply of the property is a taxable supply.

Question 2

In calculating the Goods and Services tax (GST) liability on the disposal of the building are you entitled to apply the interpretation outlined in paragraph 32 of Goods and Services Tax Ruling, Goods and services tax: development, lease and disposal of a retirement village tenanted under a ‘loan-lease’ arrangement (GSTR 2011/1) to the sale of the building?.

Answer

Yes the interpretation outlined in paragraph 32 of GSTR 2011/1 applies.

Question 3

Are you entitled to make decreasing adjustments pursuant to division 129 from the date you held the property for sale and if so, in which Business Activity Statement are the decreasing adjustments to be made?

Answer

Decreasing adjustments under Division 129 are available to the entity for the periods ending ddmmyyyy and ddmmyyyy, providing the entity was registered for GST.

Relevant facts and circumstances

On ddmmyyyy Entity B and Entity C entered into an Agreement.

Relevant clauses of the agreement for the purposes of this ruling are summarised as follows…

On ddmmyyyy Entity B and Entity C (collectively referred to as ‘Owners’) and Entity D (Manager) entered into a Deed

Relevant clauses of the Deed for the purposes of this ruling are summarised as follows…

From ddmmyyyy, Entity A registered as a partnership for GST purposes.

Under a contract entered into on ddmmyyyy, the partnerhip acquired vacant land (x m2) for the sum of $x. The land was located at a specific address and was acquired as tenants in common.

The land purchased originally consisted of x lots. The lots were then amalgamated into one lot (totalling x m2). Subsequently, the lot was subdivided into two lots, being:

The partnership contracted with a Builder for the construction of the building on the land. The building was completed between mmyyyy and mmyyyy.

The construction contract with the Builder required monthly progress payments to be made, with the last of these payments being made on ddmmyyyy. Further work was completed during this month however, due to the dollar value of these specific acquisitions, all adjustment periods have expired.

The full component of the GST embedded within the tax invoices received from the Builder, as the building was constructed, was not claimed. Further, very few input tax credits (ITC’s) on any construction, fit out or operation of the building, including any acquisitions that were made in respect of legal, accounting or other professional services made either prior to or subsequent to the first residents taking occupancy, were claimed. The only ITC’s claimed by the Partnership were in respect of fully creditable acquisitions that related to the commercial premises being constructed as part of the development.

For the period ddmmyyyy to ddmmyyyy, the partnership only made input taxed supplies of residential premises pursuant to section 40-35 of the GST Act. Consequently, the partnership claimed very few ITC’s during this period.

For the tax periods occurring between ddmmyyyy and ddmmyyyy, the partnership began claiming ITC’s that related solely to the construction of the commercial facilities outlined above.

Once the construction of the commercial facilities was completed, the partnership began claiming only a very small amount of ITC’s in the tax periods of mmyyyy and mmyyyy, resulting from the partnership altering their GST registration to that of monthly reporters, commencing ddmmyyyy.

The Net Amount (calculated pursuant to section 17-5) for each of the quarterly or monthly tax periods occurring from ddmmyyyy to ddmmyyyy resulted in a credit of $x.

The total amount of construction and other associated costs up to and including ddmmyyyy , totalled significantly more than $x ($x multiplied by eleven), as only those ITC’s directly related to the commercial premises were being claimed. That is, all acquisitions made in relation to the construction of the building were considered to have been made for a non-creditable purpose, so were not claimed to any extent.

In late yyyy or early yyyy, the partnership gave instructions to an Advisor regarding the application of the GST Act to their circumstances.

The Advisor undertook a detailed examination of the financial records kept by the partnership and concluded that there were two segments to the business / enterprise being conducted by them, being:

After considering and subsequently applying Goods and Services Tax Ruling, Goods and services tax: determining the extent of creditable purpose for claiming input tax credits and for making adjustments for changes in extent of creditable purpose (GSTR 2006/4) to the partnership circumstances, and more specifically, the content of paragraph 32 of GSTR 2006/4, the Advisor concluded that the partnership had not claimed the correct amount of ITC’s to which they were entitled, resulting from the two segments of their business /enterprise.

The Advisor concluded that those acquisitions made in respect of the commercial premises were fully creditable, whilst those relating to the building would need to be apportioned using a fair and reasonable method in line with paragraph 32 of GSTR 2006/4.

As provided within paragraph 109 of GSTR 2006/4, the Advisor determined that a direct apportionment, using floor space, would result “…in the relevant use of the acquisition or importation as a percentage of total use”.

The direct apportionment calculation resulted in the following:

                      Square Metres

Taxable Portion of Building x

Total Area of Building x

Taxable Percentage x%

Taxable Portion of Building x

Commercial Office Area - 100% Taxable x

Total Taxable Area x

Total Area of Both Sites x

Taxable Percentage x%

The apportionment calculation completed above was then applied to each acquisition that had occurred between ddmmyyyy and ddmmyyyy . A further entitlement to ITC’s of $x resulted in addition to those previously claimed and as detailed above. The additional ITC’s of $x related to all acquisitions made in constructing the building, as well as any professional service like accounting and legal costs on an apportioned basis as calculated by the Advisor as being x%.

Between ddmmyyyy and ddmmyyyy, the Advisor made amendments to the previously lodged Net Amounts lodged by the partnership. That is, the Advisor amended the previously lodged Net Amounts so that the $x of apportioned ITC’s were incorporated into the revised Net Amount for each tax period.

On ddmmyyyy, W and Y of XY were appointed as Receivers and Managers to Entity B and Entity C. W and Y retired on ddmmyyyy .

With effect from ddmmyyyy, the partnership cancelled its GST registration.

On ddmmyyyy X and Z were appointed as Receivers & Managers.

Z retired as Receiver & Manager on ddmmyyyy with X then being the sole Receiver & Manager (Receiver).

Since the commencement of the building, the partnership had successfully completed a number of the settlement of the x available units under the loan-lease model.

The partnership’s intention was to construct and then operate the building. This approach was also followed by X and Z and subsequently X (solely) between the date of their appointment and the tax period ending ddmmyyyy. That is, the Receiver continued the process of attempting to lease out all the individual units that remained unoccupied at the time of being placed in control of the building.

The Receiver’s intention changed in mid-mmyyyy, when the decision was made by the Receiver to sell the building in “one line”.

Contract of Sale

On ddmmyyyy, a Contract of Sale was exchanged.

You have provided a copy of the Contract and have highlighted the following key components / clauses. Additional clauses have also been noted…

No information has been provided regarding the value of supplies made during the period of receivership.

Contentions

As is clearly evident, from the manner in which the Vendor lodged the BAS from ddmmyyyy onwards and the fact that after three years of operation, with approximately x percent of the building units being occupied, the intention of the Vendors was to construct and then operate the building. This is further supported by the manner in which the Advisor went about the task of ensuring that the correct amount of ITC’s had been claimed in respect of the building.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Section 9-5,

A New Tax System (Goods and Services Tax) Act 1999 Division 58,

A New Tax System (Goods and Services Tax) Act 1999 Division 75 and

A New Tax System (Goods and Services Tax) Act 1999 Division 188

Reasons for decision

In this reasoning, unless otherwise stated,

Question 1

Is X (you), Receiver and Manager appointed to Entity B and Entity C, entitled to apply the margin scheme to the supply of the property?

Detailed reasoning

Under section 58-5, any supply, acquisition or importation made by an entity in the capacity of a representative of another entity, that is an incapacitated entity (IE) is a supply, acquisition or importation by the other (incapacitated) entity.

Under paragraph 58-10(1)(a) and (c), a representative is liable to pay any GST that the IE would, but for this section, be liable to pay on a taxable supply and has any adjustment that the IE would, but for this section, be entitled to, to the extent that the making of the supply or adjustment is within the scope of the representatives responsibility or authority for managing the incapacitated entity’s affairs.

“Incapacitated entity” is defined in section 195-1 to include:

“Representative” is defined in section195-1 to include:

Accordingly, you meet the definition of representative and the partnership meets the definition of an incapacitated entity.

Division 75

On ddmmyyyy, the partnership acquired land as tenants in common.

Clause x of the Deed dated ddmmyyyy, defines the Syndicate as the group of Owners who own the property as tenants in common. The recitals to the Agreement collectively refer to Entity C and Entity B as the “Owners”.

In clause x of the Agreement, the Owners acknowledge that the syndicate will be classified as a tax law partnership.

However, we consider Entity B and Entity C were carrying on a business as partners and as such were a general law partnership for the following reasons:

Entity B and Entity C registered for GST as a partnership effective from ddmmyyyy.

Following appointment of Receivers and Managers to Entity B and Entity C on ddmmyyyy, the GST registration of the partnership was cancelled on ddmmyyyy.

Although general dissolution of a partnership occurs on the bankruptcy of a partner, the partnership is deemed to continue for the purposes of winding up.

Partners may continue to carry on the enterprise of the partnership during its winding up. The definition of carrying on an enterprise includes doing anything in the course or termination of the enterprise. Activities that are carried out as part of the winding up are in ‘carrying on an enterprise’. Realising business assets as part of winding up a partnership involves the partnership making supplies in the course or furtherance of an enterprise that it carries on.

The scope of the Receivers’ appointment includes that the whole of the property assets and rights of the business are charged and that the receiver may be appointed to carry on the business of the chargor, doing all things the chargor might do in the ordinary conduct of its business for the protection or improvement of the charged property.

In this case, the operations continued for a number of years after appointment of the Receivers and Managers and it was the business and assets which were the subject of the Contract of Sale. As such, it is considered that the partnership’s enterprise continued.

No information has been provided in regard to the supplies made by the partnership however, as it was carrying on an enterprise following appointment of the Receivers and Managers, the partnership was required to be registered if its turnover met the registration turnover threshold (currently $75 000).

If the partnership was required to be registered all the requirements of section 9-5 were met and a taxable supply of the building was made.

In the alternative, if the partnership was not required to be registered; a taxable supply of the real property was not made.

You were appointed as Receivers and Managers over the assets, rights and business of the partnership. Pursuant to section 58-20, if the partnership was required to be registered, you were also required to be registered.

If you were required to be registered, Division 75 will allow you to use of the margin scheme to calculate the GST payable on the supply of the building where certain requirements are met.

Margin scheme

Under subsection 75-5(1), you may apply the margin scheme if you and the recipient of the supply have agreed in writing that the margin scheme is to apply and you make a taxable supply of real property by:

The margin for the supply is the amount by which the consideration for the supply exceeds the consideration for the acquisition of the real property unless subsection 75-10(3) or section 75-11 applies. Section 75-11 applies to supplies made on or after ddmmyyyy.

Pursuant to clause x of the Contract of Sale, the parties have agreed in writing that the margin scheme will apply to the supply of the new residential premises and the commercial premises.

Consequently, you can apply the margin scheme to the supply of new residential premises that you make unless subsection 75-5(3) applies to your circumstances. Of relevance in your case is paragraph 75-5(3)(a). This paragraph states:

(3) A supply is ineligible for the margin scheme if:

In your case, the land was acquired by the partnership from Entity D on ddmmyyyy under the margin scheme. Subclause x of the Conditions to the Contract of Sale state:

Consequently, subparagraph 75-5(3)(a) is not met and therefore paragraph 75-5(3)(a) does not apply to make a supply by you, of new residential premises and commercial residential premises, ineligible for the margin scheme.

How is the margin for a supply calculated?

Pursuant to section 75-10(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.

Under subsection 75-10(2), the margin for the supply is the amount by which the consideration for the supply exceeds the consideration for the acquisition of the real property.

Goods and Services Tax Ruling GSTR 2011/1 GST: development, lease and disposal of a retirement village tenanted under a 'loan-lease' arrangement, provides the Commissioners view on issues around the sale of a retirement village. The following paragraph is relevant:

The building is comprised of the following:

Consequently, the supply of the building is considered to be a mixed supply. Goods and Services Tax Ruling GSTR 2006/8, GST: the margin scheme for supplies of real property acquired on or after 1 July 2000, explains at paragraph 133, that if a supply of real property is partly input taxed and partly taxable (a mixed supply), then the margin scheme can apply to the taxable component.

In these circumstances, if the margin is calculated under subsection 75-10(2), the consideration for the supply and the consideration for the acquisition, are the amounts of the consideration that relate to the taxable component of the supply.

You may use any fair and reasonable method of apportionment to ascertain the consideration for the supply and either

that relates to the taxable component of the supply.

A valuation report was prepared. Based on this evidence, you have determined the Gross Realisable Value (“GRV”) of both new residential premises (taxable supplies) and those units which had been resided in for greater than five years (input taxed supplies). Utilising these figures, you have calculated the percentage applicable to those units which have been occupied for greater than five years.

The percentage determined has been applied to the consideration received for the building ($x) to calculate the input taxed portion of the consideration. The remaining figure is the consideration for the taxable portion.

In working out the consideration for the acquisition of the property, you have based this on the size of the land applicable to the building.

The land purchased originally consisted of x lots. The Lots were then amalgamated into one lot, (totalling x m2). Subsequently, the lot was subdivided into two lots, being:

You have taken the area of land on which the building is located as a percentage of the total land area and applied this to the consideration paid for the land ($x) to determine the original purchase price for Lot A. You have then determined the taxable portion of the original consideration by applying the percentage calculated above utilising the gross realisable value of the taxable portion of the consideration received as a percentage of the consideration received for the building.

Finally, the GST has been determined on the taxable supplies made pursuant to the sale of the building by calculating the margin for the supply. This has been determined by deducting the consideration for the original purchase price relating to Lot A (Taxable portion only) from the taxable portion of consideration received for the sale of the building.

Based on the information provided, the Commissioner considers that the apportionment methods applied to determine the margin on the sale of the building are fair and reasonable.

Question 2

In calculating the Goods and Services tax (GST) liability on the disposal of the building, are you entitled to apply the interpretation outlined in paragraph 32 of Goods and Services Tax Ruling GSTR 2011/1, GST: development, lease and disposal of a retirement village tenanted under a ‘loan-lease’ arrangement to the sale of the building?

Detailed reasoning

GSTR 2011/1, issued on 27 April 2011, considers the GST implications of the development and supply of a retirement village tenanted under a ‘loan-lease’ arrangement.

Paragraph 6 of GSTR 2011/1 provides that GSTR 2011/1 applies to arrangements that have the following features:

In this case, the features of the arrangement, outlined in subparagraphs (a) to (e), have been met.

The Contract of Sale in respect of the building was entered into on ddmmyyyy. At this time, x units had been leased pursuant to the loan-lease model with the remaining x units vacant and considered to be new residential premises.

The partnership initially planned to develop and operate the building. However, GSTR 2011/1 provides that this will not prevent a Vendor from meeting (f) if at a later stage a decision is taken to sell the village.

Consequently, the partnership meets subparagraph (f).

Finally, the Contract of Sale expressly contemplates that the purchaser will repay contributions outstanding at the time of sale.

Consequently subparagraph (g) is met.

As the arrangement contains the features outlined in paragraph 6 of GSTR 2011/1, The partnership may apply the interpretation in Paragraphs 32 to 39 of GSTR 2011/1:

In this case, all progress payments to the Builder relating to the construction of the building were made by ddmmyyyy and the building was operational from mmyyyy. Consequently, in line with paragraphs 34 and 36, the partnership was commercially committed to construct and develop a building before the date of issue of GSTR 2011/1.

On construction of the building, the partnership claimed very few input tax credits. The only input tax credits (ITC’s) claimed were in respect of fully creditable acquisitions that related to the commercial premises being constructed as part of the development.

In late yyyy, early yyyy, the partnership gave instructions to an Advisor regarding the application of the GST Act to its circumstances. The Advisor undertook a detailed examination of the financial records kept by the partnership and concluded that there were two segments to the business / enterprise being conducted by the partnership, being:

The Advisor further determined that the partnership had not claimed the correct amount of ITC’s to which it was entitled resulting from the two segments of its enterprise/ business. They concluded that the acquisitions made in respect of the commercial premises were fully creditable, whilst those relating to the building would need to be apportioned. The Advisor determined that a direct apportionment, using floor space, would result in the relevant use of the acquisition or importation as a percentage of total use. Consequently, in line with the requirements of paragraph 38 of GSTR 2011/1, an output based indirect method was not used to determine the extent of its creditable purpose.

Based on the above analysis, the transitional administrative treatment in GSTR 2011/1 may be applied, thereby excluding the value of ingoing contributions received from existing residents from the consideration received for the building on disposal.

Question 3

Are you entitled to make decreasing adjustments pursuant to division 129 from the date you held the building for sale and if so in which BAS are the decreasing adjustments to be made?

Detailed reasoning

You are entitled to the input tax credit for any creditable acquisition you make. One of the requirements for an acquisition to be creditable is that it be made solely or partly for a ‘creditable purpose’.

If your actual extent of use for a creditable purpose is different from your planned use, you may need to make an adjustment under Division 129.

The original intention of the partnership was to construct and then operate the building. The approach of the partnership was also followed by you between the date of your appointment and the tax period ending ddmmyyyy, that is, you continued the process of attempting to lease out all the individual units that remained unoccupied at the time of being placed in control of the building.

Your intention changed in mid-mmyyyy, when you made the decision to sell the building in “one line”.

Based on the above information, we can conclude that the building was held by you for the dual purpose of making input taxed and taxable supplies from mid mmyyyy.

Paragraphs 22 and 23 of GSTR 2011/1 discuss a fair and reasonable method of adjustment and state:

Paragraph 15 of GSTR 2011/1 outlines that the Commissioner will accept as fair and reasonable a method which determines the extent of creditable purpose for development acquisitions based on the following formula:

Paragraphs 16-19 of GSTR 2011/1 outline how the numerator is to be calculated under paragraph 15. Paragraph 19 states specifically that the value of benefits obtained from making input taxed supplies does not include the face value of ingoing contributions which the vendor has borrowed from residents.

Numerator

In your case, you have included the following items in the numerator:

Paragraph 20 of GSTR 2011/1 outlines how the denominator is to be calculated under paragraph 15, including that the face value of ingoing contributions reasonably expected to be included in consideration for the sale of the building should be included in the denominator.

Denominator

In your case, you have included the following items in the denominator:

However, where you apply the transitional arrangements, the amount of ingoing contributions will not form part of the consideration on the sale of the building. This amount should therefore be excluded from the calculation of the denominator as it does not produce a fair and reasonable basis of apportionment.

Adjustment periods

As the extent of creditable purpose has changed for the acquisitions relating to the construction of the building, there will be an adjustment for those acquisitions whose adjustment periods have not expired.

In your case, progress payments were made to the Builder for the construction of the building between mmyyyy and mmyyy. All but one of these payments was in excess of $500,000 GST exclusive with the first such payment occurring in the quarter ending ddmmyyyy.

For the purposes of Division 129, each progress payment is treated as a separate acquisition. In this case, the number of adjustment periods is determined under subsection 129-20(3). Ten adjustment periods will therefore apply to each progress payment and the first adjustment period for each progress payment is the tax period ending 30 June which commences at least 12 months after the end of the tax period to which the progress payment is attributable.

In this case, there was a change in the application of the building in the financial year ending ddmmyyyy because the building was held for sale from mid-mmyyyy. The sale contract settled on ddmmyyyy. Therefore, a decreasing adjustment is available under Division 129 in the quarter ending ddmmyyyy (as the first progress payment was made in the quarter ending mmyyyy and the first adjustment period available was ddmmyyyy).

With ddmmyyyy being the first adjustment period applicable, the final adjustment period would be ddmmyyyy.

Section 129-25 provides that when a thing is disposed of, the next tax period ending 30 June is the last adjustment period for the acquisition or importation. As the building was sold on ddmmyyyy, the last adjustment period would be in tax period ending ddmmyyyy.

In mmyyyy, the partnership made a decreasing adjustment pursuant to a revision of its input tax credit entitlements by the Advisor. You have considered the impact of the additional ITC’s claimed between ddmmyyyy and ddmmyyyy, when determining the adjustments to be made in this case.

Between ddmmyyyy and ddmmyyyy, additional input taxed supplies would have been made. Consequently, a final adjustment will be required in mmyyyy to account for this.

Based on the information and approach outlined in your submission, the Commissioner can confirm that the methodology applied by you in determining adjustments under Division 129 is consistent with paragraphs 13 to 20 of GSTR 2011/1, with the exception of the ingoing contributions being included in the denominator.

Attribution of adjustment

You are a representative as defined in the GST Act and the partnership is an incapacitated entity as defined.

Paragraph 58-10(4)(b) provides that the representative of an incapacitated entity does not have an adjustment where the incapacitated entity provided the consideration before the representative was appointed.

As the consideration for the construction of the building was provided by the partnership, you, as the representative, do not have the adjustment.

Therefore, the adjustments required under Division 129 are to be made by the partnership in the quarters ending ddmmyyyy and ddmmyyyy.

However, these adjustments only apply where it is determined that the partnership was still required to be registered.


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