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Edited version of your written advice

Authorisation Number: 1051241174835

Date of advice: 13 September 2017

Ruling

Subject: Substantial renovations and new residential premises

Question 1

Is the sale of the Property by A Ltd a supply of residential premises to be used predominantly for residential accommodation (regardless of the term of occupation) which is input taxed pursuant to subsection 40-65(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No.

Question 2

If the sale of the Property by A Ltd is not input taxed pursuant to subsection 40-65(1) of the GST Act, then:

Answer

The sale of the Property by A Ltd is a taxable supply of new residential premises. We decline to rule on whether the Commissioner will exercise the discretion to determine that A Ltd is registered for GST with effect from April 2014. Subject to A Ltd successfully applying for registration for GST with effect from April 2014 and holding the relevant tax invoices, A Ltd will be entitled to claim input tax credits for GST included in the cost of things acquired by A Ltd from April 2014 onwards in renovating and selling the Property.

Question 3

If the sale of the Property by A Ltd is not input taxed pursuant to subsection 40-65(1) of the GST Act and is a supply of ‘new residential premises’ then:

Answer

As A Ltd did not acquire the Property through a supply that is ineligible for the margin scheme A Ltd will be able to apply the margin scheme in working out the amount of GST on a taxable supply of the Property made by A Ltd. As we do not know whether the $X ‘cost to acquire’ stated in Appendix 5 includes settlement adjustments paid by A Ltd we cannot provide a ruling confirming that A Ltd can calculate the margin on the sale of the Property by A Ltd as the sale price (including GST) less $X.

Relevant facts and circumstances

A Ltd:

A Ltd is an Australian private company and is not currently registered for GST. Since incorporation A Ltd has not been registered or required to register for GST as A Ltd’s GST turnover has not met the GST registration turnover threshold.

A Ltd is wholly owned by B Ltd which is an Australian private company which registered for GST with effect from 1 July 2000.

The Property:

In April 2014 A Ltd purchased the Property from an unrelated vendor which was not registered or required to be registered for GST at the time of the sale.

The Property is zoned single family residential, two stories.

A Ltd acquired the Property for the purpose of gaining access to repair a boundary retaining wall between the Property and an adjoining property. B Ltd owned the adjoining property. A Ltd was used as the purchase vehicle for the Property because of liability and potential sale considerations. Since purchasing the Property A Ltd has not used the Property for residential accommodation or rented out the Property because of the indefinite start times for builders.

It was intended that B Ltd would rebuild the boundary retaining wall at B Ltd’s cost as the section of wall in disrepair was on the adjoining property. It was also intended that A Ltd would undertake modest renovations to the Property to quickly ready the Property for re-sale.

Work undertaken by B Ltd and A Ltd:

Between August 2014 and October 2014 B Ltd rebuilt the west section of the wall.

It was stated in the ruling request that A Ltd undertook renovations to the Property between February 2015 and December 2016. However the timeline in Appendix 5 to the ruling request states that A Ltd undertook that work between February and December 2015 and that the work was completed in December 2015. Following issue of a draft of this ruling A Ltd’s adviser confirmed that the renovations were undertaken between February 2015 and December 2016 and that the timeline in Appendix 5 is incorrect.

Appendix 2 - breakdown of works undertaken A Ltd:

Appendix 2 to the ruling request is a breakdown, purportedly in accordance with paragraphs 66 to 74 Goods and Services Tax Ruling GSTR 2003/3 (GSTR 2003/3), of works undertaken by A Ltd:

Appendix 3 - survey report:

A survey report dated June 2010 undertaken by consulting surveyors and engineers describes the improvements to the Property as a one and two storey brick and timber residence together with other improvements.

Appendix 4 - town planning report:

A Town Planning Report dated March 2017 to accompany an application to council for a Building Certificate for works carried out on the dwelling on the Property by A Ltd refers to ‘before’ and ‘after’ ground floor and first floor plans of the existing dwelling ‘to enable Council to clearly ascertain the extent of works’ and includes those ‘before’ and ‘after’ plans of both the ground floor and first floor.

The ‘before’ ground floor plan indicates that, prior to the works being undertaken, the ground floor comprised a garage which gave access to a lounge and an internal staircase. The lounge gave access to a patio from which there was access to a toilet, a laundry and a bedroom. An external hot water service was located behind the garage. The ‘after’ ground floor plan indicates that, as a result of the works, the patio was enclosed to become a sunroom and laundry, the laundry became a bathroom, the internal staircase was removed and a lift installed, the lounge became a bedroom plus a hallway extending from the garage and the lift to the two bedrooms, sunroom, and bathroom and the former toilet was extended behind the garage to provide a store and accommodate the hot water service.

The ‘before’ first floor plan indicates that, prior to the works being undertaken, the first floor comprised two bedrooms, a bathroom, a combined kitchen/dining/living area, the internal staircase and a large terrace. The ‘after’ first floor plan indicates that, as a result of the works, the floor of the kitchen/dining/living was extended and a new tiled patio added and the internal staircase was removed to make room for an island in the kitchen area, one bedroom was removed and the space used to accommodate a new toilet and the lift shaft and the bathroom was converted into an ensuite bathroom for the remaining bedroom.

The Town Planning Report describes the state of the dwelling on the Property upon purchase by A Ltd:

The Town Planning Report also describes the reasons for the works:

Appendix 5 – timeline/extent of renovations/ schedule of costs:

Appendix 5 also describes the extent of renovations to the ground level and first floor as follows:

Appendix 5 also contains a schedule of costs incurred by A Ltd, including $X to acquire the Property plus build costs of $Y (for builders, consultants, items by supply and install, items direct suppliers and all other).

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 section 11-5

A New Tax System (Goods and Services Tax Act) 1999 section 25-10

A New Tax System (Goods and Services Tax Act) 1999 section 40-65

A New Tax System (Goods and Services Tax Act) 1999 section 40-75

A New Tax System (Goods and Services Tax Act) 1999 section 75-5

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

A New Tax System (Goods and Services Tax Act) 1999 section 195-1 ‘substantial renovations’

Reasons for decision

Question 1

Summary

All legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) unless otherwise stated.

The renovations are substantial renovations as they affect the building as a whole and involve the replacement of substantially all of the building. Consequently the sale of the Property by A Ltd is a taxable supply of new residential premises, being residential premises that have been created through substantial renovations of a building.

Detailed reasoning

Section 40-65 states:

Section 195-1 sets out the meaning of ‘residential premises’:

Section 40-75 sets out the meaning of ‘new residential premises. Subsection 40-75(1) states:

Residential premises:

Paragraphs 6 and 7 of Goods and Services Tax Ruling GSTR 2012/5 (GSTR 2012/5) state:

A footnote to paragraph 6 of GSTR 2012/5 states that ‘premises’ refers to whatever is supplied, whether it is the whole or any part of land or a building. The description of the improvements to the Property in Appendix 3, i.e. a one and two storey brick and timber residence together with other improvements, plus the ‘before’ and ‘after’ ground floor and first floor plans and images in Appendix 4 indicate that the Property satisfies paragraph (b) of the ‘residential premises’ definition, i.e. the premises are intended to be occupied, and are capable of being occupied, as a residence or for residential accommodation. Paragraph 7 of GSTR 2012/5 provides that whether premises satisfy paragraph (b) of the ‘residential premises’ definition is demonstrated through the physical characteristics of the premises.

Subsection 40-65(1) requires that the residential premises are ‘to be used predominantly for residential accommodation (regardless of the term of occupation). Paragraphs 9 and 10 of GSTR 2012/5 state:

As the description, floor plans and images of the improvements to the Property indicate that the physical characteristics of the Property make the Property suitable for residential accommodation, the ‘to be used predominantly for residential accommodation’ requirement is satisfied.

New residential premises created through substantial renovations of a building:

As noted above, paragraph 40-65(2)(b) of the GST Act provides that a sale of residential premises is not input taxed to the extent that the residential premises are ‘new residential premises’ and paragraph 40-75(1)(b) provides that residential premises are new residential premises if they have been ‘created through substantial renovations of a building’.

‘Substantial renovations’ is defined in section 195-1:

Paragraph 55 of Goods and Services Tax Ruling GSTR 2003/3 (GSTR 2003/3) provides that the ‘substantial renovations’ definition requires consideration of what work has been done to the building since it was acquired by the current owner.

Work excluded from ‘substantial renovations’ - curtilage:

Paragraphs 53 to 79 of GSTR 2003/3 discuss the definition of ‘substantial renovations’ in section 195-1, which refers to substantial renovations ‘of a building’. Paragraph 56 of GSTR 2003/3 refers to the Macquarie Dictionary definition of ‘building’, i.e.

and paragraph 59 of GSTR 2003/3 states:

Paragraph 66 of GSTR 2003/3 deals with ‘curtilage’ and provides that work associated with renovations but not directly attributable to the building itself, e.g. landscaping and beautification of surrounding land is not renovations ‘of a building’ and therefore falls outside the ‘substantial renovations’ definition. It was submitted that the following renovations were not renovations ‘of a building’ and should be disregarded when determining whether there had been ‘substantial renovations’:

We agree that these items should be disregarded in determining whether the building at the Property has been substantially renovated.

Work excluded from ‘substantial renovations’ – additions:

Paragraph 67 of GSTR 2003/3 states:

In Appendix 2 it was submitted that as the new rear deck on the first floor was an addition, the new awning should also be treated as an addition and excluded when determining whether the Property had been substantially renovated. We could not find a reference to a new awning over a rear deck in Appendix 5, although Appendix 5 does refer to ‘new awning for glass slider to lift entry’ and we agree that that is an addition.

Work excluded from ‘substantial renovations’ – cosmetic work:

Paragraph 77 of GSTR 2003/3 states:

In the ruling request it was submitted that the works listed under the heading ‘cosmetic’ in Appendix 2 to the ruling request should be disregarded when deciding whether substantial renovations have been undertaken, i.e.

We agree that painting is cosmetic, although we note that Appendix 5 states that all external walls and that either the garage or enlarged store were rendered as well as painted and paragraph 74 of GSTR 2003/3 provides that rendering entire walls is non-structural building work.

We do not consider that repair of the external brick veneer is cosmetic because paragraph 77 pf GSTR 2003/3 describes cosmetic work as not impacting on the structure of the building and Appendix 5 describes the relevant work as:

which suggests that the work did impact on the structure of the building and replaced part of an exterior wall (which is listed as non-structural building work in paragraph 74 of GSTR 2003/3).

Nor do we consider ‘new finishes and cabinetry’ to be cosmetic to the extent it relates to replacing the kitchen on the first floor and the bathroom and laundry on the ground floor as that work is not similar to ‘replacing worn or out of date fittings such as light fittings’ (per paragraph 77 of GSTR 2003/3) and because paragraph 74 of GSTR 2003/3 provides that replacing kitchen cupboards and bathroom fixtures is non-structural building work. We consider that this work to be more extensive than the examples of cosmetic work in Example 4 - ‘replacing the kitchen’ – and Example 5 - ‘replacing all the fittings in the kitchen and bathroom – in GSTR 2003/3.

We do not consider that ‘new fit outs for all downstairs areas excluding garage and store’ is cosmetic. As noted above, paragraph 77 of GSTR 2003/3 refers to ‘removing or replacing worn or out of date fittings such as light fittings’ whereas the ‘Appendix 5 refers to:

In addition, the ‘before’ and ‘after’ ground floor plan in Appendix 4 indicates that a toilet basin and shower were installed in the former laundry, a toilet and shower were removed from the former bathroom (which then became part of the enlarged store) and that the former patio was enclosed and then divided by a new internal wall into a sun room and laundry with appropriate plumbing fixtures installed in the new laundry. The change in functional use of the existing bathroom and laundry and the reference in Appendix 5 to ‘fit out’ of most ground floor rooms in contrast to merely painting or rendering and painting the store and garage suggest that the ‘new fit outs’ involved new gyprock, waterproof membrane and tiling, removal of existing plumbing fixtures and installation of new plumbing fixtures appropriate to the new function of each relevant room. Paragraph 74 of GSTR 2003/3 includes plumbing and replacing bathroom fixtures in non-structural building work.

Does the work included in determining whether substantial renovations have occurred affect the building as a whole?

Paragraphs 60 to 79 of GSTR 2003/3 set out the criteria for substantial renovations. Paragraphs 61 and 62 state:

In relation to the first requirement paragraph 64 of GSTR 2003/3 states:

The submissions in the ruling request concerning whether the work affected the building as a whole distinguished between work classified in Appendix 2 as either structural or non-structural. It was submitted that the work classified as structural did not affect the building as a whole because replacement of brick and stud walls, new ceiling and roof structures and extension of the floor only affected the first floor and installation of the RSJ beam only affected the sunroom on the ground floor. It was accepted that the non-structural work comprising new electrical wiring and new plumbing affected the whole building, but it was submitted that following non-structural work only affected individual rooms:

The ruling request referred to Example 3 in paragraphs 104 to 108 of GSTR 2003/3. Example 3 involves renovations to a large, two storey, four bedroom Victorian terrace house. Where the renovations were limited to replacement of the existing kitchen, removal of a bathroom on the ground floor, conversion of a first floor bedroom to a bathroom, removal of the wall between the kitchen and the former ground floor bathroom, replacement of windows and a door at the rear of the dwelling with French doors, replacement of the slate roof with new tiles, replacement of all of the ground floor joists, bearers and floorboards and replacement of the ceilings of most ground floor rooms, the ATO considered the renovations not to be substantial as a number of rooms were unaffected and the house in its entirety was not substantially renovated. The ruling request referred to the conclusion stated in relation to Example 3 in paragraph 106 of GSTR 2003/3:

It was submitted:

The submissions also referred to Example 5 in paragraphs 111 to 114 of GSTR 2003/3 in which the renovations to a dilapidated bungalow included adding an upstairs extension to create a bedroom and bathroom (which involved replacing the roof and all ceilings on the lower level), rewiring the lower level, repairing cracked walls by removing and replacing all of the gyprock, rendering exposed brick walls, installing stairs (which required removal of two walls) and replacing the floor in two ground floor rooms. The renovations also included some cosmetic work (repainting, polishing floorboards and replacing the fittings in the kitchen and bathroom). Paragraph 113 of GSTR 2003/3 states:

In the ruling request it was submitted that the renovations to the Property were not as extensive as Example 5.

We do not agree with these submissions. Based on a comparison of the ‘before’ and ‘after’ floor plans in Appendix 4 plus the ‘Extent of Renovations’ section of Appendix 5, we consider that all but one of the rooms which existed on the ground floor prior to the work being undertaken were affected by work that is included in either structural or non-structural building work in paragraphs 70 and 74 of GSTR 2003/3 and not required by paragraphs 66, 67 or 77 of GSTR 2003/3 to be disregarded in determining whether substantial renovations were undertaken. In relation to the ground floor the ‘Extent of renovations’ section of Appendix 5 refers to:

and paragraph 74 of GSTR 2003/3 includes replacing electrical wiring and plumbing in non-structural building work.

The ‘before’ and ‘after’ ground floor plan in Appendix 4 indicates that the existing lounge on the ground floor was converted into a small bedroom, lift shaft and hallway by the construction of two new walls and a new doorway from the new hallway into the new bedroom. To achieve this, the internal staircase in the former lounge was removed to provide space for the new hallway and the existing door from the lounge out to the driveway was removed and replaced with a window. Appendix 5 states that heated flooring was installed in the hallway (replacing floors being included in structural work in paragraph 70 of GSTR 2003/3, although in Appendix 2 it was submitted that this was installation of a heating system rather than alteration of a floor and was non-structural work).

As noted above, the ‘before’ and ‘after’ ground floor plan in Appendix 4 indicates that in the existing ground floor bathroom the toilet and shower rose were removed (removing bathroom fittings being included in non-structural work in paragraph 74 of GSTR 2003/3) and the bathroom was enlarged to become the store and contain the hot water service which formerly sat outside the building to the rear of the garage. The existing laundry was transformed into a new bathroom which involved the installation of a toilet, shower, basin and heated flooring and must have involved plumbing and replacement of bathroom fixtures (both listed as non-structural building work in paragraph 74 of GSTR 2003/3). In relation to the existing ground floor patio there was structural work (installation of a RSJ in the ceiling was acknowledged in Appendix 2 to involve alteration of a supporting wall), the patio was enclosed and an internal wall constructed to create a sunroom and new laundry (which must have involved non-structural work (plumbing and installation of heated flooring)). The only existing ground floor room relatively unaffected was the bedroom (in which a robe and a double glazed window was installed).

On the first floor all of the rooms shown on the ‘before’ first floor plan in Appendix 4 were affected by either structural or non-structural work referred to in paragraphs 70 and 74 of GSTR 2003/3. In relation to the first floor the ‘Extension of renovations’ section of Appendix 5 states:

In our view this is either structural work referred to in paragraph 70 of GSTR 2003/3 (replacing supporting walls (interior or exterior), modifying of roofs) or non-structural work referred to in paragraph 74 of GSTR 2003/3 (replacing electrical wiring, plumbing) which affected all the existing rooms on the first floor.

In the existing kitchen/dining/living the floor was extended, the internal staircase was removed and the kitchen cupboards were replaced which involved structural work referred to in paragraph 70 of GSTR 2003/3 (altering of floors or parts thereof) and non-structural work referred to in paragraph 74 of GSTR 2003/3 (replacing kitchen cupboards). The existing bathroom was converted to an ensuite bathroom which, according to the ‘after’ first floor plan, involved non-structural building work referred to in paragraph 70 of GSTR 2003/3 (altering non-supporting walls and replacing bathroom fixtures). In one of the existing bedrooms a sliding door to an external terrace was closed off and a new doorway to the kitchen/dining/living created, both of which required non-structural building work referred to in paragraph 70 of GSTR 2003/3 (altering non-supporting walls or parts thereof). The other bedroom was opened up to the kitchen/dining/living area by removing a wall which was non-structural building work (removing non-supporting walls (interior or exterior)) and provided space for a new toilet and the lift shaft.

We therefore see little similarity between the present case and Example 3 in GSTR 2003/3 where one of the four bedrooms on the first floor of a two level Victorian terrace was converted to a bathroom but the other three bedrooms were unaffected by the renovations. Nor is the submission in the ruling request that ‘a number of rooms were not affected by the renovations’ supported by either the ‘before’ and ‘after’ ground floor and first floor plans in Appendix 4 or the ‘Extent of Renovations’ section of Appendix 5. In our view the test in paragraph 64 of GSTR 2003/3 that the renovations directly affect most rooms in a building is satisfied and the renovations undertaken by A Ltd affected the building on the Property as a whole.

Do the renovations result in the removal or replacement of all or substantially all of the building?

Paragraph 68 of GSTR 2003/3 provides that the extent to which parts of a building are removed or replaced will determine whether this requirement is satisfied. Paragraph 68 also refers to the second sentence of the ‘substantial renovations’ definition and to paragraph 58 of GSTR 2003/3 which explains the second sentence in the ‘substantial renovations’ definition as follows:

Paragraph 69 of GSTR 2003/3 provides that the requirement that the renovations result in the removal or replacement of all or substantially all of the building is satisfied where there is a removal or replacement of a substantial part of either the structural components or the non-structural components of the building. Paragraphs 72 and 73 state:

In Example 5 (paragraphs 111 to 114 of GSTR 2003/3) a substantial part of a building is removed or replaced. In relation to the existing level of a dilapidated three bedroom one bathroom bungalow the electrical wiring was replaced, all gyprock was removed and replaced, all ceilings were replaced, walls in two rooms were cement rendered, two walls were removed and the floors in two rooms were replaced to accommodate the installation of stairs to a new upstairs extension.

In the present case all of the wiring and plumbing was replaced on the first floor, some of the wiring and the plumbing lines were replaced on the ground floor; all of the gyprock and the ceiling was replaced on the first floor and on the ground floor the movement of the existing bath and laundry and creation of the lift shaft and hallway suggests that the reference in Appendix 5 to ‘new fit outs for all downstairs areas ex garage and store (only painted or rendered and painted)’ involved all of the gyprock or similar material being replaced on the ground floor; and floors on both the ground floor and first floor were altered either to extend them, to provide for the removal of the internal staircase or allow heated flooring to be installed. In our view the renovations involved the replacement of substantially all of the building.

Question 2

Summary

The sale of the Property by A Ltd will be a taxable supply. We decline to rule on whether the Commissioner will exercise the discretion to determine that A Ltd is registered for GST with effect from April 2014. Subject to A Ltd successfully applying for registration for GST with effect from April 2014 and holding the relevant tax invoices, A Ltd will be entitled to claim input tax credits for GST included in the cost of things acquired by A Ltd from April 2014 onwards in renovating and selling the Property.

Detailed reasoning

Sale of the Property by A Ltd will be a taxable supply:

The sale of the Property by A Ltd will be a taxable supply as the requirements of section 9-5 will be satisfied:

A Ltd will make the supply of the Property for consideration as A Ltd intends to sell the Property for between $W and $Z.

The supply will be made in the course or furtherance of an enterprise carried on by A Ltd. The definition of ‘enterprise’ in section 9-20 includes an activity, or series of activities, does in the form of an adventure or concern in the nature of trade. Paragraph 234 of Miscellaneous Taxation Ruling MT2006/1 (MT2006/1) provides that an adventure or concern in the nature of trade may be an isolated or one-off transaction that does not amount to a business but which has the characteristics of a business deal. Paragraphs 262 to 297 of MT 2006/1 discuss whether activities related to an isolated sale of real property amount to either carrying on an enterprise or the mere realisation of a capital asset. Paragraph 270 of MT 2006/1 provides that the Commissioner considers that there is an enterprise in the case of an isolated transaction where land is sold that was purchased with the intention of resale at a profit. In Appendix 5 it is stated that A Ltd acquired the Property in April 2014 to enable B Ltd to repair the boundary retaining wall (completed in October 2014) and with the intention that A Ltd would then undertake modest renovations to quickly prepare the Property for resale and that when initial renovations revealed the water and termite damage A Ltd undertook a more extensive renovation (between February and December 2015). We assume that the sale of the Property by A Ltd has been delayed by the need to obtain a Building Certificate in respect of unauthorised works.

The sale of the Property by A Ltd will be connected with the indirect tax zone as the Property is in the indirect tax zone (subsection 9-25(4)).

A Ltd is not registered for GST, but we consider that A Ltd will be required to register for GST. Section 23-5 provides that an entity is required to be registered if that entity is carrying on an enterprise and the entity’s GST turnover meets the registration threshold ($75,000 for an entity other than a non-profit body). Paragraph 188-10(1)(b) provides that an entity has a GST turnover that meets a particular turnover threshold if that entity’s projected GST turnover is at or above the turnover threshold. Subsection 188-20(1) provides that an entity’s projected turnover at a time during a particular month is the sum of the values of all the supplies that the entity has made, or is likely to make, during that month and the next 11 months other than supplies that are either input taxed, not made for consideration or not made in connection with an enterprise carried on by the entity. In the ruling request it was submitted that the sale of the Property should be included in A Ltd’s projected turnover as it will not be input taxed, will be made for consideration and will be made in connection with A Ltd’s enterprise. We agree. Paragraph 188-25(a) provides that in working out an entity’s projected turnover any supply made or likely to be made by way of transfer of ownership of a capital asset is to be disregarded. Although A Ltd’s enterprise involves dealing with a single asset paragraph 46 of Good and Services Tax Ruling GSTR 2001/7 (GSTR 2001/7) states:

The sale of the Property by A Ltd will not be GST-free or input taxed. Although a sale of residential premises to be used predominantly for residential accommodation (regardless of the term of occupation) is input taxed under subsection 40-65(1), for the reasons set out in Question 1 the sale of the Property by A Ltd will be a sale of new residential premises within the meaning of paragraph 40-75(1)(b) which is stated by paragraph 40-65(2)(b) not to be input taxed.

Date of effect of GST registration:

The ruling request also asked the Commissioner to confirm that the Commissioner will allow A Ltd to register for GST with effect from April 2014 when A Ltd acquired the Property.

Pursuant to section 25-10 the Commissioner has the power to decide the date of effect of an entity’s GST registration and that decision is a reviewable GST decision listed in subsection 110-50(2) in Schedule 1 to the Taxation Administration Act 1953. Paragraph 101 of Law Administration Practice Statement PSLA 2008/3 (PSLA 2008/3) provides that the Commissioner may decline to make a private ruling if the matter sought to be ruled on is about how the Commissioner would exercise a power under a relevant provision and paragraph 102 of PSLA 2008/3 states (in part):

Consequently we decline to rule on whether the Commissioner will allow A Ltd to register with effect from April 2014 on the ground that it would be more appropriate for A Ltd to apply via www.ato.gov.au for registration with effect from that date and the Commissioner to exercise the power under section 25-10. We note that subsection 25-5(1) obliges the Commissioner to register an entity if the entity has applied for registration in the approved form and the Commissioner is satisfied that the entity is carrying on an enterprise from a particular date specified in the entity’s application. A Ltd could apply for GST registration with effect from April 2014 on the grounds set out in the ruling request, i.e. that ‘carrying on’ an enterprise is defined in section 195-1 to include doing anything in the course of the commencement or termination of the enterprise and that the enterprise carried on by A Ltd commenced with the acquisition of the Property by A Ltd in April 2014 with the initial intention of undertaking modest renovations and then selling the Property. A decision made by the Commissioner in June 2017 to register A Ltd for GST with effect from April 2014 would not offend against the limitation in subsection 25-10(1A) that the date of effect of GST registration must not be a day that occurred more than 4 years before the day of the Commissioner’s decision.

Entitlement to claim input tax credits:

Subsection 7-1(2) provides that entitlements to input tax credits arise on creditable acquisitions and creditable importations. Section 11-5 states:

In the ruling request it was submitted that either A Ltd or B Ltd on A Ltd’s behalf has acquired things in the course of renovating the Property and A Ltd expects to acquire more things in the course of selling the Property. To the extent that the supplies of those things to A Ltd were taxable supplies we agree that those things were acquired for a creditable purpose as they were acquired in the course of carrying on A Ltd’s enterprise and the acquisitions of those things do not relate to making input taxed supplies (as the sale of the Property will be a taxable supply of new residential premises) and are not of a private or domestic nature. Provided A Ltd provided, or is liable to provide, consideration for the acquisitions of those things, the acquisitions of those things will be creditable acquisitions as we consider that A Ltd is required to be registered for GST. The effect of backdating an entity’s GST registration on the claiming of input tax credits is dealt with in paragraph 54 of Law Administration Practice Statement PSLA 2011/8 (PSLA 2011/8):

As A Ltd acquired the Property in April 2014 the four year time limit is not an issue. Pursuant to subsection 29-10(3), attribution of an input tax credit by A Ltd to a tax period will depend upon A Ltd holding the relevant tax invoice when lodging the GST return.

Question 3

Summary

As A Ltd did not acquire the Property through a supply that is ineligible for the margin scheme A Ltd will be able to apply the margin scheme in working out the amount of GST on a taxable supply of the Property made by A Ltd. As we do not know whether the $X ‘cost to acquire’ stated in Appendix 5 includes settlement adjustments paid by A Ltd we cannot provide a ruling confirming that A Ltd can calculate the margin on the sale of the Property by A Ltd as the sale price (including GST) less $X.

Detailed reasoning

Eligibility for the margin scheme:

It was submitted that as A Ltd acquired the Property from an existing residential premises from a vendor that was not registered for GST or required to be registered, A Ltd did not acquire the Property through a supply that was ineligible for the margin scheme.

Subsection 75-5(1) provides that the margin scheme applies in working out the amount of GST on a taxable supply of real property made by selling a freehold interest in land, a stratum unit or granting or selling a long term lease if the supplier and the recipient of the supply have agreed in writing that the margin scheme is to apply. However subsection 75-5(2) provides that the margin scheme does not apply to the supply of a freehold interest etc. if the supplier acquired the freehold interest through a supply that was ‘ineligible for the margin scheme’.

Section 195-1 provides that ‘ineligible for the margin scheme’ has the meaning given by subsections 75-5(3) and (4). With application to supplies made on or after 17 March 2005 paragraph 75-5(3)(a) states:

The test in paragraph 75-5(3)(a) is similar to the test in the former subsection 75-5(2) before it was repealed and replaced by the Tax Laws Amendment (2005 Measures No 2) Act 2005 (2005 Amendment Act). Paragraph 29 of Goods and Services Tax Ruling GSTR 2006/8 (GSTR 2006/8) explains the operation of the test in the former subsection 75-5(2):

If A Ltd acquired the Property from an entity that was not registered or required to be registered for GST, A Ltd did not acquire the Property through a supply that is ineligible for the margin scheme pursuant to paragraph 75-5(3)(a). Nor do paragraphs 75-5(3)(b) to (g) apply to the acquisition of the Property by A Ltd. A Ltd will be able to apply the margin scheme when calculating the GST payable on a sale of the Property by A Ltd which is a taxable supply provided A Ltd and the recipient agree in writing that the margin scheme is to apply and that agreement is made either on or before A Ltd makes the supply of the Property or within such further period as the Commissioner allows.

Amount of margin:

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

Subsection 75-10(2) provides that, subject to certain exceptions, the margin is the amount by which the consideration for the supply exceeds an entity’s consideration for the acquisition of the relevant interest.

In the ruling request it was submitted that if A Ltd applies the margin scheme to a taxable supply of the Property, the margin will be the sale price (including GST) less the original purchase price of $X (which is referred to in Appendix 5 as ‘cost to acquire’).

In relation to the ‘consideration for the supply’ referred to in subsection 75-10(2) (i.e. the consideration for which A Ltd sells the Property), ‘consideration’ is defined in section 195-1 in relation to a supply as any consideration within the meaning of sections 9-15 and 9-17 in connection with the supply and subsection 9-15(1) provides that consideration includes any payment in connection with a supply of anything. If the terms of the contract increase the amount payable to A Ltd by the purchaser by the amount of any GST payable by A Ltd on the sale of the Property then that amount is included in the consideration for the supply of the Property by A Ltd. Goods and Services Tax Determination GSTD 2006/3 (GSTD 2006/3) provides that, due to adjustments (defined as adjustments for rates, taxes and other outgoings on settlement of a contract for the sale of real property), the consideration may not be the sale price shown on the contract. Paragraphs 2 to 5 of GSTD 2006/3 state:

In relation to the ‘consideration for the acquisition of your interest’ referred to in subsection 75-10(2) paragraph 48 of Goods and Services Tax Ruling GSTR 2006/8 (GSTR 2006/8) provides that the consideration for the acquisition of real property is the original purchase price after taking into account settlement adjustments and paragraph 49 of GSTR 2006/8 provides that the consideration for acquisition does not include costs incurred by the supplier associated with the purchase of the real property (e.g. legal expenses or stamp duty) and does not include costs incurred in developing the property either prior to or after acquisition.

As we do not know what costs are included in the $X ‘cost to acquire’ stated in Appendix 5 we are unable to provide the ruling requested confirming that $X can be used by A Ltd to calculate the margin in relation to the sale of the Property by A Ltd. In our view GSTR 2006/8 and GSTD 2006/3 provide sufficient guidance to enable A Ltd to calculate the margin.


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