Edited version of your written advice

Authorisation Number: 1051286866709

Date of advice: 4 October 2017

Ruling

Subject: GST and property

Question 1

Are you entitled to an input tax credit in respect of your purchase of property located at a specified location (the Property), from the Vendor?

Answer

No.

Question 2

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

i. The Vendor and you agree in writing that the sale of the property is a going concern (and the supply otherwise qualifies as a GST-free going concern); and

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

iii. Your subsequent supply of new residential property 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 GST liability will be calculated pursuant to section 75-10.

Question 3

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

i. The Vendor is registered for GST at the time of the supply of the property.

ii. The Vendor charged GST on the supply of the property and issued you with a tax invoice.

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

iv. You and the Vendor do not agree in writing that the sale of the property is a going concern (and the supply otherwise qualifies as a GST-free going concern); and

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

vi. Your subsequent supply of new residential property to a “new purchaser” is made (noting the margin scheme is not available because you acquired the property as a taxable supply).

Answer

The GST liability will be calculated pursuant to section 9-70.

Question 4

If the GST liability for your 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 1/11^th of the consideration for the acquisition of the interest from the Vendors (which is equal to the value of the property sold by the Vendors to the Purchaser in Question 1 above)?

Answer

See Reasons for decision.

Relevant facts and circumstances

You are registered for GST.

In 2015 you entered into a contract with the Vendor to purchase property situated at a specified location (the Property).

Subsequently you entered into a Deed of Variation of Contract with the Vendor that provided for the sale of the Property to be treated as a GST-free sale of a going concern and not a taxable supply. Also, the Property is to be sold subject to existing tenancies with a specified settlement date in 2015.

Further Deeds of Variation were entered into resulting in a settlement date in 2018.

Publicly available information available on the Australian Business Register show the Vendor is not registered.

You intend to develop the Property and construct new residential premises for the purpose of sale.

The Property is subject to a lease and the lease will be transferred to you at settlement.

You have agreed to the following assumptions being made in respect to the private ruling.

Assumptions – Re: Question 2:

The Vendor will supply to you all of the things necessary for the continued operation of the enterprise identified as being the subject of the going concern.

The Vendor carries on, or will carry on the enterprise until the day of the supply.

Prior to the date of settlement, you and the Vendor will agree in writing that the supply is of a going concern.

You will be registered for GST on or prior to the date of settlement.

The Vendor will not be registered, or required to be registered, for GST as at the date of settlement.

Subsection 75-10(3) does not apply.

Assumptions – Re: Question 3

The Vendors are registered for GST at the time of the supply of the property.

The Vendor’s supply of the property is a taxable supply.

The margin scheme is not applied in working out the amount of GST on the Vendor’s supply of the property.

Relevant legislative provisions

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

Section 9-5

Section 9-20

Section 9-70

Section 11-5

Section 11-20

Section 38-325

Subsection 38-325(1)

Subsection 38-325(2)

Paragraph 38-325(2)(a)

Paragraph 38-325(2)(b)

Subsection 75-5(1)

Subsection 75-5(2)

Subsection 75-5(3)

Paragraph 75-5(3)(a)

Paragraph 75-5(3)(e)

Subparagraph 75-5(3)(e)(i)

Subparagraph 75-5(3)(e)(ii)

Subsection 75-5(4)

Section 75-10

Subsection 75-10(1)

Subsection 75-10(2)

Subsection 75-10(3)

Section 75-11

Subsection 75-11(5)

Taxation Administration Act 1953

Section 359-5 of Schedule 1.

Reasons for decision

Note: In this reasoning, unless otherwise stated,

● all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)

● reference material(s) referred to are available on the Australian Taxation Office (ATO) website www.ato.gov.au

Question 1

Section 11-20 provides that you are entitled to an input tax credit (ITC) for any creditable acquisition that you make.

Section 11-5 contains the meaning of the term ‘creditable acquisition. One of the requirements of making a creditable acquisition is that the supply of the thing to you is a taxable supply.

Section 9-5 contains the definition of a ‘taxable supply’ and provides that a supply is not a taxable supply to the extent that it is GST-free or input taxed.

Pursuant to the Deed of Variation to Contract, you and the Vendor have agreed that the sale of the Property is a supply of a GST-free going concern under section 38-325 (and not a taxable supply as contemplated under the original contract). The Deed of Variation to Contract also provides that the sale of the Property is sold ‘subject to existing tenancies’.

Subsection 38-325(2) defines the supply of a going concern for GST purposes as a supply under an arrangement under which:

(a) the supplier supplies to the recipient all of the things that are necessary for the continued operation of an enterprise; and

(b) the supplier carries on, or will carry on, the enterprise until the day of the supply.

Goods and Services Tax Ruling GSTR 2002/5 Goods and services tax: when is a ‘supply of a going concern’ GST-free? (GSTR 2002/5) provides guidance on the operation of section 38-325. The principles outlined in GSTR 2002/5 have been applied in this case.

The conditions in paragraphs 38-325(2)(a) and (b) must be satisfied in relation to an ‘identified enterprise’.

Identified enterprise

The term ‘enterprise’ is defined in section 9-20 and includes 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. This is the enterprise for which the supplier must supply all things that are necessary for its continued operation. Also, the supplier must carry on this enterprise until the day of the supply.

The Property is subject to a lease and the sale of the Property will be made subject to existing tenancies with the lease being transferred to you at settlement.

Consequently, the Vendor is conducting an enterprise of property leasing in relation to the Property.

Supply of all things necessary for the continued operation of an enterprise

Paragraph 107A of GSTR 2002/5 states in part that ‘where the identified enterprise is one of leasing, the supply of the property subject to the existing leases to the tenant or tenants is all that is required to satisfy paragraph 38-325(2)(a)’.

Paragraph 108 continues providing that in respect of an enterprise consisting solely of the leasing of property, all of the things that are necessary for the continued operation of the enterprise include the supply of the property and the covenants under the existing lease.

In this case, as the Property will be sold subject to existing tenancies, the Vendor will provide all of the things necessary for you to continue the leasing enterprise with the Vendor continuing to carry on the leasing enterprise until the day of the supply (settlement).

GST-free supply of a going concern

Subsection 38-325(1) provides that the sale of a going concern will be GST-free if:

● the supply is for consideration; and

● the recipient is registered or required to be registered; and

● the supplier and the recipient have agreed in writing that the supply is of a going concern.

In this case you will provide consideration and you are registered for GST. Furthermore, you and the Vendor have agreed in writing that the supply is of a going concern.

Given the above, the supply of the Property will not be a taxable supply from the Vendor to you. The supply to you will be a GST-free supply of a going concern. Consequently, you will not make a creditable acquisition as defined in section 11-5 and you will not be entitled to an ITC pursuant to section 11-20.

Other comments

The definition of a taxable supply in section 9-5 includes the requirement that the supplier is registered or required to be registered for GST. Information available on the Australian Business Register shows the Vendor is not currently registered for GST. In the situation the Vendor is not registered (or is not required to be registered) as at the date of settlement, the supply to you will not be a taxable supply and also for this reason, you will not be entitled to an ITC pursuant to section 11-20.

Question 2

Under the basic rules, section 9-70 provides the methodology for calculating the amount of GST on taxable supplies. However special rules contained in Chapter 4 vary the basic rules in certain circumstances. Division 75 is one such area of the legislation with the calculation of GST in regard to supplies of property being modified where a supply of real property is made using 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 that an entity makes by selling either a freehold interest in land or a stratum unit or granting or selling a long term lease if that entity and the recipient have agreed in writing that the margin scheme is to apply.

However subsection 75-5(2) of the GST Act provides that the margin scheme does not apply if the entity acquired the entire freehold interest, stratum unit or long term lease through a supply that was ‘ineligible for the margin scheme’.

Section 195-1 of the GST Act states that ‘ineligible for the margin scheme’ has the meaning given by subsections 75-5(3) and (4).

Paragraph 75-5(3)(e) is of most relevance in this case and provides that a supply is ineligible for the margin scheme if it is a supply in relation to which all of the following apply:

i. you acquired the interest, unit or lease from an entity as, or as part of, a supply of a going concern to you that was GST-free under Subdivision 38-J;

ii. the entity was registered or required to be registered, at the time of the acquisition;

iii. the entity had acquired the entire interest, unit or lease through a taxable supply on which the GST was worked out without applying the margin scheme;

The contract for the sale of the Property indicates that the sale of the Property is a taxable supply. Subsequently you entered into a Deed of Variation of Contract which provided for the sale of the Property to be treated as a GST-free sale of a going concern and not a taxable supply.

As agreed, it has been assumed the provisions of section 38-325 have been satisfied and the supply to you will be a GST-free supply of a going concern pursuant to Subdivision 38-J. Therefore subparagraph 75-5(3)(e)(i) has been satisfied.

Subparagraph 75-5(3)(e)(ii) requires that the entity which supplied the freehold interest etc. to you was registered for GST or required to be so registered at the time you acquired the freehold interest etc. You will acquire the freehold interest in the Property from the Vendor with the Completion Date of the contract for the sale of the Property (settlement) being in 2018 as provided for in the Deed of Variation of Contract. Publicly available information available on the Australian Business Register shows that the Vendor is not currently registered for GST. Based on the assumption the Vendor will not be registered or be required to be registered as at the date of settlement the requirement in subparagraph 75-5(3)(e)(ii) is not satisfied.

Therefore, paragraph 75-5(3)(e) will not apply to make your sales of a new residential premises to a purchaser a supply that is ‘ineligible for the margin scheme’.

As none of the other circumstances described in subsection 75-5(3) apply, your supplies of new residential premises are not ineligible for the margin scheme. You may choose to apply the margin scheme on your supplies of new residential premises where prior to making the supply, you and the recipient have agreed in writing that the margin scheme is to apply.

Subsection 75-10(1) provides that 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 (subject to subsection 75-10(3) and section 75-11).

Subsection 75-10(3) is not applicable.

Section 75-11 provides the methodology for calculations of margins for supplies of real property in particular circumstances. Subsection 75-11(5) is relevant in your case.

Subsection 75-11(5) will apply if:

● if you acquired the interest, unit or lease in question from an entity as, or as part of a supply of a going concern to you that was GST-free under Subdivision 38-J; and

● the entity was registered or required to be registered, at the time of your acquisition; and

● subsections 75-11(1) to (4) are not applicable.

In this case, the second point above will not be satisfied as the entity (Vendor) will not be registered or required to be registered at the time you acquire the interest in the Property.

For completeness, subsections 75-11(1) to (4) do not apply.

Given the above, section 75-11 is not applicable and as such the margin will be calculated pursuant to section 75-10.

Question 3

As discussed above under the basic rules section 9-70 provides the methodology for calculating the amount of GST on taxable supplies.

Paragraph 75-5(3)(a) provides that 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.

In the scenario you have presented, the Vendors are making a taxable supply without electing to adopt the use of the margin scheme. Consequently, your subsequent supply of the new residential premises will be ineligible for the margin scheme.

Given the above, when you make a taxable supply of new residential premises, your GST liability will be calculated using the basic rules pursuant to section 9-70.

Question 4

Section 359-5 of Schedule 1 to the Taxation Administration Act 1953 (TAA) provides that a private ruling is a ruling on the way in which a relevant provision of tax law applies, or would apply, to an entity in relation to a specified scheme.

We are unable to provide a response to your question as it is not in regard to the way in which a relevant provision of tax law applies. That is, your query is not a question of law.

Other relevant comments

Whilst we are unable to provide a response to Question 4 in the form of a private ruling, the following is a discussion on the calculation of GST under the basic rules (pursuant to section 9-70) and the calculation of GST where real property is sold under the margin scheme.

In the case you subsequently make a taxable supply of new residential premises where the amount of GST is calculated using the margin scheme, the GST will represent 1/11^th of the value added as a result of the development of the Property. For example, you acquire Property for an amount of $770,000 and subsequently make a supply of new residential premises for consideration of $1.1m. The margin is calculated as being the amount by which the consideration for the supply (of the new residential premises) exceeds the consideration you provided for your acquisition.

In the above example the margin will be $330,000. The GST liability will be $30,000 (1/11^th of the margin).

However, in the scenario you subsequently make a taxable supply of new residential premises where the amount of GST is calculated under the basic rules (section 9-70), the GST is calculated as being 10% of the value of your taxable supply. The value of a taxable supply is effectively the GST-exclusive amount of consideration you receive. Following on from the above example, the value of your taxable supply of new residential premises is $1m. The GST liability under this scenario will be $100,000 (10% of $1m).

Given the above, the difference in the GST liability under the different scenarios is $70,000 (as per Question 2 and Question 3) is $70,000 (i.e $100,000 - $30,000).

In this example the Property was purchased for an original cost of $770,000 with 1/11^th of that cost being $70,000. This amount is equal to the difference between the GST liabilities as illustrated above.

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