Edited version of private advice

Authorisation Number: 1051682832430

Date of advice: 19 May 2020

Ruling

Subject: Eligibility to apply the margin scheme

Question

Can you apply the margin scheme under section 75-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) to calculate the GST payable on the sale of the Property?

Answer

Yes.

Relevant facts and circumstances

1.    You are an entity that carries on an enterprise of leasing commercial and residential premises.

2.    You are registered for GST.

Acquisition details

3.    On or before December 2008, you entered into a contract of sale to acquire a Property located in Australia as a GST-free supply of a going concern under section 38-325 of the GST Act.

4.    The settlement date for the acquisition of the Property was on or before December 2008.

5.    The Property is commercial premises that are suitable as retail or office space.

Sale Details

6.    On or after 9 December 2008, you entered into a contract with the Initial Purchaser for the sale of the Property.

7.    Sometime after you entered into the contract of sale, an amendment was made on the basis that the sale of the properties would be a GST-free supply of a going concern. A variation was also made to the sale contract to allow that the parties to change the way the sale as a GST-free supply of going concern to a taxable supply under the margin scheme.

8.    On the same day, the lnitial Purchaser entered into a nominee agreement for another entity to be the substitute transferee under the contract of sale.

9.    On the date of settlement of the property, you, the Initial Purchaser and the nominee entered into a written agreement whereby you, the lnitial Purchaser and the nominee elect to apply the GST margin scheme provisions for the sale of the Property.

10.  Ignoring the dates of effect of each paragraph in subsection 75-5(3), apart from paragraph 75-5(3)(e), the other paragraphs of 75-5(3) do not apply to make the supply ineligible for the margin scheme.

Relevant legislative provisions

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

Reasons for decision

Overview of the margin scheme

1.    If you make a taxable supply of real property, the GST payable under the basic rule is 1/11th of the sale price.^[1] However if you make the supply under the margin scheme, the GST payable on the supply of real property is 1/11th of the margin for the supply. For the purposes of the margin scheme, the margin 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.[2]

2.    Subsection 75-5(1) provides that the margin scheme applies in working out the amount of GST on a taxable supply of real property if you and the purchaser have agreed in writing that the margin scheme is to apply. However, subsection 75-5(2) provides that the margin scheme does not apply if you acquired the interest through a supply that was ineligible for the margin scheme.

Taxable Sale of the Property

3.    The sale of the Property by you is a taxable supply of real property. The requirements for a taxable supply under section 9-5 were met:

-   The sale was made for consideration.

-   The sale was made in the course of a leasing enterprise you carried on.

-   The sale was connected to the indirect tax zone as the property is located in Australia.

-   You were registered for GST at the time of sale.

4.    The exclusions for a taxable sale do not apply. The sale of the Property, being commercial premises, does not fall within any categories of supplies that are input taxed. The sale of the Property also does not fall within any categories of supplies that is GST-free. Although an amendment to the contract of sale stated that it would be affected as a GST-free supply of a going concern, a later written agreement entered between you, the Initial Purchaser and nominee transferee changed the supply to be a taxable supply under the margin scheme. This change was provided for in the amendments to the contract.

Requirements for a written agreement

5.    In order to apply the margin scheme to a supply of real property, the vendor and purchaser must have agreed in writing to apply. Subsection 75-5(1A) provides that the agreement must be made on or before the making of the supply or within such further period as the Commissioner allows.

6.    For the purposes of subsection 75-5(1A), the time of making a supply of real property is at settlement.

7.    A variation was made on the day of settlement where the you, Initial Purchaser and nominee agreed to change the supply of the property from a GST-free supply of going concern to taxable supply under the margin scheme.

8.    The written agreement requirement under section 75-5 is therefore satisfied.

Supplies ineligible for the margin scheme

9.    Subsection 75-5(2) provides that you are not eligible to apply the margin scheme if you acquired the 'entire' freehold interest, unit or long term lease through a supply that was 'ineligible for the margin scheme'. Subsection 75-5(3) outlines the circumstances where a supply would be ineligible for the margin scheme.

10.  Subsection 75-5(3) provides the circumstances when you cannot use the margin scheme. Generally, you cannot use the margin scheme if when you first purchased the property, the sale to you was fully taxable and the margin scheme was not used. Subsection 75-5(3) also provide circumstances that are eligible for the margin scheme when the previous owner of the property was not eligible to use the margin scheme

11.  Various amendments were made to subsection 75-5(3) and as a result the eligibility requirements in the subsection have different dates of effect. Paragraphs 75-5(3)(a) to (f) applies to supplies made on or after 17 March 2005.

1.    Paragraphs 75-5(3)(e) to (g) "apply in relation to supplies that are supplies of things that the supplier acquired through a new supply to the supplier [our emphasis]". A "new supply" is defined as a supply that:

(a) is made on or after 9 December 2008; and

(b) is not made:

(i) under a written agreement entered into before 9 December 2008; or

(ii) pursuant to a right or option granted before 9 December 2008;

that specifies in writing the consideration, or a way of working out the consideration, for the supply.

12   As the contract of sale for the acquisition of the Property was entered into on or before December, paragraphs 75-5(3)(e) to (g) do not apply to determine the eligibility status of the Property for the margin scheme. Paragraph 75-5(e) applies to properties acquired as a GST-free going concern from a vendor who in turn had acquired the entire interest through a taxable supply on which the GST was worked out without applying the margin scheme.

13   Paragraphs 75-5(3)(a) to (d) are the only relevant provisions to determine your eligibility to apply the margin scheme and the circumstances outlined in those provisions do not apply on the acquisition of the Property.

Conclusion

1.    You were eligible to apply the margin scheme on the sale of the Property as it satisfied the requirements set out in section 75-5 of the GST Act. This includes the requirement of a written agreement between the supplier and recipient as one was entered into on or before the day of supply.

2.    Although the Property was acquired a GST-free as supply of going concern, the sale of the Property was not ineligible for the margin scheme under subsection 75-5(3) of the GST Act. The contract of sale to acquire the Property was entered into prior to the date of effect for the provision that made certain supplies of GST-free supply of going concern ineligible for the margin scheme.

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