Edited version of private advice

Authorisation Number: 1051757181806

Date of advice: 22 September 2020

Ruling

Subject: GST and the margin scheme

Question 1

When you sell your two properties located at <specified address> (the Properties) are you eligible to apply the margin scheme in working out the amount of GST on the supply under Division 75 of the A New Tax System (Goods and Services Tax) Act 1999 (the GST Act)?

Answer

Yes, when you sell the Properties you are eligible to apply the margin scheme in working out the amount of GST on the supply under Division 75 of the GST Act.

Question 2

Are you making a creditable acquisition in relation to the construction costs of the residential premises on the Properties under section 11-5 of the GST Act and are you entitled to the input tax credits?

Answer

Yes, you are making a creditable acquisition in relation to the construction costs of the residential premises on the Properties under section 11-5 of the GST Act and you are entitled to the input tax credits. This is provided:

(i)    the acquisition is made through a taxable supply from the supplier.

(ii)   you provide, or are liable to provide, consideration for the supply, and

(iii)  you were registered, or required to be registered, for GST at the time you made the acquisition.

Where this is the case, you are entitled to the input tax credits and can claim the input tax credits to the extent you have provided consideration for the acquisition and you hold a tax invoice.

This ruling applies for the following period:

<date> - <date>

The scheme commences on:

<date>

Relevant facts and circumstances

You, <name of entity>, are a <specified entity>. You are registered for GST from <specified date> and you report for GST on a cash basis.

In <yyyy> you purchased a property located at <specified address> (the Property) with an existing dwelling house on the land. You provided a copy of the front page of the document 'Contract for the sale of land - <yyyy> edition'. Based on the contract page,

·         The vendor was not making a taxable supply of the Property to you. The sale was input taxed because the sale is of eligible residential premises for GST purposes.

·         The improvements included a house with vacant possession.

·         The purchase price of the Property was <$> including nil GST.

The vendor was

·         not your associate

·         not your fellow GST group member

·         your fellow participant in a GST joint venture

The vendor did not sell the Property to you as a GST-free sale (either as part of a supply of a going concern or farmland).

In <yyyy>, the house was demolished, the land sub-divided and <specified number> new residential premises were constructed.

·         Construction costs were <$> inclusive of GST.

·         You entered into a contract for the sale and purchase of land - <yyyy> edition for the sale of these <specified number>new properties, the details of which include:

The Properties being sold constitute 'new residential premises' as defined for GST purposes.

The Properties were sold with vacant possession and not subject to existing tenancies.

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 Paragraph 9-5(a)

A New Tax System (Goods and Services Tax) Act 1999 Paragraph 9-5(b)

A New Tax System (Goods and Services Tax) Act 1999 Paragraph 9-5(c)

A New Tax System (Goods and Services Tax) Act 1999 Paragraph 9-5(d)

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

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

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

A New Tax System (Goods and Services Tax) Act 1999 Section 11-15

A New Tax System (Goods and Services Tax) Act 1999 Division 38

A New Tax System (Goods and Services Tax) Act 1999 Division 40

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

A New Tax System (Goods and Services Tax) Act 1999 Subsection 75-5(1)

A New Tax System (Goods and Services Tax) Act 1999 Subsection 75-5(2)

A New Tax System (Goods and Services Tax) Act 1999 Subsection 75-5(3)

A New Tax System (Goods and Services Tax) Act 1999 Section 195-1

Taxation Administration Act 1953 Schedule 1 Section 18-60

Taxation Administration Act 1953 Schedule 1 Section 14-250

Reasons for decision

In this reasoning, unless otherwise stated:

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

·         all legislative terms of the GST Act marked with an asterisk are defined in section 195-1 of the GST Act

·         all reference materials referred to in this ruling are available on the Australian Taxation Office (ATO) website www.ato.gov.au

1.    Margin scheme eligibility

Under subsection 75-5(1), the margin scheme applies in working out the amount of GST on a taxable supply of real property that a vendor entity makes if the vendor and the recipient of the supply have agreed in writing that the margin scheme is to apply.

The sale contract for the Properties provides that the 'margin scheme will be used in making the taxable supply'. Accordingly, the Commissioner accepts that you and the recipient/purchaser have an agreement in writing that the margin scheme is to apply.

An entity can only apply the margin scheme if the sale of the property is a taxable supply.

Under section 9-5, an entity makes a taxable supply if all the following requirements are satisfied:

(a)  the supply is made for consideration,

(b)  the supply is made in the course or furtherance of an enterprise that the entity carries on,

(c)   the supply is connected with the indirect tax zone, and

(d)  the entity is registered for GST or required to be registered for GST.

However, the supply is not a taxable supply to the extent that it is GST-free or input taxed.

You have entered into sale contracts for the sale of the Properties for <$> each, thus satisfying paragraph 9-5(a).

Paragraph 9-5(b) requires that the supply is made in the course or furtherance of an enterprise that the entity carries on.

In this case, you purchased the property in <yyyy> and carried out subdivision and development activities in <yyyy> in the construction of <specified number> new residential premises for sale purposes.

We consider the activities you carried on in relation to the acquisition, subdivision and development of the Property into <specified number> new residential premises for sale purposes amount to an enterprise for GST purposes, that is, a property development and sale enterprise.

In a sale of real property, where the property is situated in Australia, paragraph 9-5(c) will be satisfied.

You are registered for GST.

Accordingly, we consider that the requirements specified in paragraphs 9-5(a), (b), (c) and (d) are all satisfied.

Division 38 and 40 provide for certain supplies to be GST-free and input taxed respectively. Where a supply is GST-free or input taxed, GST will not be payable on the sale.

In your case, we consider Division 38 and 40 do not apply to the sale of the Properties. Accordingly, the sale of the Properties will not be GST-free or input taxed.

Therefore, your supplies of the Properties will be taxable supplies as defined in section 9-5. Accordingly, as you are making a taxable supply of the Properties and have a written agreement with the recipient for the margin scheme to apply to the sale, you will be eligible to apply the margin scheme provided the exceptions in subsections 75-5(2) and (3) do not apply.

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 (GSTR 2006/8) includes at paragraph 32 that subsection 75-5(2) provides that the margin scheme does not apply if you acquired the entire freehold interest, stratum unit or long-term lease through a supply that was ineligible for the margin scheme.

Subsection 75-5(3) provides a supply is ineligible for the margin scheme in situations which include where the property has been acquired under certain circumstances:

·         from an associate

·         from a fellow GST group member

·         from a fellow participant in a GST joint venture

·         as a GST-free sale (either as part of a going concern or farmland) where the seller was not eligible to use the margin scheme.

In your case, when you purchased the Property,

·         the contract states that the vendor was not making a taxable supply of the Property to you. The sale was input taxed because the sale is of eligible residential premises for GST purposes.

• the Property was not acquired:

o   from an associate

o   from a fellow GST group member

o   from a fellow participant in a GST joint venture

o   as a GST-free sale (either as part of a going concern or farmland)

In considering the above facts, we determine that the provisions on ineligibility to apply the margin scheme in subsections 75-5(2) and (3) do not apply to your sale of the Properties.

As the exceptions in subsections 75-5(2) and (3) do not apply, we determine that when you sell the properties located at <specified addresses>, you are eligible to apply the margin scheme to work out the amount of GST on the supply under Division 75 of the GST Act.

2.    Entitlement to input tax credits

An entity is entitled to the input tax credit for any creditable acquisition that the entity makes. Section 11-5 provides:

You make a creditable acquisitionif:

(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.

The meaning of the term 'creditable purpose' is contained in section 11-15:

(1)    You acquire a thingfor a creditable purposeto the extent that you acquire it in * carrying onyour * enterprise.

(2) However, you do not acquire the thing for a creditable purpose to the extent that:

(a)    the acquisition relates to making supplies that would be * input taxed; or

(b) the acquisitionis of a private or domestic nature.

In your case, your acquisitions in relation to the construction of the <specified number> new residential premises were made for a creditable purpose. That is, the acquisitions were made in carrying on your property development enterprise and are neither related to making input taxed supplies nor of a private or domestic nature. You are registered for GST. Thus paragraphs 11-5(a) and 11-5(d) have been satisfied.

Accordingly, any acquisition you make that relates to the sale of your <specified number> properties located at <specified addresses> will satisfy as a creditable acquisition, provided:

(i)    the supply of the thing to you is a taxable supply from the supplier

(ii)   you provide, or are liable to provide, consideration for the supply, and

(iii)  you were registered, or required to be registered, for GST at the time you made the acquisition.

Where this is the case, you are entitled to the input tax credits and you can claim the input tax credits to the extent you have provided consideration for the acquisition and you hold a tax invoice.

Additional information

For sales of residential premises that are new residential premises, therecipient of thesupply must pay an amount representing the GST on the supply to the Commissioner under section 14-250 in Schedule 1 to the Taxation Administration Act 1953, and the supplier is entitled to a credit for that payment under section 18-60 in that Schedule.

The GST withholding amount to be paid by the purchaser is generally 1/11^th of the contract price. However, if the margin scheme is to apply to the sale, the amount to be paid to the Commissioner by the purchaser is 7% of the contract price.

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