Edited version of private advice

Authorisation Number: 1051792506838

Date of advice: 23 December 2020

Ruling

Subject: Goods and services tax and the margin scheme

Question

What is the consideration for the acquisition of your interest in X Street, Suburb when working out the margin for the supply of developed lots under section 75-10 (2) of the GST Act?

Answer

The property at X Street, Suburb is taken to be acquired by Y Pty Ltd in its capacity as partner in the Partnership on the X date 20XX for $x.xx.

The margin for the supply of developed lots made by you will be the amount by which the consideration for the supply exceeds the consideration for acquisition. This will be 47% of the amount you paid to purchase X Street in month 20XX, plus 53% of the GST inclusive market value of the property as at month 200X.

Relevant facts and circumstances

Entities:

X Pty Ltd, Y Pty Ltd and Z Trust are involved in a property development project located in Street, Suburb, State(the Development).

X, Y and Z are registered for GST

A is not registered for GST (other than in its capacity as trustee of the Z Trust).

The Development:

The development is a mixed use project, comprising X residential apartments, first floor commercial office space and X retail shops (the Lots).

All the apartments, commercial and retail shops are intended to be sold. It is expected that the sale of the commercial space and retail shop will be taxable supplies and the margin scheme will be applied to the sales of residential apartments.

Construction of the Development commenced in 20XX and it is expected that the development will be completed, and the transfer of the residential, commercial and retail premises will be settled in mid to late 20XX.

Development Site:

The site at which the Development is taking place comprises the following 6 properties (together, The Properties):

•         Property 1 acquired for $X on date 20XX by Z Trust;

•         Property 2 acquired for $X on date 20XX by X Pty Ltd;

•         Property 3 acquired for $X on date20XX by Y Pty Ltd;

•         Property 4 acquired for $X date 20XXX by Pty Ltd;

•         Property 5 acquired for $X on date 20XXZ by Trust;

•         Property 6 acquired for $X on date 20XXY Pty Ltd and X Pty Ltd as tenants in common (Y Pty Ltd 45.1% and X Pty Ltd 54.9%).

Acquisition of XXXX Street:

The previous owner of this property was N the Vendor who has been registered for GST since 1 July 2000. The Vendor is not related to development entities.

D entered into a contract of sale of the property with the Vendor dated month20XX. The sale price was $X.

The sale contract indicates that the property is 'commercial premises and residential flat, that is, the property is partly commercial and partly residential premises.

The contract included the following clause:

The vendor and the purchaser agree that the sale of the property is the supply of a going concern for the purposes of section 38-325 of the GST Act, but only to the extent that the sale is not residential premises (as defined in the GST Act) and would not, aside from this clause, be input taxed for GST purposes.

The property settled on date 20XX.

You advised the Vendor sought a ruling from the ATO which confirmed the sale was partly input taxed (to the extent that it was residential premises) and partly a GST-free going concern (to the extent it was commercial premises).

Other than the sale to D, there has been no sale of the property since 1 July 20XX. However, the property was previously jointly owned by T and the N (since before 1 July 20XX). T died on date 20XX, at which time the Vendor inherited the remainder of the property.

A family partnership comprising of "N & T" is listed on the Australian Business Register under the ABN with the same postcode as the Vendor. The partnership was registered for GST from 1 July 20XX until 31 December 20XX (when the registration was cancelled). The property was used as a partnership asset under this ABN until Vendor inherited the property.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999, section 75-10(2)

A New Tax System (Goods and Services Tax) Act 1999, section 75-11(5)

Reasons for decision

Margin scheme cost base in relation to XXXX Street Suburb (Property 3)

You acquired Property3 (53%) as a GST-free supply under Subdivision 38-J and (47%) as an input taxed supply under section 40-65 of the GST Act on date 20XX.

The relevant provisions for working out the amount of GST on your taxable supplies are subsection 75-10(2) and subsection 75-11(5) of the GST Act.

75-10(2) provides:

Subject to subsection (3) and section 75-11, the margin for the supply is the amount by which the consideration for the supply exceeds the consideration for your acquisition of the interest, unit or lease in question.

75-11 provides for the Margin for supply of real property acquired as a GST-free going concern or as GST-free farm land.

Subsection 75-11(5)

If:

(a) you acquired the interest, unit or lease in question from an entity as, or as part of:

(i) a *supply of a going concern to you that was *GST-free under Subdivision 38-J; or

(ii) a supply to you that was GST-free under Subdivision 38-O; and

(b) the entity was *registered or *required to be registered, at the time of the acquisition; and

(c) none of subsections (1) to (4) applies;

the margin for the supply you make is the amount by which the *consideration for the supply exceeds:

(d) if that entity had acquired the interest, unit or lease before 1 July 2000 and on that day was registered or required to be registered:

(i) if you choose to apply an *approved valuation to work out the margin for the supply-an approved valuation of the interest, unit or lease as at 1 July 2000; or

(ii) if subparagraph (i) does not apply-the *GST inclusive market value of the interest, unit or lease as at 1 July 2000; or

(e) if that entity had acquired the interest, unit or lease on or after 1 July 2000 and had been registered or required to be registered at the time of the acquisition:

(i) if the entity's acquisition was for consideration and you choose to apply an approved valuation to work out the margin for the supply-an approved valuation of the interest, unit or lease as at the day on which the entity had acquired it; or

(ii) if the entity's acquisition was for consideration and subparagraph (i) does not apply-that consideration; or

(iii) if the entity's acquisition was without consideration-the GST inclusive market value of the interest, unit or lease as at the time of the acquisition; or

(f) if that entity had not been registered or required to be registered at the time of the entity's acquisition of the interest, unit or lease (and paragraph (d) does not apply):

(i) if you choose to apply an approved valuation to work out the margin for the supply-an approved valuation of the interest, unit or lease as at the first day on which the entity was registered or required to be registered; or

(ii) if subparagraph (i) does not apply-the GST inclusive market value of the interest, unit or lease as at that day.

With respect to the acquisition by you that relates to the input taxed part of Property 3, subsection 75-11 does not apply to your circumstances.

Applying the facts and assumptions for this part of Property 3 the consideration for the acquisition (the residential component) as per 75-10(2) will be 47% of $X.

With respect to the acquisition by you of the GST Free part of Property 3, subsection 75-11 (5) does apply to your circumstances.

Applying the facts and assumptions for this part of Property 3, it is our view the tax law partnership was the entity for GST purpose that held the interest in Property 3 as at 1 July 20XX. When the partnership terminated at the time of T's death on date 20XX, N is taken to have acquired the property on the date 20XX.

N was registered for GST in own right at this time.

Therefore sub-paragraph 75-11(5) (a) to (c) are satisfied as you acquired the interest in Property 3 from an entity in part, as a supply of a going concern, the entity was registered for GST at the time of the acquisition and subsections 75-11 (1) to (4) do not apply to you.

Sub-paragraph 75-11(5)(d) to (f) determines the amount to be used for the purposes of the margin scheme cost base.

In your case, paragraph 75-11(5)(e) is applicable to your circumstances. This is based on the fact that N acquired the interest in Property 3 after 1 July 20XX, was registered for GST at the time of acquisition and the acquisition was without consideration.

Therefore the margin scheme cost base for Property 3 will be 53% of the GST inclusive market value of the property (commercial component) as at date 20XX.

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