Edited version of private advice

Authorisation Number: 1051808922068

Date of advice: 24 February 2021

Ruling

Subject: GST and the margin scheme

Question

Is Entity A (you) eligible to apply the margin scheme in accordance with section 75-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) to its supplies of house and land packages on XXX (Property)?

Answer

No,you will not be eligible to apply the margin scheme in accordance with section 75-5 of the GST Act to your supplies of house and land packages on the Property. The sale of the house and land packages will be fully taxable supplies.

Relevant facts and circumstances

Entity A (you) is registered for GST effective from XXX.

On XXX, you entered into a contract (Contract) with Entity B (Seller) to purchase a partially completed residential subdivision located at XXX (Property) as a going concern. The settlement of the property occurred on XXX.

The GST Annexure of the Contract details the treatment of GST agreed to for the supply of Property wherein you and the Seller agree that:

The sale of the Property in the Contract is the supply of a Going Concern and GST free.

The GST Annexure of the Contract also provides that:

The Seller represents that the Seller will be registered for GST at Settlement.

However, the Seller's GST registration has been cancelled since XXX.

To the best of your knowledge the purchase of the Property was a supply of a going concern to you and was not subject to GST as the legislative requirements for a GST-free supply of a going concern under section 38-325 of the GST Act were considered satisfied. Therefore, GST was not applied to the purchase of the Property.

The Property was purchased for $XXX and consisted of partially completed residential subdivision.

You subsequently completed the residential subdivision of the Property and are progressing with the sale of individual lots as part of house and land packages in a joint venture with Entity C.

You anticipate that sale of lots will take place in XXX.

At the time of your purchase you were not informed of the Seller's eligibility to use the margin scheme.

You do not have and have been unable to obtain evidence to substantiate the Seller's eligibility to use the margin scheme. You have not been able to contact the Seller since purchasing the Property.

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 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 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)

Reasons for decision

Section 9-5 of the GST Act provides that you make a taxable supply if:

(a) you make a supply for consideration and

(b) it is in the course or furtherance of an enterprise that you carry on and

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

(d) you are registered 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.

In your case, you are making supplies of new residential lots for consideration; the supplies are connected with Australia; the supplies are made in the course of or furtherance of an enterprise that you carry on, and you are registered for the GST. Therefore, paragraphs a, b, c and d in section 9-5 of the GST Act are satisfied.

Section 40-65 of the GST Act provides that the supply of residential premises is input taxed unless they are new residential premises. Section 40-75 of the GST Act provides that residential premises are new residential premises if they have been built to replace demolished premises on the same land, or have not previously been sold as residential premises and have not been previously the subject of a long-term lease.

As you subdivided XXX new residential lots that have not been previously sold and are selling them as part of house and land packages, you are selling new residential premises. The supply of the new residential premises will be taxable supplies of real property.

Subsection 75-5(1) of the GST Act provides that the margin scheme applies in working out the amount of GST on a taxable supply of real property that you make by selling either a freehold interest in land or a unit or granting or selling a long term lease, if you 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 you cannot use the margin scheme if you acquired the interest through a supply that is ineligible for the margin scheme.

Subsection 75-5(3) of the GST Act defines which supplies are ineligible for the margin scheme.

Of particular importance is paragraph 75-5(3)(e) which states that a supply is ineligible for the margin scheme if:

(e) 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;

In this case, to the best of your knowledge the purchase of the Property was a supply of a going concern to you and was not subject to GST as the legislative requirements for a GST-free supply of a going concern under section 38-325 of the GST Act were considered satisfied. Therefore subparagraph 75-5(3)(e)(i) of the GST Act is considered satisfied.

While the Seller's GST registration has been cancelled since XXX, the GST Annexure of the Contract stipulates that the Seller represents that it will be registered for GST at Settlement. On this basis it cannot be concluded, without evidence to demonstrate otherwise, that subparagraph 75-5(3)(e)(ii) is not satisfied as the Seller's representation under the Contract either demonstrates its intention to become registered at settlement; or suggests a requirement to do so.

You are unable to provide evidence as to whether or not the Seller had acquired the property through a taxable supply on which the GST was worked out without applying the margin scheme or as an input taxed supply to you.

As you are unable to supply evidence of the vendor's eligibility to use the margin scheme, it cannot be concluded that the requirement under subparagraph 75-5(3)(e)(iii) is not satisfied.

As such, you will not be eligible to apply the margin scheme to your supplies of house and land packages on the Property. The supplies of the house and land packages will be fully taxable.

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