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Ruling

Subject: goods and services tax and the margin scheme

Question 1

Will you be entitled to apply the margin scheme to calculate GST on your supplies of the apartments made under the apartment sales contracts?

Answer

Yes.

Question 2

Will the 'cost price' available to you for the purposes of determining your margin on your sales of the apartments made under the apartment sales contracts be as follows?:

(i) a certain percent of an approved valuation of the property as at a certain date, if the sale of the property from your supplier to you is a GST-free supply of a going concern and you choose to obtain and apply an approved valuation of the property as at the date your supplier acquired it.

(ii) a certain amount, which is a certain percent of a certain amount if the sale of the property from your supplier to you is a GST-free supply of a going concern and you do not choose to obtain and apply an approved valuation of the property as at the date your supplier acquired it.

(iii) a certain percent of a certain amount (plus or minus any settlement adjustments) if the sale of the property from your supplier to you is a taxable supply under the margin scheme.

Answer

The methods set out in question 2 cannot be used.

See reasons for decision for guidance on how to calculate the margins for your sales of apartments.

This ruling applies for the following periods:

The scheme commences on:

Relevant facts and circumstances

You are registered for GST.

You will purchase a property at a certain address located in Australia (the property) from your supplier.

The property consists of a building with a certain number of levels (including the basement) plus a rooftop terrace and premises that were formerly a residence (which was later converted to commercial premises).

Your supplier purchased the property on a certain date that was on or after 1 July 2000 for a certain amount.

Your supplier was registered for GST when it purchased the property and will be registered for GST when it sells the property to you.

The sale of the property to your supplier was a GST-free supply of a going concern.

When your supplier purchased the property, if was fully tenanted. In addition to retail tenancies, parts of the building had been leased to a certain entity and the upper floors had been rented as approximately a certain number of separate commercial premises.

After your supplier purchased the property, it obtained planning approval to develop the building to create ground floor, something and certain floor retail and commercial tenancies plus a certain number of apartments.

The sale of the property to you will be partly a GST-free supply of a going concern and partly a taxable supply. The property sale contract between your supplier and you provides that to the extent that the sale of the property to you is not a GST-free supply, the parties agree that the margin scheme will be used to calculate GST payable on the taxable supply.

You and your supplier will not be members of the same GST group when you purchase the property from your supplier.

You will not acquire the property from a joint venture operator of a GST joint venture at a time when you are a participant of that joint venture.

You will develop the property into a combination of apartments and retail premises.

You will strata title the apartments.

You will sell apartments and retail and commercial units in the property on completion of their construction.

Each apartment sale contract you have entered into with your purchasers contains a clause pursuant to which the parties agree that the margin scheme applies to the supply of the apartment.

The estimated gross realisation from sale of the apartments is a certain amount.

The estimated gross realisation from sale of the retail and commercial units is a certain amount.

The total estimated gross realisation from the developed property is a certain amount.

Relevant legislative provisions

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(1A)

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 subsection 75-10(2)

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

Reasons for decisions

Summary

You can use the margin scheme to calculate GST on your sale of the apartments as they will be taxable supplies of real property that you make by selling stratum units; you did not acquire the stratum units through a supply that is ineligible for the margin scheme and you and the purchasers will agree in writing before you sell the apartments that the margin scheme would be used to calculate GST on your sales of the apartments.

Detailed reasoning

Subsection 75-5(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) states:

The margin scheme applies in working out the amount of GST on a taxable supply of real property that you make by:

(a) selling a freehold interest in land

(b) selling a stratum unit

(c) granting or selling a long-term lease.

if you and the recipient have agreed in writing that the margin scheme is to apply.

Subsection 75-5(1A) of the GST Act states:

The agreement must be made

(a) on or before making the supply, or

(b) within such further period as the Commissioner allows.

However, subsection 75-5(2) of the GST Act states:

However, the *margin scheme does not apply if you acquired the freehold interest, stratum unit or *long-term lease through a supply that was ineligible for the margin scheme.

Subsection 75-5(3) of the GST Act sets out the circumstances in which a supply is ineligible for the margin scheme.

You will make taxable supplies of real property by selling stratum units when you sell the apartments. You will not acquire your interests in the stratum units through a supply that is ineligible for the margin scheme. You and the purchasers will agree in writing before you sell the apartments that the margin scheme would be used to calculate GST on your sales of the apartments.

Therefore, you may use the margin scheme to calculate GST on your sales of the apartments.

Question 2

Ultimately, GST is a self actuating tax, the calculation of which depends upon a number of variables.

We cannot provide you with the values or percentages to use in calculating a liability. We can however provide formulae to calculate the margins under the margin scheme.

Applying the rules in subsection 75-10(2) of the GST Act and subsection 75-11(5) of the GST Act, you can calculate the margin for your sale of an apartment using one of the following two methods:

Method 1

Step 1: Obtain an approved valuation of the portion of the property that formed part of the GST-free supply of a going concern to you. The valuation will be as at the time your supplier acquired the property.

Step 2: Apportion on a fair and reasonable basis the consideration you paid for your acquisition of the property to the units that you acquired that did not form part of the GST-free supply of a going concern to you.

Step 3: Add together the amounts calculated at Steps 1 and 2.

Step 4: Apportion the amount calculated at Step 3 on a fair and reasonable basis to the apartment that you sell. An example of a fair and reasonable basis would be to divide the expected sale price of the apartment by the total expected proceeds from selling all units (including the retail and commercial units) and multiplying the result of this calculation by the amount calculated at Step 3.

Step 5: Subtract the amount calculated at Step 4 from the price you sell the apartment for.

(The total 'cost price' of the apartments that you sell could be calculated by multiplying the figure calculated at Step 3 by the expected sale proceeds from your sales of apartments in the development and dividing the result of this calculation by the total expected sale proceeds from your sales of units in the development)

Method 2

Step 1: Apportion on a fair and reasonable basis the consideration your supplier provided for its acquisition of the property to the units that formed part of the GST-free supply of a going concern to you.

Step 2: Apportion on a fair and reasonable basis the consideration you paid for your acquisition of the property to the units that you acquired that did not form part of the GST-free supply of a going concern to you.

Step 3: Add together the amounts calculated at Steps 1 and 2.

Step 4: Apportion the amount calculated at Step 3 on a fair and reasonable basis to the apartment that you sell. An example of a fair and reasonable basis would be to divide the expected sale price of the apartment by the total expected proceeds from selling all units (including the retail and commercial units) and multiplying the result of this calculation by the amount calculated at Step 3.

Step 5: Subtract the amount calculated at Step 4 from the price you sell the apartment for.

(The total 'cost price' of the apartments that you sell could be calculated by multiplying the figure calculated at Step 3 by the expected sale proceeds from your sales of apartments in the development and dividing the result of this calculation by the total expected sale proceeds from your sales of units in the development)