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Ruling
Subject: goods and services tax (GST) and calculating GST on the sale of units
Question
You asked for a reduction in the GST payable on your sale of each individual unit constructed.
Answer
You can reduce your GST liability on your sale of a unit by using the margin scheme, provided that you and the purchaser agree in writing by the relevant deadline that the margin scheme will be used.
You cannot use the method that you have proposed for calculating GST on your sales of the units, as it is not one of the two allowable methods under the GST legislation.
This ruling applies for the following periods:
The scheme commences on:
Relevant facts and circumstances
You are registered for GST.
You purchased land located in Australia after 30 June 2000.
The contract price was a certain amount. You paid fees and stamp duty of a certain amount.
No GST was paid on the land purchase.
You proceeded to get council approval to build a certain number of units. This was approved and construction commended on a number of units at a certain time.
The costs of council fees to date total a certain amount. There was no GST on this outlay.
In a certain year, one unit was sold with a part payment in the something quarter and a part payment in the something quarter in which full GST was paid.
Now in the something quarter of a certain financial year, you have received the final payment for a certain unit and the full payment for the sale of a certain other unit.
You have proceeded building a certain number more units.
You have recently changed the size of the development from a certain number of units to a certain number of units to allow for more stand-alones. You are expecting approval for this any day.
The units you will create will all be strata titled.
You believe you should not have to pay GST on the portion of the sale of a unit that did not accrue GST in the first place.
Your calculations are:
o Land value is a certain amount divided by 11 = a certain amount per unit.
o Council fee component is a certain amount divided by 11 = a certain amount per unit.
o The total being a certain amount per unit.
That would be a reduction of a certain amount of GST per unit.
You have not been a member of GST group or a GST joint venture.
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 9-70
A New Tax System (Goods and Services Tax) Act 1999 subsection 9-75(1)
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(1)
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 75-10(3)
A New Tax System (Goods and Services Tax) Act 1999 section 75-11
A New Tax System (Goods and Services Tax) Act 1999 subsection 75-14(1)
Reasons for decision
There are two options for calculating GST on your sales of the units that may be available to you.
One is calculating GST at 1/11th of the price (after adjusting for settlement adjustments, such as an adjustment for council rates) you sell a unit for.
The other method is calculating GST using the margin scheme provided that you and the purchaser agree in writing by the relevant deadline that the margin scheme will be used
The normal method
In accordance with section 9-70 and subsection 9-75(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), GST is normally calculated by dividing the price by 11.
In accordance with the normal method, you may calculate GST on your sale of a unit by dividing the price (after adjusting for settlement adjustments, such as an adjustment for council rates) of the unit by 11.
The margin scheme
Subsection 75-5(1) of the 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; or
(b) selling a *stratum unit; or
(c) granting or selling a *long term lease;
if you and the *recipient of the supply 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 the making of the supply; or
(b) within such further period as the Commissioner allows.
Subsection 75-5(2) of the GST Act states:
However, 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) of the GST Act explains when an entity acquires a property through a supply that was ineligible for the margin scheme.
You will make taxable supplies of real property by selling stratum units
You did not acquire the stratum units through a supply that was ineligible for the margin scheme.
Therefore, you and the purchaser of each unit may choose to use the margin scheme. The choice must be put in writing and this must be done on or before the making of the supply or within such further period as the Commissioner allows.
If you and the purchaser do not choose to use the margin scheme, the margin scheme will not apply.
Subsection 75-10(1) of the GST Act explains how to calculate the GST when a property is sold under the margin scheme. It provides that the GST is 1/11 of the margin for the supply.
Subsection 75-10(2) of the GST Act states:
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.
Subsection 75-10(3) and section 75-11 of the GST Act do not apply in your case.
Subsection 75-14(1) of the GST Act states:
To avoid doubt, in working out the *consideration for an acquisition for the purposes of applying the *margin scheme to a *taxable supply of *real property, disregard
(a) the cost or value of any other acquisitions that have been made by you,
(b) or any work that has been performed, in relation to the real property; and
(c) the cost or value of any other acquisitions that are intended to be made
(d) by you, or any work that is intended to be performed, in relation to the
(e) real property after its acquisition;
(f) including acquisitions or work connected with bringing into existence the interest, unit or lease supplied.
Under the margin scheme, the GST payable on your sale of a unit would be 1/11th of the difference between your selling price (after adjusting for settlement adjustments, such as an adjustment for council rates) of the unit and the consideration for your acquisition of the unit. The consideration for your acquisition of unit would be a fair and reasonable portion of the price you paid for the land (after adjusting for settlement adjustments, such as an adjustment for council rates).
You cannot include the council and other fees, stamp duty and construction expenses you have incurred in the cost base for the purposes of calculating the margin. Your cost base for each unit will be a portion of the price you paid for the land.
The method you have proposed for calculating the GST on your sales of the units cannot be used as it is not one of the two methods that the GST legislation allows. The Australian Taxation Office (ATO) does not have discretion to allow a different method for calculating GST than the methods that the GST legislation allows.
Goods and Services Tax Ruling GSTR 2006/8 and the fact sheet, Margin scheme Made easy, provide guidelines on the margin scheme.