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Ruling

Subject: GST and margin scheme valuation

Question

Is the original cost you paid for your principal residence considered to be the cost of the property for margin scheme calculations when that principal residence is used in a commercial development?

Answer

Yes, the original cost you paid for your principal residence is considered to be the cost of the property for margin scheme calculations when that principal residence is used in a commercial development.

Relevant facts and circumstances

You bought a property as your principal residence post June 2000.

You did not pay any GST on the acquisition of your principal residence. The purchase of the house was not a taxable supply to you.

A few years later, the house was demolished and the property being developed into several residential apartments of which you will keep one as your new principal residence and another one for investment purposes and will rent it out on completion.

The remaining apartments shall be sold off-plan and settled at completion.

You are registered for GST.

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 Paragraph 40-65(2)(a).

A New Tax System (Goods and Services Tax Act) 1999 Section 75-5.

A New Tax System (Goods and Services Tax Act) 1999 Section 75-10.

A New Tax System (Goods and Services Tax Act) 1999 Section 75-15.

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

Reasons for decision

As provided under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), you make a taxable supply if:

§ you make the supply for consideration; and

§ the supply is made in the course or furtherance of an enterprise that you carry on; and

§ the supply is connected with Australia; and

§ you are registered or required to be registered.

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

Paragraph 40-65(2)(b) of the GST Act provides that the sale of residential premises is not input taxed to the extent that the residential premises are new residential premises.

In your case, you have demolished your principal residence to make way for the construction of residential apartments. You will retain one as your new principal residence and another for leasing. The remaining apartments will be sold off-plan.

Consequently, the sale of the remaining newly-constructed residential apartments will constitute a taxable supply as you will supply it for consideration; in the course of carrying on your enterprise; the supply is connected with Australia; you are registered for GST; and that it will not be a GST-free or input taxed supply.

Normally the amount of GST payable on a taxable supply is 10% of the value of the supply as specified under section 9-70 of the GST Act. However, for supplies of real property an election may be made to apply the margin scheme and use an alternative calculation to determine the GST amount.

Division 75 of the GST Act contains the provisions relevant to the margin scheme. Section 75-5 of the GST Act stipulates when you may apply the margin scheme:

· If you make a taxable supply of real property by:

(a) selling a freehold interest in land; or

(b) selling a stratum unit; or

(c) granting or selling a long-tem lease;

you may choose to apply the margin scheme in working out the amount of GST on the supply, if you and the purchaser have agreed in writing that margin scheme is to apply.

· However, you cannot choose to apply the margin scheme if you acquired the freehold interest, stratum unit or long-term lease through a supply that was ineligible for the margin scheme. For example, you cannot use the margin scheme where your acquisition was through a taxable supply on which the GST was worked out without applying the margin scheme.

The acquisition of your principal residence was not a taxable supply to you. As a consequence you will be entitled to apply the margin scheme on the subsequent sale of the newly constructed premises.

The amount of GST on these supplies is provided under section 75-10 of the GST Act:

§ If a taxable supply of real property is under the margin scheme, the amount of GST on the supply is 1/11 of the margin for the supply.

§ 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.

§ However, if:

(a) the circumstances specified in an item in the second column of the table in this subsection apply to the supply; and

(b) a valuation of the freehold interest, stratum unit or long-term lease, as at the day specified in the corresponding item in the third column of the table, has been made that complies with any requirements determined in writing by the Commissioner for making valuations for the purposes of Division 75;

the margin for the supply is the amount by which the consideration for the supply exceeds that valuation of the interest, unit or lease.

Use of valuations to work out margins
Item	When valuations may be used	Days when valuations are to be made
1	The supplier acquired the interest, unit or lease before 1 July 2000, and items 2, 3 and 4 do not apply.	1 July 2000
2	The supplier acquired the interest, unit or lease before 1 July 2000, but does not become *registered or *required to be registered until after 1 July 2000.	The date of effect of your registration, or the day on which you applied for registration (if it is earlier)
2A	The supplier acquired the interest, unit or lease on or after 1 July 2000, but the supply to the supplier: (a)    was *GST-free under subsection 38-445(1A); and (b)    related to a supply before 1 July 2000, by way of lease, that would have been GST-free under section 38-450 had it been made on or after 1 July 2000.	1 July 2000
3	The supplier is *registered or *required to be registered and has held the interest, unit or lease since before 1 July 2000, and there were improvements on the land or premises in question as at 1 July 2000.	1 July 2000
4	The supplier is the Commonwealth, a State or a Territory and has held the interest, unit or lease since before 1 July 2000, and there were no improvements on the land or premises in question as at 1 July 2000.	The day on which the *taxable supply takes place

(* denotes a term defined in the section 195-1 of the GST Act).

In this case, although you will be entitled to apply the margin scheme under the relevant provisions of the GST Act, you will not be entitled under those same provisions to substitute a valuation for the purchase price.

A valuation is used to ensure that GST is payable on the value added after the commencement of the GST system. As you acquired your principal residence post-July 2000, any value added has arisen subsequent to introduction of the GST system. Consequently, a valuation is not required to calculate the relevant margin.

In circumstances like yours, the legislation specifically states that the margin is the amount by which the consideration for the supply exceeds the consideration for the acquisition. As the operation of the provisions specifically requires the consideration paid on the acquisition to be used in calculating the margin, no other value can be substituted for this amount.

As such, the original cost paid for your principal residence is considered to be the cost of the property for margin scheme calculations when that property is used in a commercial development.

Section 75-15 of the GST Act deals with the margin scheme and subdivided land. Section 75-15 of the GST Act provides that, for the purposes of sections 75-10 to 75-14 of the GST Act, if the interest, unit or lease that you supply relates to only part of the land (that is, where land has been subdivided) or premises that you acquired, the consideration for the acquisition of that part is the corresponding proportion of the consideration for the land or premises that you acquired.

In order to ascertain the proportion of the purchase price that relates to each apartment, you may use any fair and reasonable method apportionment.

The margin for each apartment will be the difference between a fair and reasonable apportioned amount of the consideration for your acquisition as determined under section 75-15 of the GST Act in respect of each apartment and the consideration that you receive for the taxable supply of each apartment. Your liability for GST in respect of each taxable supply of the apartment will be 1/11^th of the margin for the supply of each apartment.