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Ruling

Subject: GST and margin scheme

Question 1

For the purposes of paragraph 75-11(7) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) did the Owner's Corporation make an acquisition from associates for no consideration?

Answer

No.

Question 2

Was the time of the acquisition the time that the strata plan of subdivision first creating the new lot being Unit 8 was registered?

Answer

Not applicable.

Question 3

For the purpose of determining the consideration for the acquisition, what is the market value of the common property at the time of your acquisition?

Answer

The consideration for the acquisition is nil.

Facts

The Owner's Corporation was established upon registration of the Strata Plan. The Owner's Corporation carries on an enterprise of managing and maintaining a residential building located in NSW. The Owners Corporation is registered for GST.

The common property of the Strata Plan includes car parking for a number of vehicles in total. We have outlined its distribution.

As common property, legal title to these car parking spaces is vested in the Owner's Corporation as agent for the unit owners (Owners), as tenants in common in shares proportional to the unit entitlements of their respective lots (see section 20 of the Strata Schemes (Freehold Development) Act 1973 (NSW) (SSFDA 1973).

The Owners passed a special resolution at a general meeting of the Owner's Corporation, authorising the Owner's Corporation to subdivide the common property pursuant to subsection 9(1) of the SSFDA 1973 to create a new residential lot, Lot A.

In consideration of the successful vote, with the result that the legal and beneficial interest in Lot A vested in the Owner's Corporation upon the registration of the strata plan of subdivision, the Owner's Corporation agreed to undertake and complete at its own expense:

§ development of a residential unit within Lot A

§ construction of a replacement underground car park beneath the common property lawn area

§ reinstatement of the lawn area

§ construction of a swimming pool and landscaping

§ construction of a lift from the new underground car park

§ construction of a new foyer on each level of the building to accommodate the lift, and

§ the construction of new fire stairs.

As a result of adjustments to the boundaries of the existing lots, the Owner's Corporation also agreed to transfer to the relevant Owner, probably for nominal consideration, that part of the former common property now contained jointly on the new title to that Owner's lot.

After obtaining the consent of the relevant Local Government Authority (Council) to the subdivision and/or to the creation of a new apartment in Lot A and construction of the building works, the Owner's Corporation will sell Lot A.

Lot A was created from the common property by the registration of strata plan of subdivision SP AAAA. Subject to market conditions, Lot A will be sold hopefully in the near future.

We issued a GST private ruling where we advised, among others, that the Owner's Corporation is entitled to use the margin scheme. The consideration for the acquisition by the Owner's Corporation is nil.

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 9-10.

A New Tax System (Goods and Services Tax) Act 1999 section 11-10.

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 75-11.

Reasons for decision

Summary

There was no acquisition by the Owner's Corporation for the purposes of the margin scheme.

Detailed reasoning

Section 75-10 of the GST Act provides the amount of GST on taxable supplies made under the margin scheme is calculated as follows:

(1) 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.

(2) 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.

(3) …

Section 75-11 of the GST Act modifies section 75-10 of the GST Act somewhat as it sets out rules for margins of supplies of real property in particular circumstances.

Subsection 75-11(7) deals with the margin on the subsequent supply of an interest, unit or lease over real property acquired from an associate. It states:

(7) If:

(a) you acquired the interest, unit or lease in question from an entity who was your *associate at the time of the acquisition; and

(b) none of the other subsections of this section apply;

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

(d) if your acquisition was made before 1 July 2000 - an *approved valuation of the interest, unit or lease as at 1 July 2000; or

(e) if your acquisition was made on or after 1 July 2000 - the *GST inclusive market value of the interest, unit or lease at the time of the acquisition.

For either section to be invoked, it follows that an acquisition needs to be made prior to a later supply being made. Further, Goods and Services Tax Ruling GSTR 2006/8 Goods and services tax: the margin scheme for supplies of real property acquired on or after 1 July 2000, states that the acquisition in question in respect to the application of the margin scheme is one of real property.

GSTR 2006/8 also offers guidance as to when real property is acquired in respect of the margin scheme; most legal interests in Torrens title land are created or transferred only upon registration of the relevant instrument. Given the practical difficulties in ascertaining the exact moment of lodgement or registration, the Commissioner considers that sale (and therefore supply and acquisition) occurs at settlement as this is when the purchaser (or the purchaser's agent) obtains:

§ unconditional possession of a registrable instrument of transfer; or

§ an instrument of transfer that would be registrable once stamped.

If the supply is made by way of grant of a long-term lease, the lease is supplied and acquired when the recipient obtains a leasehold estate in the land. However, if registration of the lease or instrument of transfer is required under the State or Territory legislation applying when the lessee obtains the leasehold interest, the Commissioner considers that the lease is supplied and acquired when the recipient (or the recipient's agent) obtains

§ unconditional possession of a registrable lease or instrument of transfer of the lease; or

§ a lease or an instrument of transfer that would be registrable when it is stamped.

Again, as in the sale of a freehold interest or stratum unit, this is at settlement.

The Commissioner's policy on the timing of acquisition in respect of the margin scheme is underpinned by the view that the acquisition being made is one of real property. The acquisition of real property is made from the receipt of a supply of real property.

In this case, it is necessary to ascertain if the Owner's Corporation has made an acquisition.

The meaning of acquisition in section 11-10 of the GST Act is the corollary of the meaning of supply in section 9-10 of that Act. This means that an entity can only make an acquisition where a corresponding supply is made to the entity.

Subsection 9-10(1) of the GST Act defines supply as any form of supply whatsoever.

Subsection 9-10(2) of the GST states that without limiting subsection 9-10(1) of the GST Act, supply includes, among others

(a) a supply of goods

(b) a supply of services

(c) a provision of advice or information

(d) a grant, assignment or surrender of *real property

(e) a creation, grant, transfer, assignment or surrender of any right

(f) a *financial supply

(g) an entry into, or release from , an obligation:

(i) to do anything; or

(ii) to refrain from an act, or

(iii) to tolerate an act or situation;

(h) any combination of any 2 or more of the matters referred to in paragraphs (a) to (g).

Goods and Services Tax Ruling GSTR 2006/9 Goods and services tax: supplies, sets out the Commissioner's views on the meaning of the term 'supply' in the GST Act.

GSTR 2006/9 sets out a number of propositions to assist in analysing a transaction to identify the supply or supplies made in a transaction.

Proposition 5: to 'make a supply' an entity must do something, is relevant in this case and is discussed at paragraphs 71 to 91 of GSTR 2006/9.

Paragraph 71 of GSTR 2006/9 refers to paragraph 41 of GSTR 2004/9, a ruling which is about the assumption of liabilities. It states:

In adopting the ordinary and natural meaning of the term, 'to furnish or provide', it follows that an entity must take some action to 'make a supply'. This approach is consistent with the use of active phrases throughout the examples of supplies in subsection 9-10(2), such as the normalised verbs: 'a provision'; 'a grant'; 'a creation'; 'a transfer'; 'an entry into'; and 'an assignment'.

The use of the word 'make' in the context of section 9-5 was considered by Underwood J in Shaw v. Director of Housing and State of Tasmania (No. 2). His Honour expressed the view that GST only applies where the 'supplier' makes a voluntary supply and not where a supply occurs without any action by the entity that would be the 'supplier' had there been a supply.

Further, in Westley Nominees Pty Ltd v. Coles Supermarkets Australia Pty Ltd (2006) 152 FCR 461 the court noted hat the ordinary meaning of 'supply' required a positive act.

However, paragraph 74 of GSTR 2006/9 states in part:

…that an entity can still make a supply even if the supply is made under the compulsion of statute if the entity takes some action to cause a supply to occur. His Honour went on to compare a supply resulting from a positive act against a situation where there is no supply because nothing is done.

An example of a transfer which does not constitute a supply is the compulsory acquisition of land by Government authorities.

One of the means that compulsory acquisitions occur is the vesting of the interest in the relevant Government authority and the extinguishment of any previous interests.

This view is held by the Commissioner at paragraph 82 of GSTR 2006/9:

The effect of the gazettal notice is that the legal ownership of the land, described in the notice, is vested in the authority acquiring the land, and that the land becomes freed from any other interests. The entity's interest in the land, whether legal or equitable, is extinguished. In this case the entity does not make a supply because it takes no action to cause its legal interest to be transferred or surrendered to the authority.

Section 20 of the SSFDA 1973 provides that the estate or interest of a body corporate in common property vested in it or acquired by it shall be held by the body corporate as agent for the lot proprietors as tenants in common in proportions equal to their lot entitlements. The body corporate's name is on the title deed and as such, legal title is vested in the body corporate, but only in its capacity as agent for the owners.

However, common property may be subdivided by registration of a strata plan of subdivision so as to create one or more new lots (subsection 9(1) and 5(7) of the SSFDA 1973.

Prior to the registration of the strata plan of subdivision, in accordance with Taxation Ruling IT 2505 Income Tax: bodies corporate constituted under strata legislation, the ownership of the common property is vested in the body corporate as agent for the proprietors as tenants in common in proportion equal to their lot entitlements.

In this case, the registration of the strata plan of subdivision containing a lot made up in whole or in part from the common property changes the nature of that property. Since common property is the land in a parcel that is not comprised in a lot, lots and common property are mutually exclusive (Houghton v. Immer (No 155) Pty Ltd (1997) 44 NSWLR 46 at 51 per Handley JA). Therefore, on registration of the strata plan of subdivision the subdivided property ceased to be common property and becomes a new lot. The legal and beneficial interests in the new lot are vested in the Owner's Corporation.

Looking through the transaction, in executing the subdivision, it is considered that the Owner's Corporation continues to act as an agent for the Owners in order to sell, in substance, common property. The fact that the common property is first converted into a lot in order to be sold to a new unit owner does not alter the relationship between the Owners and the Owner's Corporation with respect to that common property as per section 20 of the SSFDA 1973.

While a transfer of interest in land, or the surrender of real property, is within the definition of supply in section 9-10 of the GST Act, in this case rights or interests are not transferred or surrendered. The registration of the strata plan of subdivision pursuant to the statute has the effect of extinguishing the Owners' interests in the land and creates new rights in the land that vest in the Owner's Corporation. The Owners do not 'do something', as outlined above.

There is no supply of the common property by the Owners to the Owner's Corporation prior to the sale of that property to the new unit owner. The only supply for GST purposes is the proposed sale of Lot A to a purchaser, by the Owner's Corporation acting as an agent for the Owners. With no supply, there can be no acquisition for the purposes of the margin scheme.

This is achieved in a similar way to that of a land acquisition gazettal notice by extinguishing the entity's interests and vesting those interests in the statutory body. The legal interest was vested in the Owner's Corporation by operation of the statute, upon registration of the strata plan. It is not considered to be a positive act by the Owners. Hence, there is no supply by the Owners.

You have cited the approach taken by Deputy Presidents Professor GD Walker and Mr Julian Block in Hornsby Shire Council v. Commissioner of Taxation [2008] AATA 1060 as an appropriate way to deal with the question at hand. The ATO considers that approach inappropriate under the circumstances. The Hornsby Shire case turned on the facts on the basis that CSR drove the transaction by requesting Hornsby Council to acquire the land or on the basis that CSR surrendered the land. At paragraph 38 the AAT notes in part:

…In this case, CSR was the very antithesis of an unwilling party. It was CSR, which against opposition compelled the finalisation of the acquisition and the payment of compensation.

In your case, rights are not surrendered or transferred by the Owners but are extinguished with new rights being created in relation to a newly created lot. This also differs somewhat from the surrender of a licence by an entity with a view to have the licence reissued to another entity as a component of a broader sale transaction.

In the scenario you outline, the rights extinguished and the rights created are not the same thing and are not viewed as an acquisition of the same thing that was supplied. Therefore, as the Owners have not made a supply to you, you have not made an acquisition.

As you have not made an acquisition, for the purpose of calculating the GST payable under the margin scheme, the consideration for the acquisition is nil.