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Ruling

Subject: GST and margin scheme

Question 1

Are you, as Receiver of X (in liquidation) in its capacity as trustee of the X Trust, able to use the margin scheme to calculate the GST liability arising from a sale of any of the identified land?

Answer

Yes.

Question 2

In applying the margin scheme to the sale of any of the land, is the margin scheme cost base (being the consideration for the acquisition of the land) calculated by reference to the amount of $xxxxx plus the consideration for the acquisition of the interest in the joint venture to the extent this is attributable to this acquisition in the land)?

Answer

Yes.

Relevant facts and circumstances

Y acquired the land some time ago.

Subsequently a Joint Venture deed was executed between Y and others. The Joint Venture parties consisted of X Trust and two other representative parties. This was not a GST joint venture. The main entities in the JV were X Trust, B and C. The Joint Venture was established between the above three parties to facilitate the development of the land. Under the Joint Venture Deed:

The respective interests of the Joint Venturers in and to the Joint Venture were vested in the Joint Venturers as tenants in common.

Each of the Joint Venturers was entitled to a share of the revenues and project assets of the Joint Venture and to pay a share of the expenses, outgoings, losses and liabilities of the Joint Venture.

X Trust was a special purpose entity that borrowed part of the funds used to purchase the land and was appointed the project manager for the development which had then subcontracted third party construction companies to undertake works.

When the Joint Venture Deed was executed, Z entered into a Declaration of Trust with the Joint Venturers. You supplied a copy of this declaration of trust. Under the Declaration of Trust, the role of Z was limited to:

Z will hold all other property, rights and interests which it acquires after the date of this deed (Trust Fund) as trustee on trust for the Joint Venturers and for the purposes of the Joint Venture.

The Trustee (Z) will at all times deal with, transfer, dispose of and exercise rights or privileges attaching to the Trust Fund only in accordance with instructions given by the Joint Venturers and not otherwise.

Joint Venturers are defined as the three Joint Venturers and each of their successors or permitted assigns.

Later Z borrowed money from F and this was secured by a fixed and floating charge over the assets of Z. Z used the finance to acquire the land from Y under a Put and call option. The fixed and floating charge between F and Z was registered in the Australia Register of Company Charges as ASIC Charge.

For GST purposes, the margin scheme was applied to the acquisition by Z. When Z acquired the land, it acquired the land as a bare trustee and agent for the Joint Venturers in accordance with the Joint Venture Deed and Declaration of Trust.

Later again, the X Trust acquired the other interest in the project from the other Joint Venture parties. The acquisition of the interest in the project by X Trust was treated as a GST-free supply, of a going concern by the Joint Venture which was treated as a tax law partnership for GST purposes.

The acquisition of the interest was under a deed executed later. Under this deed:

Each of the other Joint Venture parties agreed to transfer their interest in the Joint Venture to X Trust.

Transfer of the interests in the project took place later the same year.

X Trust made payment in the amount of $xxxxxxxx to each of the other Joint Venture parties to acquire their interest in the project.

The interests of the other Joint Venture parties at transfer date consisted of their respective interests in the Project Assets at that time.

The Project Assets included:

o the Land;

o the benefit of all consents and approvals in respect of the Land;

o any plans, drawings, specifications, diagrams and all other instruments or paper writings in respect of or relating to the Land or its development (including any intellectual property of Z, or the Joint Venture parties);

o the benefit of any finance procured for the Project;

o the benefit of all contracts including construction contracts, supply agreements, options, leases and any sales agreements in respect of any subdivided lots (including any intellectual property of Z, or the Joint Venture parties);

o the benefit of all subdivisional, development, building or other work done or contracted to be done for the Project; and

o other assets connected with the above or the Project generally.

Contemporaneously with the execution of the Deed, X Trust acquired

· the shares held by the other Joint Venture parties in Z.

· the shares held by the other Joint Venture parties in D.

Subsequent to the interests being transferred, the Joint Venture was dissolved. X Trust also agreed to indemnify each of the other Joint Venture parties against any liability or loss arising from the Development, Land and project.

The consideration was payable under the share transfer agreements for the interest in Z. At the time of the acquisition of the other interest in the Joint Venture, the only asset of any significant value of the Joint Venture was the partly developed land. There was also a small amount of cash in the bank, receivables and office equipment.

Following this acquisition, X Trust held 100% of the project and 100% beneficial interest in the relevant land. Legal title in the land remained with Z. Z was 100% owned by X Trust which continued to carry on the land development enterprise.

Later X Trust became the GST group representative for a new GST Group that consisted of X Trust and D.

F appointed you as Receiver and Manager of Z and X Trust.

Subsequently the fixed and floating charge over Z was assigned from F to S and T.

You continued to act as RM.

As Receiver and Manager of Z and X Trust you are negotiating to sell the remaining land legally owned by Z which is beneficially owned by X Trust.

The remaining interest in the land consists of a development and various parcels of land (held as a freehold or strata title interest in land).

Relevant legislative provisions

A New Tax System (goods and Services Tax) Act 1999 section 58-20

A New Tax System (goods and Services Tax) Act 1999 subsection 75-5(3)

A New Tax System (goods and Services Tax) Act 1999 section 195-1

A New Tax System (goods and Services Tax) Act 1999 section 23-5

Reasons for decision

Question 1

Summary

You as Receiver of X (in liquidation) in its capacity as trustee of the X Trust, are able to use the margin scheme to calculate the GST liability arising from a sale of any of the land occurring after February 2010.

Detailed Reasoning

You were appointed as Receiver and Manager (RM) of the following three entities:

1. Z

2. X in its own capacity and

3. X as Trustee for the X Trust

You are currently negotiating, in your capacity as RM for the sale of the Land that is legally owned by Z. You have asked whether you in your capacity as RM of X Trust can apply the margin scheme to the supply of these properties.

You supplied a copy of your deed of appointment which set out that Z had borrowed money from F to acquire all the land from another entity, Y. F had secured its mortgage by a fixed and floating charge over the property in. Therefore at that time Z held 100% of the legal interest in the property.

You contend however that it was held in trust for the three Joint Venturers including X Trust, as set out in the Declaration of Trust which sets out that Z:

will hold all property, rights and interests which it acquires after this date as trustee on Trust for Joint Venturers and for the purpose of the joint venture.

Goods and Services Tax Ruling GSTR 2008/3 Goods and services tax: dealings in real property by bare trusts (GSTR 2008/3) explains how the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) applies to supplies of real property involving bare trusts and similar trusts where the trustee has limited active duties and acts solely at the direction of the beneficiary or beneficiaries.

It provides at paragraph 13 that:

13. An example of an arrangement where a bare trust may be created is where a general law partnership (B) decides to acquire and develop real property for sale. The partners may not wish to disclose their names to the vendor of the property and so arrange for a company (T) that they control to acquire title to the property. If there are a large number of partners, it may also be more convenient for the partnership to have a single company that can execute legal documents associated with the acquisition, development and disposal of the property. T acquires and holds the legal title to the property on trust for B. T has no discretion regarding the use and disposal of the trust property and deals with it solely at the direction of B.

In addition paragraphs 47 and 48 are considered to reflect the arrangements you have set out as the factual situation.

Therefore we accept that the arrangements put in place in regard to the land created a bare trust arrangement between the Joint Venturers and Z. Therefore any transfers of the legal title of the land by Z while the Joint Venture existed would be in its capacity as bare trustee, and we accept that the supplies of land would be made by the Joint Venturers.

In addition we note that the declaration of Trust between the Joint Venturers and Z extended to the assignees of the Joint Venturers. We accept that when C and B transferred their interests to X Trust, Z continued to hold the land as a bare trustee for X Trust.

Following this transaction a GST group was formed and it is accepted that Z was still bare trustee for X Trust who became the Group representative for the GST Group.

In your case you were appointed RM and therefore any supplies by Z over which you are appointed are to be reported by X Trust on the CAC role you are appointed to.

Representatives Liability

The GST payable on taxable supplies made by a RM during their term of appointment is dealt with under Division 58 of the GST Act.

Section 58-20 of the GST Act provides that a representative of an incapacitated entity is required to be registered in that capacity if the incapacitated entity is registered or required to be registered. Section 58-20 has effect despite section 23-5 (which is about who is required to be registered).

You have been appointed RM of a company, Z and another, X, both in its own capacity and its capacity as trustee (X Trust).

A RM meets the definition of representative as set out in section 195-1 of the GST Act. Therefore we need to look at whether there is an incapacitated entity and which entity is incapacitated.

Entity Z

In respect of Z, you have been appointed by S and T, (Appointers) to be the RM the secured assets referenced to the fixed and floating charge between F and Z and the real property mortgage between F and Z. You were formerly RM to Z, but appointed by F.

You have powers to take possession of the secured assets, sell the secured assets and otherwise enforce the Appointer's rights in respect of the secured assets. You also have the powers to take possession of the mortgaged land, sell the mortgaged land and otherwise enforce the Appointer's rights in respect of the mortgaged land.

Z is the legal owner of charged property and is the representative member of a GST group. However as set out above it holds the property as a bare trustee for X Trust.

Entity X

In respect of X you have been appointed by the Appointers to be the RM for the secured assets referenced to the fixed and floating charge between S and X. Your appointment came about through the assignment of debt by F to the current creditors. You were formerly RM to Z, appointed by F.

You have powers to take possession of the secured assets, sell the secured assets and otherwise enforce the Appointer's rights in respect of the secured assets.

X in its capacity as trustee for the X Trust is the representative member of a GST group. In its own capacity X is not registered for GST.

You have been appointed RM of Z which holds title to property on behalf X Trust, in the first instance as the result of a bare trusteeship. While the bare trust was formed on behalf of a number of Joint Venturers who were subsequently bought out by one of their number, your role in holding land is unchanged as the Declaration of trust contemplated succession and assignment.

You are currently appointed by S and T to be the Receiver and Manager of in relation to the Secured Assets and to take possession of the Secured Assets as well as take possession of the Mortgaged Land and sell the Mortgaged Land.

Z is a bare trustee for X Trust. The Declaration of trust sets out that the actions of Z will only be at the instruction of the Joint Venturers, their successors and assignees.

The Joint Venture was developing land. However it was unable to continue and financiers acted to protect their exposure to risk. Although Z holds legal title to the Property, it does so on behalf of the remaining Joint Venturer X Trust.

However you are currently appointed as RM to X Trust as well, having the same authority and responsibility as you do for Z.

Any dealings by Z were on behalf of the Joint Venture. As this is the case your dealings as RM of Z are on behalf of the residual entity which is essentially X Trust. As X Trust is required to be registered, section 58-20 of the GST Act requires you to register for GST in your capacity as RM of Z in its role as bare trustee for X Trust.

Subsequent supplies of the land can be made under the margin scheme if the supplies are not ineligible for the margin scheme as outlined in subsection 75-5(3) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act). Amongst other things a supply is ineligible for the margin scheme if the real property was, in specified circumstances, acquired:

· from a fellow GST-group member; or

· from the joint venturer operator of the joint venture that you participated in; or

· acquired as or as part of a GST-free supply of a going concern; or

· from an associate.

In particular paragraph 75-5(3)(c) rules out:

(c) it is a supply in relation to which all of the following apply:

(i) you were a *member of a *GST group at the time you acquired the interest, unit or lease in question;

(ii) the entity from whom you acquired it was a member of the GST group at that time;

(iii) the last supply of the interest, unit or lease by an entity who was not (at the time of that supply) a member of the GST group to an entity who was (at that time) such a member was a supply that was ineligible for the margin scheme; or

While a GST Group existed at a later point, not all the Joint Venturers were members and any transfer of interest over land occurred prior to the group's formation. The formation and subsequent retrospective cancellation of an earlier GST Group is of no consequence.

Paragraph 75-5(3)(d) disallows:

(d) it is a supply in relation to which both of the following apply:

(i) you acquired the interest, unit or lease from the *joint venture operator of a *GST joint venture at a time when you were a *participant in the joint venture;

(ii) the joint venture operator had acquired the interest, unit or lease through a supply that was ineligible for the margin scheme; or

X Trust's acquisition of the remaining of an interest in the land was acquired from its fellow Joint Venturer, but not from the Joint Venture operator.

Paragraph 75-5(3)(e) does not allow for use of the margin scheme where:

(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; or

This exception and the following (Paragraph 75-5(3)(g)) apply only to supplies that were acquired on or after 9 December 2008.

(g) it is a supply in relation to which all of the following apply:

(i) you acquired the interest, unit or lease from an entity who was your *associate, and who was registered or required to be registered, at the time of the acquisition;

(ii) the acquisition from your associate was without *consideration;

(iii) the supply by your associate was not a taxable supply;

(iv) your associate made the supply in the course or furtherance of an *enterprise that your associate *carried on;

(v) your associate had acquired the entire interest, unit or lease through a taxable supply on which the GST was worked out without applying the margin scheme.

Therefore the margin scheme can be used in calculating the GST liability arising from a sale from any of the land. The 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', notes that when operating within the requirements of Division 58 of the GST Act, the margin scheme is allowable. Paragraph 175B of GSTR 2006/8 states:

175B. If all the requirements for applying the margin scheme under Division 75 are satisfied when the incapacitated entity is taken to make the supply, the representative of the incapacitated entity may apply the margin scheme in respect of the supply. However, providing the requirements for a representative to be liable for GST under section 58-10 are met, it is the representative of the incapacitated entity (and not the incapacitated entity) that will be liable for the GST calculated under the margin scheme.

Question 2

Summary

In applying the margin scheme to the sale of any of the land, the margin scheme cost base is calculated by reference to the amount of $xxxxxx plus the consideration for the acquisition of the interest in the Joint Venture to the extent this is attributable to this acquisition in the land.

Detailed reasoning

When Z originally acquired the land under the margin scheme, the consideration for the entire acquisition was $xxxxx. Z, as a Joint Venturer in equal shares would tabulate its original acquisition cost as its share of the entire cost. As noted above, Z held (and still holds) the land as a bare trustee.

Subsequent to the original acquisition the remaining Joint Venturer, X Trust acquired from the departing members a number of things in return for $xxxxxx. In particular the acquisitions were:

The land;

The benefit of all consents and approvals in respect of the land;

Any plans, drawings, specifications, diagrams and all other instruments or paper writings in respect of or relating to the land or its development…;

The benefit of any finance procured for the Project;

The benefit of all contracts including construction contracts, supply agreements, options, leases and any sales agreements in respect of any subdivided lots…;

The benefit of all subdivisional, development, building or other work done or contracted to be done for the Project;

Any other assets connected with the above or of the Project generally.

You state that the partly developed land was the only asset of significance in this transaction with assets of lesser value being cash in the bank, receivables and office equipment, all of which would be excluded in tabulating the margin scheme cost base.

You have indicated that as part of the transfer of the interest in the Joint Venture that a component of the transaction included X Trust's assumption of the Joint Venture's liabilities to the extent those liabilities have economic value and an independent identity. The Commissioner's view on the GST consequences of the assumption of vendor liabilities is set out in GSTR 2004/9 'Goods and services tax: GST consequences of the assumption of vendor liabilities by the purchaser of an enterprise'. Broadly, the assumption of quantified liabilities by the purchaser is considered to form part of the consideration for the supply whereas unquantified liabilities do not.

In calculating the cost base for the margin scheme margin scheme for the sale of land after the dissolution of the Joint Venture, the following base is agreed to:

Z original acquisition cost plus [$xxxxxx plus (value of quantified liabilities of the Joint Venture assumed) less (amounts attributable to non-land assets received at dissolution)].

This outcome is in line with the Commissioner's view on property dealings by bare trusts, GSTR 2008/3 'Goods and services tax: dealings in real property by bare trusts'. GSTR 2008/3 contemplates the use of the margin scheme by bare trusts and also affirms that supplies between departing and joining beneficiaries of a bare trust can be valid supplies for GST purposes.

71. A trustee that has acted as bare trustee of an asset for one beneficiary carrying on an enterprise in relation to the asset may agree to act as bare trustee of the asset for a new beneficiary.

72. If the beneficiary of a bare trust disposes of its beneficial interest in the trust property in favour of an entity whose interest will be held on a bare trust by the same trustee, the disposal by the outgoing beneficiary is a taxable supply if the requirements of section 9-5 are satisfied. Similarly, the acquisition by the incoming beneficiary is a creditable acquisition if the requirements of section 11-5 are satisfied.

73. For example, if B assigns its interest in the land to a new beneficiary, the assignment is a taxable supply by B if the assignment is made for consideration and the other requirements of section 9-5 are satisfied.

74. Similarly, the new beneficiary makes a creditable acquisition if the interest is acquired in the course or furtherance of its enterprise and the other requirements of section 11-5 are satisfied.