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Ruling

Subject: GST and margin scheme

Question 1

Is the apportionment method that you intend to use to determine the consideration for the taxable part of the supply of the specified properties (collectively referred to as 'the properties') considered to be reasonable?

Answer

No.

Question 2

Is there any GST payable on the supply of the properties?

Answer

GST is not payable on the taxable part of the supply of the properties if the consideration for the supply of the taxable part is less than an approved valuation of the interest in the taxable part as at 1 July 2000.

GST is payable on the taxable part of the supply of the properties if the consideration for the supply of the taxable part exceeds an approved valuation of the interest in the taxable part as at 1 July 2000.

Relevant facts and circumstances

You have been registered for GST since 1 July 2000.

You were the registered proprietor of the following properties:

· residential properties (the residential properties A)

· vacant land which previously contained residential premises (the residential properties B), and

· commercial properties (the commercial properties).

The properties comprise a specified number of allotments.

You acquired the residential properties A from unrelated third parties for consideration after 1 July 2000.

You acquired the residential properties B from unrelated third parties for consideration prior to 1 July 2000.

You acquired the commercial properties prior to 1 July 2000.

At the time of acquisition, the residential properties A and B each contained older style residential dwellings which were constructed many decades ago.

You transferred the residential properties A and B to a member of your GST group after 1 July 2000.

The residential dwellings on the residential properties B which were used solely for the purpose of leasing to third parties were substantially damaged and were then demolished.

You reacquired the residential properties A and B from your GST group member on a specified date for a specified nominal consideration.

After you reacquired the residential properties A and B from your GST group member, you entered into a contract for the sale of the properties (the contract) with an unrelated entity (the purchaser). The settlement took place on a specified date.

At the time of the sale of the properties to the purchaser, the residential dwellings situated on the residential properties A were leased to third parties pursuant to residential tenancy agreements. There were no substantial renovations carried out at these properties since they were acquired by you from the unrelated third parties.

At the time of the sale of the properties to the purchaser, the residential properties B were vacant land and since the demolition of the residential dwellings you did not do anything significant to improve the value of the vacant land.

At the time of the sale of the properties to the purchaser, the commercial properties contained purpose built commercial buildings which were constructed prior to 1 July 2000 and used for a specified business. The business that had operated on those properties ceased a few years prior to the sale to the purchaser. The commercial properties were not occupied since.

According to the contract, the sale price for the properties was $X exclusive of GST.

The contract provides that for the purposes of calculating GST in accordance with the terms of the contract, the parties agree that the sale of the properties is a mixed supply as contemplated in Goods and Services Tax Ruling GSTR 2001/8 (GSTR 2001/8).

The contract provides that the sale of:

· the residential properties A is input taxed because the sale is of residential premises

· the residential properties B is input taxed because the sale is of residential premises

· the commercial properties is a taxable supply because the sale is of commercial premises.

Under the contract the parties agreed that the portion of the price that will be subject to GST was to be calculated by dividing the number of taxable lots by the total number of lots that form the properties, multiplied by the total price.

The parties agreed that the apportionment of the price as described in the contract was a reasonable method to apportion the consideration to the parts of this mixed supply.

The contract provides that all consideration provided by the purchaser under the contract is calculated without regard to GST and that the amount of consideration will be increased so that you are compensated for any GST payable on the supply of the properties.

The contract provides that the parties agree that you will apply the margin scheme on the sale of the properties made under the contract.

You did not engage a real estate agent to sell the properties. You sought interested purchasers through a number of specified channels. The purchase approached you after having been referred via these channels.

The purchaser has never had prior dealings with you. The purchaser has not provided any further consideration to you whether monetary or non-monetary that is directly or indirectly related to the sale of the properties. The purchaser was unknown to you up until the time the offer to purchase the properties was made by the purchaser.

You engaged a valuer (the valuer) to value the properties as at 1 July 2000 and produce a valuation report (the valuation report).

The valuation report is dated DD/MM/YYYY and provides that the valuation was prepared in accordance with the requirements under subsection 75-35(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) and the A New Tax System (Goods and Services Tax) Margin Scheme Valuation Requirements Determination MSV 2009/1 (MVS 2009/1) for determining the market value as at 1 July 2000 for tax purposes only.

The valuer valued the properties at $Y as at 1 July 2000 and apportioned the amount between the residential properties A, residential properties B and commercial properties.

According to the plans of the properties that you have provided, the several allotments that make up the properties have different land areas.

Your contentions

In your private ruling application you submitted that in relation to the residential properties B, ATO Interpretative Decision ATO ID 2009/18 (ATO ID 2009/18) suggests that the land can be treated as eligible residential premises and the supply of which can be input taxed.

The residential properties B previously had residential premises constructed on them and were used solely to make supplies by way of residential leases to third parties that were input taxed.

After the residential premises on the residential properties B were damaged, the premises were no longer habitable and you arranged for the damaged premises to be demolished. Since the demolition of the premises, you have not done anything significant to improve the value of the vacant land. You have only been holding these properties for the purpose of bringing an end to their leasing of the now-demolished residential premises, as it was not cost effective to rebuild the residential premises for lease.

You also submitted that the parties have agreed that the sale is a mixed supply of commercial and residential premises. To calculate the portion of the price that represent the supply of the commercial premises and which is subject to GST, the parties arrived at a bona fide agreement that it was reasonable to apportion the price by dividing the number of commercial lots by the total number of lots that form the properties.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 section 7-1

A New Tax System (Goods and Services Tax) Act 1999 section 9-5

A New Tax System (Goods and Services Tax) Act 1999 section 40-65

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 subsection 75-11(1)

A New Tax System (Goods and Services Tax) Act 1999 subsection 75-11(2)

Reasons for decision

Question 1

Summary

The apportionment method that you intend to use to determine the consideration for the taxable part of the supply of the properties is not considered to be fair and reasonable.

Detailed reasoning

Section 7-1 of the GST Act provides that GST is payable on a taxable supply.

A supply is a taxable supply if it satisfies all the requirements of section 9-5 of the GST Act. Section 9-5 of the GST Act states:

You make a taxable supply if:

a) you make the supply for *consideration; and

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

c) the supply is *connected with Australia; and

d) 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.

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

The sale of the properties satisfies the requirements of paragraphs 9-5(a) to 9-5(d) of the GST Act as:

· you sold the properties for consideration

· the sale was in the course or furtherance of your enterprise

· the sale was connected with Australia as the properties are located in Australia, and

· you were registered for GST at the time of the sale.

However, as stated in section 9-5 of the GST Act, a supply is not a taxable supply to the extent that is GST-free or input taxed.

There are no provisions in the GST Act under which the sale of the properties would be GST-free. Therefore, what is left to determine is whether the sale of any of the properties is input taxed.

Sale of the residential properties A

Section 40-65 of the GST Act states:

(1) A sale of real property is input taxed, but only to the extent that the property is residential premises to be used predominantly for residential accommodation (regardless of the term of occupation).

(2) However, the sale is not input taxed to the extent that the residential premises are:

a) commercial residential premises; or

b) new residential premises other than those used for residential accommodation (regardless of the term of occupation) before 2 December 1998.

At the time of the sale of the properties to the purchaser, the residential properties A contained old residential dwellings and no substantial renovations were carried out on those properties after you acquired them from the unrelated third parties. Therefore, the sale of the residential properties A is an input taxed supply pursuant to subsection 40-65(1) of the GST Act.

Sale of the residential properties B (vacant land)

Subsection 9-30(4) of the GST Act states:

(4) A supply is taken to be a supply that is input taxed if it is a supply of anything (other than new residential premises) that you have used solely in connection with your supplies that are input taxed but are not financial supplies.

You contend that subsection 9-30(4) of the GST Act should apply to the supply of the residential properties B and consider that ATO ID 2009/18 supports your contention.

ATO ID 2009/18 deals with the sale of vacant land after removal of a damaged house that had been used solely in connection with input taxed supplies. Under the Reasons for Decision, the ATO ID states in part:

In considering the application of subsection 9-30(4) of the GST Act to the supply of the vacant land it is necessary to identify the uses to which the entity has put the land and whether these uses are solely in connection with the entity's input taxed supplies (other than financial supplies). This requires that the land, whether by itself or as part of the residential premises, has not been used in any way other than in connection with the entity's input taxed supplies.

The Commissioner's view is that 'used' has a broad meaning in the context of subsection 9-30(4) of the GST Act (see the interpretation of 'use' in other statutory contexts in Council of the City of Newcastle v. Royal Newcastle Hospital (1959) 100 CLR 1; Ryde Municipal Council v. Macquarie University (1978) 139 CLR 633; and Lennard v. Jessica Estates Pty Ltd [2008] NSWCA 121).

The Macquarie Dictionary, 2005, 4th edn, The Macquarie Library Pty Ltd, NSW, defines 'use' as including 'to employ for some purpose'. In considering whether land has been used solely in connection with input taxed supplies, it is important to consider throughout the period of ownership by the entity:

· how the land has been exploited or enjoyed (for example, private use by the entity, business use by the entity, or leasing to a third party)

· what the entity has done to change or develop the land, and whether those things can be said to be connected to input taxed supplies, and

· what the entity's purpose has been in holding the land (for example, if the land is dormant for a period of time, whether the purpose of holding the land is to achieve profits through appreciation in the capital value).

It is necessary to look at the surrounding circumstances to determine if the entity's activities can be said to be connected with the entity's input taxed supplies, or whether they instead should be regarded as having a separate purpose.

You acquired the residential properties B before 1 July 2000. You transferred the properties to a member of your GST group after 1 July 2000. The residential properties B contained residential premises which were solely used for the purposes of residential leasing to third parties. The premises were damaged whilst owned by your GST group member and subsequently demolished. You reacquired the properties from your GST group member on a specified date. You then entered into the contract for the sale of the properties with the purchaser.

We consider that your circumstances are different to the one outlined in ATO ID 2009/18. In your case, your GST group member was the last entity that used the residential properties B for making input taxed supplies up to the time when the residential premises were damaged and subsequently demolished. The activity of making input taxed residential rental supply ceased when the residential dwellings were damaged.

After you reacquired the residential properties B from your GST group member, you did not (and were not able to) use those properties solely in connection with making input taxed supplies as they no longer contained the residential dwellings. You acquired those properties from your GST group member for the purposes of selling them to the purchaser. Accordingly, the supply of the residential properties B is not input taxed under subsection 9-30(4) of the GST Act. Further, the supply is not input taxed under any other provision in the GST Act. The supply is a taxable supply as it meets all the requirements of section 9-5 of the GST Act.

Sale of the commercial properties

You advised that the premises on the commercial properties are purpose built commercial premises.

Based on the information provided, the sale of the commercial properties is not input taxed therefore the supply is a taxable supply as it meets all the requirements of section 9-5 of the GST Act.

Mixed supply

The supply of the properties is a mixed supply as the supply contains separately identifiable taxable and non-taxable parts. The sale of the residential properties A is input taxed whilst the sale of the residential properties B and the commercial properties is a taxable supply.

Margin Scheme and sale of the residential properties B and the commercial properties

Section 75-5 of the GST Act sets out the requirements to be satisfied in order to use the margin scheme.

Subsections 75-5(1) and 75-5(1A) of the GST Act state:

(1) 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.

(1A) The agreement must be made:

a) on or before the making of the supply; or

b) within such further period as the Commissioner allows.

You meet the above requirements as you made a taxable supply of real property when you sold the residential properties B and the commercial properties and before making the supply, you and the purchaser agreed in writing that the margin scheme would apply.

Subsection 75-5(2) of the GST Act states:

(2) 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 specifies the circumstances when a supply is ineligible for the margin scheme.

Based on the facts of your case, you did not acquire the freehold interests in the residential properties B and the commercial properties through supplies that were ineligible for the margin scheme under any of the circumstances specified in subsection 75-5(3) of the GST Act. Therefore, you can use the margin scheme to calculate the GST payable on the sale of the residential properties B and the commercial properties.

Apportioning of the price to calculate the GST payable on the sale of the residential properties B and the commercial properties

GSTR 2001/8, deals with apportioning the consideration for a supply that includes taxable and non-taxable parts. It discusses how you can work out the value of the taxable part of a mixed supply and provides methods and examples to help you to work out how to apportion the consideration for a supply that contains separately identifiable taxable and non-taxable parts.

GSTR 2001/8 provides that the value of the taxable part of the supply has to be determined by having regard to the facts and circumstances and taking a particular commonsense approach.

The contract indicates that the parties agreed to apportion the value of the supply ($X) by dividing the number of taxable lots by the total number of lots and multiplying the quotient by $X to calculate the value of the taxable part of the supply.

Apportioning based on the number of lots may be considered reasonable where all the lots have the same land area and the same value per square meter. In your case, not all the lots have the same land area.

We consider that the apportioning method that you propose to use to calculate the value for the taxable part of the supply is unreasonable. The fact that the parties have agreed with this apportionment method and consider it to be a reasonable method is not relevant for consideration.

Further, as explained above, the sale of the residential properties B is a taxable supply and therefore it is a component of the taxable part of the sale.

Conclusion

You can use the margin scheme to calculate the GST payable on the sale of the residential properties B and the commercial properties. However, you need to apportion the value of the supply between the taxable (the residential properties B and the commercial properties) and non-taxable (the residential properties A) parts using an apportionment method that is fair and reasonable.

For further information on apportionment of the consideration please refer to GSTR 2001/8.

Question 2

Summary

a. GST is not payable on the taxable part of the supply of the properties if the consideration for the supply of the taxable part is less than an approved valuation of the interest in the taxable part as at 1 July 2000.

b. GST is payable on the taxable part of the supply of the properties if the consideration for the supply of the taxable part exceeds an approved valuation of the interest in the taxable part as at 1 July 2000.

Detailed reasoning

Section 75-10 of the GST Act states, in part:

(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) Subject to section 75-11, if:

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

(b) an approved 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;

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

Margin for the supply of the commercial properties

Subject to section 75-11 of the GST Act, subsection 75-10(3) of the GST Act requires an approved valuation of the freehold interest, strata unit or long-term lease as at the day specified under the corresponding item in the third column of the table in that subsection.

Item 3 in the table in subsection 75-10(3) (item 3) applies in your case. Item 3 provides that a supplier must obtain a valuation as at 1 July 2000 if:

· the supplier is registered or required to be registered

· 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.

You were registered for GST on 1 July 2000 and acquired the commercial properties before 1 July 2000. Those properties contained improvements on the land as at 1 July 2000.

Accordingly, the margin for the supply of the commercial premises is the amount by which the consideration for the supply of those properties exceeds an approved valuation of the interest in those properties as at 1 July 2000.

Margin for the supply of the residential properties B

Subsection 75-11 of the GST Act deals with margin for the supply of real property that an entity acquires from a fellow member of a GST group. Subsection 75-11(1) and 75-11(2) of the GST Act state:

(1) If:

(a) you acquired the interest, unit or lease in question at a time when both you and the entity from whom you acquired it were *members of the same GST group; and

(b) on or after 1 July 2000, there has been a supply (an earlier supply) of the interest, unit or lease that occurred at a time when the supplier was not a member of the GST group; and

(ba) the recipient was at that time, or subsequently became, a member of the GST group;

the margin for the supply you make is the amount by which the consideration for the supply exceeds:

(c) the consideration for the last such earlier supply, if the supplier and the recipient were not associates at that time; or

(d) the GST inclusive market value of the interest, unit or lease at that time, if the 2 entities were associates at that time.

(2) If:

(a) you acquired the interest, unit or lease in question at a time when both you and the entity from whom you acquired it were members of the same *GST group; and

(b) subsection (1) does not apply;

the margin for the supply you make is the amount by which the consideration for the supply exceeds an approved valuation of the interest, unit or lease as at 1 July 2000.

Subsection 75-11(2) of the GST Act applies to the sale of the residential properties B as:

· after 1 July 2000 you acquired the residential properties B from your GST group member and at the time of the acquisition you and the GST group member were members of the same GST group, and

· subsection 75-11(1) of the GST Act does not apply (as you acquired the residential properties B from the unrelated third parties before 1 July 2000).

Pursuant to subsection 75-11(2) of the GST Act, the margin for the supply of the residential properties B is the amount by which the consideration for the supply of those properties exceeds an approved valuation of the interest in those properties as at 1 July 2000.

Paragraphs 72 to 87 of Goods and Services Tax Ruling GSTR 2006/8 discuss the application of subsection 75-11(1) and subsection 75-11(2) of the GST Act.

Further, Goods and Services Tax Ruling GSTR 2006/7 provides the ATO view on how the margin scheme applies to a supply of real property made on or after 1 December 2005 that was held before 1 July 2000.

Approved valuation

Section 75-35 of the GST Act provides that a valuation that is made in accordance with the requirements determined in writing by the Commissioner of Taxation for making valuations for the purposes of Division 75 is an approved valuation.

MSV 2009/1 specifies the requirements for making valuations for the purposes of applying the margin scheme in Division 75 of the GST Act. The requirements apply to valuations for taxable supplies of real property made on or after 1 March 2010.

Where the valuation that you have obtained from the valuer meets all the requirements of MSV 2009/1, then the valuation is an approved valuation.

The amount of GST on the supply of the residential properties B and the commercial properties

The contract provides that all consideration provided by the purchaser under the contract is calculated without regard to GST and that the amount of consideration will be increased so that you are compensated for any GST payable on the supply of the properties.

To work out the amount of GST payable on the supply of the properties, you need to determine the value of the taxable part by apportioning the value of the supply (that is $X) between the taxable (the residential properties B and the commercial properties) and non-taxable (the residential properties A) parts using a reasonable method. You are then required to add 10% GST to the value of the taxable part to determine the price (GST inclusive) for the supply of the residential properties B and the commercial properties.

If the price for the sale of the residential properties B and the commercial properties is less than the value of these properties as at 1 July 2000 as determined in an approved valuation, then the margin for the supply is zero. Where the margin for the supply is zero, no GST is payable on the supply.

However, if the price for the sale of the residential properties B and the commercial properties is greater than the value of these properties as at 1 July 2000 as determined in an approved valuation, then you are liable to pay 1/11 of the margin for the supply as GST.

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