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Ruling
Subject: Sale of property
Issue:
Can you apply the margin scheme to work out the GST on the supply of the property which you intend to sell off the plan?
Advice:
No, you cannot apply the margin scheme to work out the GST on the supply of the property which you intend to sell off the plan.
This ruling applies for the following periods:
Not relevant to this case.
The scheme commences on:
Not relevant to this case.
Relevant facts and circumstances
You are a company registered for the goods and services tax (GST).
You provided a loan to three related parties, severally and collectively, referred to as the Borrowers.
A property consisting of vacant land was given, in part, as collateral for the loan.
The land was purchased by one of the three related parties which constitute the Borrowers (hereinafter referred to as the Vendor) from another company which was acting as a mortgagee in possession for a sum which excluded GST.
The Contract of Sale between the Vendor and the mortgagee in possession states that the property was sold as a fully taxable supply. That is, the property was sold without applying the margin scheme.
As the Borrowers were unable to repay the loan, a court order was obtained by you to take possession of the property. The short minutes of the court order lists you as the plaintiff and one of the three Borrowers as the respondent.
On the same day you and the Borrowers entered into an agreement (the Agreement), under the court seal.
Clause 5 of the Agreement states that you will attempt to sell the property at a price not less than which is specified in the Agreement inclusive of GST within a specified period from the date of the agreement.
Clause 6 of the Agreement states that if at the end of that period the property is either not sold or subject to a binding contract for sale, you agree to buy the property at the minimum price specified in the Agreement, inclusive of GST.
Clause 7 of the Agreement state that the parties agree to apply the net purchase price (less costs of sale, taxes (including GST) and duties) to be applied by you in reduction of the debt due under the Agreement.
You could not sell or enter into a binding contract to sell the property within the stipulated time.
Consequently, you acquired the property under the court order and the Agreement under which the power of sale was given to you.
You paid stamp duty for the transfer of the property to your name.
The property had a development approval granted by the local council and you are continuing to develop the property.
You now intend to sell the property off the plan.
Relevant legislative provisions
Section 75-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)
Reasons for decision
Subsection 75-5(1) of the GST Act states that you may apply the margin scheme 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 to the sale.
Subsection 75-5(2) of the GST Act states that 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 lists the supplies that are ineligible for the margin scheme.
Of relevance to this case is paragraph 75-5(3)(a) of the GST Act which states that a supply is ineligible for the margin scheme if it is a taxable supply on which the GST was worked out without applying the margin scheme.
This means, you cannot use the margin scheme if you purchased the property as a taxable supply and the margin scheme was not used.
In this case one of the three entities who constitute the Borrowers sold the property to you, under the court order and the consequent Agreement you entered into with the Borrowers, as a taxable supply without applying the margin scheme. Consequently, when you sell the property, partly or wholly, off the plan, you cannot apply the margin scheme. When you supply the property/properties, they will be taxable supplies and you must remit 1/11th of the sale price to the Tax Office as GST.