Edited version of your private ruling

Authorisation Number: 1012437685204

Ruling

Subject: GST and margin scheme

Question 1

Can the Margin Scheme be applied to the supply the Property under the Sales Contract?

Answer

Yes.

Question 2

If yes, will there be a negative margin?

Answer

Yes.

Relevant facts and circumstances

The Purchaser and the Vendor entered into the Sales Contract whereby the Vendor agreed to sell the Property to the Purchaser. The parties agreed in writing that the Margin Scheme is to apply to the sale of the Property. The Vendor is selling the Property as mortgagee exercising power of sale pursuant to a mortgage granted by X. The Property is vacant land.

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 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 105-5

Reasons for decision

Question 1

Summary

The Margin Scheme can be applied to the supply of the Property under the Sales Contract.

Detailed reasoning

In accordance with subsection 75-5(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act):

(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.

Subsection 75-5(2) stipulates when the margin scheme cannot apply:

(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.

In considering these requirements, you make a taxable supply where the supply meets the requirements of section 9-5 of the GST Act:

(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.

This transaction involves a supply of real property located in Australia which will be made for cash consideration. In this instance the supply will be made by the Vendor as mortgagee exercising power of sale pursuant to a registered mortgage. A mortgagee exercising power of sale will make a taxable supply if the sale satisfies the requirements of section 105-5 of the GST Act. Section 105-5 of the GST Act provides:

(1) You make a taxable supply if:

(a) you supply the property of another entity (the debtor) to a third entity in or towards the satisfaction of a debt that the debtor owes to you; and

(b) had the debtor made the supply, the supply would have been a *taxable supply.

(2) It does not matter whether:

(a) you made the supply in the course or furtherance of an *enterprise that you *carry on; or

(b) you are *registered, or *required to be registered.

(3) However, the supply is not a *taxable supply if:

(a) the debtor has given you a written notice stating that the supply would not be a taxable supply if the debtor were to make it, and stating fully the reasons why the supply would not be a taxable supply; or

(b) if you cannot obtain such a notice-you believe on the basis of reasonable information that the supply would not be a taxable supply if the debtor were to make it.

(4) This section has effect despite section 9-5 (which is about what is a taxable supply).

If X was to make the supply it would be a taxable supply as:

· it would be for consideration;

· it would be considered to be in the course or furtherance of an enterprise that it carried on as carrying on an enterprise is a broad term that includes doing anything in the course of the commencement or the termination of the enterprise;

· it would be connected with Australia; and

· X is registered for GST.

The Vendor will be selling a freehold interest in land as required by paragraph 75-5(1)(a) of the GST Act. Further the Vendor and the Purchaser agree in writing that the margin scheme is to apply to the transaction as required by subsection 75-5(1) of the GST Act.

The margin scheme was applied to the supply of the Property when X acquired the Property. The contract for that acquisition, through which X acquired the Property from Y has the 'Margin Scheme option' marked. Therefore we conclude that the Property was not acquired by X through a supply that was ineligible for the margin scheme and the margin scheme can be applied to the current transaction.

Question 2

Summary

There will be a negative margin.

Detailed reasoning

From the contract for X's acquisition it can be noted that the consideration provided by X Trust for the acquisition of the Property was $XX. In this case the calculation method of the margin and consequent GST liability is set out in subsections 75-10(1) and 75-10(2) of the GST Act:

(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.

Based on this formula and the information to hand, the relevant cost base for margin scheme purposes on the supply from the Vendor to the Purchaser wilI be $XX. It follows that in calculating the margin, the relevant calculation will be:

Less than $XX (sale price) less $XX (acquisition consideration) = (a negative amount)

As section 75-10 of the GST Act requires the margin to be an amount where the consideration for the supply exceeds the consideration for the acquisition, there is no relevant margin in this case - the required computation does not produce a positive amount. As the margin will be negative, there will not be a margin in the context of Division 75 of the GST Act and therefore, no GST payable on the supply made by the Vendor to the Purchaser.