Edited version of your private ruling

Authorisation Number: 1012452478334

Ruling

Subject: Sale of land and the margin scheme

Questions

1. Can the Commissioner confirm that the supply of the Land by Entity A to Entity B under the contract of sale (the Contract) consists partly of:

(a) an input taxed supply of residential premises under section 40-65 of the GST Act, and

(b) a taxable supply of real property and to the extent the supply is a taxable supply Entity A is entitled to apply the margin scheme to calculate its GST liability in accordance with subsection 75-11(7) of GST Act.

2. Can the Commissioner confirm that the apportionment method applied by Entity A to determine the proportion of the sale price that relates to the input taxed supply of residential premises can be determined based on the land area of the input taxed component as a percentage of the whole Land area?

Answers

1. Yes. The Commissioner considers that in relation to the supply of the Land by Entity A to Entity B under the Contract there is a mixed supply which consist partly of:

(a) an input taxed supply of residential premises under section 40-65 of the GST Act, and

(b) a taxable supply of real property and to the extent the supply is a taxable supply Entity A is entitled to apply the margin scheme to calculate its GST liability in accordance with subsection 75-11(7) of GST Act.

2. Yes. The Commissioner accepts that a land area apportionment method using the proportion of the sale price that relates to the residential proportion of the sale price as a percentage of the whole Land area is fair and reasonable.

Relevant facts and circumstances

Entity A carries on an enterprise and is registered for GST.

Entity A's activities include providing support to people with a disability or who are disadvantaged across areas of accommodation or employment.

Entity A acquired property (the Land) after 1 July 2000 but prior to 9 December 2008 from an associate. For GST purposes Entity A did not provide consideration for the Land.

The Land is comprised of numerous titles on which there are a number of buildings/structures on each title. These are shown on the Site Plan which has been provided as part of this ruling request.

The Land is used by Entity A to operate a facility (the Facility).

The Facility is a supervised accommodation facility which has previously accommodated over 100 residents. It is designed to provide accommodation and personal support care to its residents, including amongst other things and as relevant to each resident's need, the provision of meals, laundry facilities and on-call assistance.

Residents that reside at the Facility do not have a principal place of residence elsewhere and in some cases a number of residents have lived on the site for their entire life.

There is no tenancy agreement that applies between Entity A and its residents.

Using certain facilities on the Land, Entity A was involved in running "Day Programs" for it clients, which involved the facilitation of activities including sports, recreational activities, visual and performing arts, music, literacy and numeracy development, as well as other education and training courses.

The buildings on the Land consist of the following:

· a metal building which is a purpose built school designed to provide training and educational programs (Building B1)

· a building which provides sleeping accommodation in a dormitory style setting (Building B2). Building B2 is designed to provide accommodation and personal support care to residents. The interior structure has a main hallway, shared kitchen facilities, shared toilet and bathroom facilities and laundry room. The 'rooms' occupied for sleeping accommodation are partitioned by dividing panel/walls that do not extend to the ceiling.

· a building which is designed as a residence and has bedrooms, sitting areas, bathroom, toilet and laundry facilities (building B3).

· a recreational area which includes an indoor swimming pool with change rooms and bathroom facilities (building B4) and bare land for sporting/recreational activities.

· A single storey metal building that was used by Entity A as offices for the administration of the Facility (building B5).

· A building which has 4 separate self contained apartments with garages and is designed and occupied as residential premises by nursing staff (building B6).

Entity A (as Vendor) and Entity B (as Purchaser) entered into a Contract for the sale of the Land. A copy of the Contract has been provided as part of this request.

The purchase price of the land is a monetary amount plus any GST (if) payable.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 9-10

A New Tax System (Goods and Services Tax) Act 1999 9-80

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

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

A New Tax System (Goods and Services Tax) Act 1999 75-5

A New Tax System (Goods and Services Tax) Act 1999 75-10

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

Reasons for decision

Taxable supply

A supply is a taxable supply if under section 9-5 of the GST Act:

(a) an entity makes the supply for consideration,

(b) the supply is made in the course or furtherance of an enterprise that an entity carries on,

(c) the supply is connected with Australia, and

(d) the entity is registered, or required to be registered for GST.

However, section 9-5 of the GST Act provides that the definition of a taxable supply excludes a supply to the extent that it is GST-free or input taxed.

In this case it is not in contention that the sale of the Land (i.e. each Title) by Entity A to Entity B would satisfy the requirement of paragraph 9-5(a) to (d) of the GST Act, however what remains to be determined is whether the Land supplied by Entity A is input taxed and therefore not a taxable supply.

Input taxed supply - residential premises

Division 40 of the GST Act identifies those supplies which are input taxed and therefore not taxable supplies. Subsection 40-65(1) of the GST Act relevantly provides that a sale of real property is input taxed to the extent that the property is residential premises to be used predominantly for residential accommodation (regardless of the term of occupation).

However, the sale of real property is not input taxed to the extent 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.

The sale of new residential premises are excluded from being input taxed under paragraph 40-65(2)(b) of the GST Act. New residential premises are defined in section 40-75 of the GST Act. In particular, paragraph 40-75(1)(a) of the GST Act provides that residential premises are new residential premises if they have not previously been sold as residential premises (other than commercial residential premises) and have not previously been the subject of a long term lease.

In this case the Land supplied by Entity A is not a supply that falls within the definition of new residential premises. On this basis 40-65(2)(b) of the GST Act will not apply to the sale.

Section 195-1 of the GST Act defines 'residential premises' and 'commercial residential premises' as follows:

residential premises means land or a building that:

(a) is occupied as a residence or for residential accommodation, or

(b) is intended to be occupied, and is capable of being occupied, as a residence or for residential accommodation (regardless of the term of occupation or intended occupation) and includes a floating home.

commercial residential premises means;

(a) a hotel, motel, inn, hostel or boarding house; or

(b) premises used to provide accommodation in connection with a *school; or

(c) …

(d) anything similar to *residential premises described in paragraphs (a) to (e)….

(e) It is submitted by Entity A and Entity B that the supply of the Land consists of a mixed supply. That is, part of the Land supplied by Entity A is input taxed residential premises and part of the Land will be a taxable supply.

In this case we agree with the submission the supply of Land is a mixed supply. That is part of the supply is an input taxed supply of residential premises and the remaining part of the supply will be a taxable supply. In particular we consider that the supply of building B1 is clearly not an input taxed supply of residential premises on the basis that it is not designed to provide residential accommodation. Accordingly as it is not a supply that is input taxed this part of the Land will fall within the requirements of a taxable supply under section 9-5 of the GST Act.

Further we accept that the supply of B3 and B6 will be an input taxed supply of residential premises. That is, building B3 and B6 do not fall within the exceptions of subsection 40-65(2) of the GST Act and satisfy the requirements of 40-65(1). Accordingly the part of the supply that relates to B3 and B6 is an input taxed supply.

In respect of the remaining part of the Land being supplied we consider that the premises are not commercial residential premises or residential premises within the meaning of subsection 40-65(1) of the GST Act.

Although we accept that the remaining buildings may possess basic living facilities we do not consider that these premises are used or to be used predominately for residential accommodation. Rather we consider that consistent with paragraph 25 of GSTR 2012/5, from the physical characteristics of the premises; their suitability for living accommodation is ancillary to their prevailing function of providing care and other services to disabled and disadvantage residents. This is similar to Example 6 in paragraph 30 to 35 in GSTR 2012/5. On this basis we do not consider that the supply is comparable to that of retirement village accommodation discussed in paragraphs 242 to 245 of GSTR 2012/6.

Accordingly, it is our view that the remaining part of the Land is a taxable supply under section 9-5 of the GST Act.

In reaching the above conclusions our reasons are as follows.

Goods and Services Tax Ruling GSTR 2012/5, Goods and services tax: residential premises (GSTR 2012/5) provide the Commissioner's view regarding the meaning of residential premises. In particular paragraph 7, 15, 16 and 20 state:

7. Premises, comprising land or a building, are also residential premises under paragraph (b) of the definition of residential premises if the premises are intended to be occupied, and are capable of being occupied, as a residence or for residential accommodation, regardless of the term of the intended occupation. This limb of the definition refers to premises that are designed, built or modified so as to be suitable to be occupied, and capable of being occupied, as a residence or for residential accommodation. This is demonstrated through the physical characteristics of the premises. …

15. To satisfy the definition of residential premises, premises must provide shelter and basic living facilities. Premises that do not have the physical characteristics to provide these are not residential premises to be used predominantly for residential accommodation.

16. A supply of a residential apartment in a building may include a garage, car-parking space, or storage area located within the building complex. The garage, car-parking space, or storage area is ancillary or incidental to the dominant component of the supply being the residential apartment. It can be reasonably concluded that the garage, car-parking space, or storage area are to be used for the better enjoyment of the residential apartment. They do not form a dominant part of the supply. The supply is therefore a composite supply of residential premises to be used predominantly for residential accommodation. This is still the outcome where the garage, car-parking space, or storage space is separately titled from the residential apartment, but is physically located within the same building complex.

20. Premises must be fit for human habitation in order to be suitable for, and capable of, being occupied as a residence or for residential accommodation.

However paragraphs 25 of GSTR 2012/5 states:

Other premises

25. Not all premises that possess basic living facilities are residential premises to be used predominantly for residential accommodation. If it is clear from the physical characteristics of the premises that their suitability for living accommodation is ancillary to the premises' prevailing function, the premises are not residential premises to be used predominantly for residential accommodation.

Paragraph 242 to 245 of GSTR 2012/6 considers supplies in respect of retirement village accommodation and states:

Retirement village accommodation

242. Retirement villages provide living accommodation in 'communal or semi-communal' facilities.

243. Retirement village living units are residential premises to be used predominantly for residential accommodation based on their physical characteristics. In addition, some of the buildings and facilities that residents can directly enjoy in conjunction with their residency form part of the residential premises. This includes, for example, barbeque areas, gardens, car-parks and driveways.

244. A retirement village may also include parts that are not residential premises to be used predominantly for residential accommodation. This includes, for example, site offices, staff rooms, medical centres, and commercial premises, such as hairdressing salons, golf courses, shops, and restaurants or cafes. These are commercial premises the value of which should be apportioned or treated as separate supplies under the basic rules, depending on the circumstances of their supply.

245. A retirement village does not display sufficient physical, nor operational, features referred to at paragraphs 9 to 42 and 140 to 188 of this Ruling to be characterised as a hotel, motel, inn, hostel or boarding house, nor is it sufficiently similar to these premises for the purposes of paragraph (f) of the definition of commercial residential premises. See Example 1 at paragraph 43 of this Ruling.

Accordingly, in the case of retirement village accommodation the premises will be input taxed where they are residential premises to be used predominately for residential accommodation based on their physical characteristics.

The words 'to the extent' in section 40-65 of the GST Act indicates that the GST Act contemplates circumstances where the supply of an interest in real property may not be wholly input taxed. This raises the issue of to what extent the land supplied with the residential premises comes within the definition of residential premises to be used predominantly for residential accommodation. Section 40-65 of the GST Act places a focus on the physical characteristics of property as evidence of its suitability for its intended use.

In paragraph 46 of GSTR 2012/5, the Commissioner expresses the view that there is no specific restriction, in the definition of residential premises, on the area of land that can be included with a building. The extent to which land would form part of the residential premises to be used predominantly for residential accommodation is a question of fact and degree in each case.

A relevant factor in determining to what extent land forms part of the residential premises is the extent to which the physical characteristics of the land and building as a whole indicate that the land is to be enjoyed in conjunction with the residential building. The use of the land is not a determining factor in deciding whether the land forms part of the residential premises.

For land to be regarded as residential premises, it must be evident that the land possesses physical characteristics which demonstrate its suitability for a residential purpose.

Conclusion

Consequently when Entity A makes the supply of the Land to Entity B under the contract it consists of a mixed supply and Entity A is required to apportion the consideration for the supply on a basis that is fair and reasonable.

Margin scheme

Division 75 of the GST Act allows the use of a margin scheme to calculate the GST payable on taxable supplies of freehold interests in land, of stratum units and of long-term leases, in certain circumstances. On this basis where a supply of interest in land is not a taxable supply, such as where there is an input taxed supply of residential property, that part of the supply will not be eligible to apply the margin scheme.

Based on the facts in this case Entity A makes a mixed supply which consists of a supply of real property which is (partly) taxable and (partly) input taxed. Therefore the following advice applies to the extent that the supply of real property is a taxable supply.

On the understanding that the requirements of section 75-5 of the GST Act are met, 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:

4. (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;

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

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

(b) 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.

In this case, it is submitted that for the purposes of calculating the margin on the supply of the Land section 75-11(7) of the GST Act applies.

We agree with the submission that subsection 75-11(7) of the GST Act applies. In this case Entity A acquired the Land from an entity who was their associate. The acquisition of the Land by Entity A was made on or after 1 July 2000. Consequently paragraph 75-11(d) of the GST Act will apply for the purpose of determining the margin for the supply.

Question 2

Apportionment

On the basis that there is a mixed supply Entity A is required to apportion the consideration received in respect of the supplies made.

There are no legislative provisions specifying a basis for apportionment in the case of supplies covered by section 9-80 of the GST Act. An entity may use any reasonable method to apportion consideration to the separately identifiable taxable part of a mixed supply.

However, the apportionment must be supported by the facts in the particular circumstances and be undertaken as a matter of practical commonsense. What is a reasonable method of apportioning the consideration for a mixed supply depends on the circumstances of each case and records must be kept to explain the method used.

Goods and Services Tax Ruling GSTR 2001/8, Goods and services tax: Apportioning the consideration for a supply that includes taxable and non-taxable parts (GSTR 2001/8) provides methods and examples that assist in working out how to apportion consideration for a supply that contains separately identifiable taxable and non-taxable parts.

Paragraph 97 of GSTR 2001/8 states:

Direct methods

97. Direct methods use relevant variables that measure the connection between what is supplied (the taxable and non-taxable parts) and the consideration for the actual supply. A direct method usually gives you the most accurate measure of the consideration for (and therefore, the calculation of the value of) the taxable part of the supply you make (that is, the value of the taxable supply). Such methods may include:

· the price allocation as agreed between the parties to the supply (see paragraphs 97A to 97M of this Ruling);

· the comparative price of each part if it were supplied on its own, relative to the whole payment received (see paragraphs 98 to 103D of this Ruling);

· the relative amounts of rental consideration (see paragraph 103E to 103F of this Ruling);

· the relative amount of time required to perform the supply (see paragraphs 104 to 105 of this Ruling); and

· the relative floor area in a supply of property (see paragraphs 106 to 108 of this Ruling).

In this case it is proposed by Entity A and Entity B that a land area based method of apportionment is fair and reasonable.

In this case, based on the circumstances we agree with the submission that an area based method of apportionment is fair and reasonable. However based on our reasons set out above we do not agree with the extent to which the area is input taxed in respect of the relevant titles. It is our view that the land area to which 40-65 of the GST Act applies will only extend to building B3 and B6. Accordingly to the extent the remaining property does not form part of the input taxed supply of residential premises the area in respect of the relevant title is considered a taxable supply.