Edited version of your private ruling

Authorisation Number: 1012455847719

Ruling

Subject: GST and the margin scheme

GST and the margin scheme

Question 1

What is the consideration you have provided for your acquisition of the property in question?

Answer

The consideration for your acquisition only includes your payment for the reversionary interest in the land.

Please refer to our reasons for decision

Relevant facts and circumstances

· You are registered for goods and services tax (GST).

· You presently have a long term lease over a property located in Australia (the Property). The lease will expire in the 2090s.

· The freehold interest in the Property is presently owned by B a GST registered entity.

· You intend to purchase B's freehold interest in the Property for monetary consideration. This interest has also been referred to as the reversionary interest. A reversionary interest in these circumstances refers to the interest that B has once the leasehold interest ceases to exist.

· B and you intend to enter into a Contract relating to the sale of the reversionary interest at the earliest opportunity.

· You have advised that it is your view that once the sale is complete, your current leasehold interest in the Property will "merge" in equity with the reversionary interest that you will acquire from B.

· Following the completion you therefore intend to request the Title Office recognise the legal merger of the interests, which result in the leasehold interest being removed from the registered title.

· Consequently, from Completion, you will in equity own the freehold title in the Property free from any leasehold interest.

Background

· Before 1 July 2000, B granted a lease over the Property to C for a term of 99 years.

· Before 1 July 2000, B granted a lease over the Property to D for a term of 93 years, 3 months and 3 days (expiring 1 day later than the C Lease).

· The D Lease is a 'concurrent lease'. Consequently, D held a 'Head Lease' over the Property, while C held a 'Sub-Lease'. D effectively became C's landlord, with D being entitled to the rent and other amount payable under the C Lease.

· Under the D Lease, D paid a lease premium for the grant of the lease. The annual rent payable was set at a nominal value.

· In early 2000, you purchased the D Lease.

· On the same day, you purchased the C Lease.

· As a consequence of your acquisition of both the D Lease and the C Lease, the C Lease was merged with the D Lease (so that only the D Lease remained).

The intention to redevelop the existing hotel

· You intend to redevelop the existing property into:

· residential apartments which will be sold to the public as new residential premises, and

· some retail/commercial areas.

· While you intend to commence and undertake the redevelopment as soon as possible, it is presently estimated that it may take up to a number of years to complete the Redevelopment Project.

· You intend to apply the margin scheme on your sale of the residential premises once the Redevelopment Project is completed.

Assumption

You can apply the margin scheme to calculate the GST payable on the subsequent supply of the Property.

Relevant legislative provisions

A New Tax System (Goods and services Tax) Act 1999

Section 9-5

Division 75

Reasons for decision

Summary

The consideration for your acquisition only includes your payment for the reversionary interest in the land.

Detailed reasoning

The reasoning below is based on the assumption that you can apply the margin scheme on the subsequent supplies of stratum title units when the Redevelopment Project is completed.

The sale of your strata titled units after the completion of the Redevelopment Project will be a taxable supply of new residential premises.

Under subsection 75-5(1) of the GST Act, you can apply the margin scheme to calculate the GST payable on the supply of the stratum titles unit (provided certain conditions are satisfied).

Provided that you apply the margin scheme on the supply of the stratum title units Subsection 75-10(1) provides that the amount of GST on the supply (where the margin scheme applies) is 1/11 of the margin for the supply.

The margin for the supply is defined in subsection 75-10(2) to mean the amount by which the consideration you receive for your supply exceeds the consideration you provided for your acquisition of the real property in question.

Consideration you provided for your acquisition

Section 75-15 modifies the meaning of 'consideration for your acquisition of the real property in question' where the subject matter of your supply relates only to part of the land or premises that you acquired. In particular, this applies to subdivided land or stratum title units. This section applies to stratum title units because a strata title plan is an example of a property subdivision plan (see section 195-1 of the GST Act).

The effect of section 75-15 of the GST Act is that for your supply of stratum title units, the consideration for the acquisition is the corresponding proportion of the consideration for the real property that you acquired. In other words, if you supply a stratum unit that relates only to part of land or premises that you acquired, the consideration for your acquisition of that part is the corresponding proportion of the consideration for the land or premises that you acquired.

Furthermore, section 75-14(1) of the GST Act provides that in working out the consideration for an acquisition for the purposes of applying the margin scheme you disregard the costs or value of any acquisitions that have been made by you, or any work that has been performed, in relation to the real property, including acquisitions or works connected with bringing into existence the interest, unit or lease supplied.

Goods and services tax ruling GSTR 2006/8 further explains how the margin scheme under division 75 of the GST Act applies to a supply of a freehold interest, stratum unit or long term lease that you acquired on or after 1 July 2000.

Paragraphs 48 to 53 of GSTR 2006/8 explain the Commissioner's view on the meaning of the phrase 'consideration for the acquisition' in the context of sections 75-10 and 75-15 of the GST Act.

48. The consideration for the acquisition of the real property is the original purchase price after taking into account settlement adjustments. In the case of subdivided land or a stratum unit, the effect of section 75-15 is that the consideration for the acquisition is the corresponding proportion of the consideration for the real property that you acquired. If land that is part of the original broadacres is used for public purposes including roads, parklands or utilities ('lost land'), the acquisition consideration of the entire broadacres is apportioned to the total number of subdivided lots, so that the sum of the apportioned amounts equals the acquisition consideration for the broadacres (including the 'lost land').

49. The consideration for the acquisition does not include costs that the supplier had incurred that were associated with their purchase of the real property, such as their legal expenses and stamp duty. It also does not include costs incurred in developing the real property, prior to or after its acquisition.

You have contended that:

…the reference to "through a supply" in 75-5(2) is a reference to all supplies through which the supplier acquired its present interest. It is not a reference to the supply which creates or gives the supplier's present registered interest (in fee simple) in the Property.

An approach that is limited to the supply that creates the supplier's present interest would be inconsistent with sections 75-16 and 75-22, which contemplate that the real property being supplied may be acquired through several acquisitions…..

We agree that a property may be acquired through several acquisitions. We address your particular scenario below.

Subsection 75-16 of the GST Act, Margins for supplies of real property acquired through several acquisitions, was inserted by the Tax Laws Amendment (2008 Measures No. 5) Act 2008 (TLAA 2008).

It states

1. If

(a) you make a *taxable supply of *real property under the *margin scheme; and

(b) the interest, unit or lease in question is one that you acquired through 2 or more acquisitions (partial acquisitions); and

(c) one of the following provisions (a margin provision) applies in relation to such a partial acquisition, or would so apply if the partial acquisition had been an acquisition if the whole of the interest, unit or lease:

(i) section 75-10;

(ii) subsection 75-11(1), (2), (2A), (2B), (3), (4), (5), (6) or (7);

the margin provision applies, in working out the margin for the supply you make, only to the extent that the supply is connected to the partial acquisition.

The term 'partial acquisition' is not defined in the GST Act. The Dictionary meaning of 'partial' is 'being a part only, not total or general incomplete '[Macquarie dictionary, third edition].

It is considered that in your circumstances, the earlier acquisitions of the Leases are not partial acquisitions.

· The Leases were acquired in their entirety, not as part of the Property. The reversionary interest on the Property also covers the whole Property.

· When you acquire the reversionary interest in the land the Lease is extinguished because you (the lessee) become the legal owner and an entity cannot lease a property to itself. In these circumstances the acquisition of the reversionary interest therefore equates to the acquisition of the freehold interest in the land. There is no combination or amalgamation of the Leases into the reversionary interest.

Therefore you have not acquired the relevant interest in the land, for margin scheme purposes, through partial acquisitions. The provisions of section 75-16 have no application in this case.

When you make a taxable supply of new residential premises and want to apply the margin scheme we look at the consideration you provided for the 'interest' that you hold in the land at that time. The relevant interest is only the freehold interest that was acquired. The consideration for the leasehold interest previously held does not form part of the consideration for the interest held by you at the time when you make the supply.

Conclusion

Therefore, as from the date of the acquisition of the reversionary interest in the land, your interest in the land is limited to the contract price for freehold interest you acquired.

The consideration for the land from which the stratum title units will be created does not include the acquisitions of the leasehold interest in either the C Lease or the D Lease.

Section 75-10(3) of the GST Act

Under subsection 75-10(3) of the GST Act, valuations may be used to work out the margin where the supplier held or acquired the necessary interest in the land before 1 July 2000.

Following the Full Federal Court decision in Brady King v Commissioner of Taxation [2008] FCAFC 118 we consider that section 75-10(3) of the GST Act can be applied to work out the margin on the supply of stratum units (that will be created from the Property) if you acquired the necessary interest in the Property from which the stratum units will later be carved out, before 1 July 2000.

Subsection 75-10 provides that an approved valuation of the freehold interest in the Property can be used to work out the margin of the supply.

However, you cannot apply subsection 75-10(3) of the GST Act to use an approved valuation to work out the margin. You did not hold a freehold interest in the Property that the stratum units will be created from before 1 July 2000, you only held a leasehold interest. The leasehold interest is a separate interest to the freehold. The leasehold does not enable you to use the land to build the stratum units.

You must acquire the freehold interest to enable you to undertake the development. As you did not hold this interest prior to 1 July 2000 you cannot use a valuation method. .

In conclusion, you can only apply the consideration method and the consideration for Property in your circumstances is the consideration that you provided to the Vendor for the Property.