Edited version of your private ruling

Authorisation Number: 1012458214490

Ruling

Subject: GST and using margin scheme on the supply of inherited property

Question 1

Are you making a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) when you sell the subdivided lots of land inherited from the deceased estate?

Answer 1

Yes, you are making a taxable supply under section 9-5 of the GST Act when you sell the subdivided lots of land inherited from the deceased estate.

Question 2

Are you entitled to use the margin scheme on the supply of subdivided lots of land inherited from the deceased estate under Division 75 of the GST Act?

Answer 2

Yes, you are entitled to use the margin scheme on the supply of subdivided lots of land inherited from the deceased estate under Division 75 of the GST Act.

Relevant facts and circumstances

· You are not registered for goods and services tax (GST).

· You and your sibling jointly inherited a parcel of land from your relative's estate. There is a residential house located on this property in which the deceased was living.

· You and your sibling wish to subdivide the property for the purposes of selling the sub-divided lots of land.

· Your tax agent has advised you that you and your sibling are required to apply for an Australian Business Number (ABN) as a partnership and register the partnership for GST purposes to complete the proposed property development.

· Your tax agent also advised you that you may be entitled to use the margin scheme for the sale of the subdivided lots of land.

· The house located on the land has a separate title and the proposed development will not affect this house.

· The inherited property was held by the deceased before 1 July 2000 and the deceased was not carrying on any enterprise and not registered or required to be registered for GST at the time the deceased passed away.

· Your tax agent confirmed that you inherited the property on the same day when the deceased passed away and there are no will or any court orders pending in relation to the acquisition of the property.

· The deceased passed away in 20XX at which time you have obtained a valuation of the property.

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 9-40

A New Tax System (Goods and Services Tax) Act 1999 paragraph 75-11(3)(ca), 75-11(3)(d) and 75-11(3)(e)

Reasons for decision

Question 1

Section 9-40 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that an entity must pay the GST payable on any taxable supply that the entity makes.

A supply would be taxable if all of the requirements listed in section 9-5 of the GST Act are satisfied.

Taxable supply

You make a taxable supply if you make the supply for consideration; and the supply is made in the course or furtherance of an enterprise that you carry on; and the supply is connected with Australia; and 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.

In this case we need to determine whether you will be making a taxable supply in carrying on the activities of subdividing the inherited land for sale. You advised that you will be making the supply of subdivided lots of land for consideration and the supply would be connected with Australia.

The next issue to be determined is whether you will be making the supply in the course or furtherance of an enterprise that you carry on and whether you will be required to be registered for GST in relation to the proposed development activities.

The term enterprise is defined in the GST legislation as an activity or series of activities done in a certain manner. This includes activities done in the form of a business or an adventure or concern in the nature of trade. The acts can range from a single transaction to groups of related transactions. It is held that the act of subdividing the property for sale will be considered as carrying on an enterprise as these activities are undertaken with a profit motive and will be carried on in a similar manner to that of the ordinary trade.

Therefore, you will be making the supply in the course or furtherance of an enterprise that you will carry on.

You informed us that you inherited the property and you intend to subdivide the property for sale. The sale of the subdivided lots of land will bring your turnover from that one-off enterprise over the registration turnover threshold. Currently the registration turnover threshold is $75,000 ($150,000 for a non-profit entity). Therefore, you will be required to register for GST as you will exceed the registration turnover threshold.

The supply of land will not be a GST-free or input taxed supply under the GST Act.

Therefore, the sale of the subdivided lots of land will satisfy all of the requirements of section 9-5 of the GST Act and you will be making a taxable supply when you sell them.

Question 2

Margin scheme

Division 75 of the GST Act grants the option of applying the margin scheme in some circumstances to reduce your GST liability on this taxable supply.

The margin scheme provides some relief in relation to property transactions and allows for a reduced amount of GST to be paid. It applies to the supply of freehold interests in land, strata units and long-term leases, including those held on 1 July 2000. GST may be calculated on the full value of the supply or on the margin.

The margin scheme cannot be used if a property is acquired through a taxable supply where GST was calculated without using the margin scheme.

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

Paragraph 48 of GSTR 2006/7 explains further on how the margin scheme applies when you supply real property that you acquired by inheriting it. It states that you inherit a freehold interest in land, a stratum unit or a long-term lease if you become an owner of the interest, unit or lease:

(a) under the will of a deceased person, or that will as varied by a court order; or

(b) by operation of an intestacy law, or such a law as varied by a court order; or

(c) because it is appropriated to you by the legal personal representative of a deceased person in satisfaction of a pecuniary legacy or some other interest or share in the deceased person's estate; or

(d) under a deed of arrangement if:

(i) you entered into the deed to settle a claim to participate in the distribution of the deceased person's estate; and

(ii) any consideration given by you for the interest, unit or lease consisted only of the variation or waiver of a claim to one or more other assets that formed part of the estate.

Paragraph 75-11(3)(ca) of the GST Act allows you to choose to use the consideration for the deceased's acquisition of the real property when calculating the margin for the supply if the deceased had acquired the real property before 1 July 2000. You can only apply if you know the amount of the consideration for the deceased's acquisition of the property; and you choose to use this amount when calculating the margin for the supply. (Paragraph 50 of the GSTR 2006/7)

If you do not know the consideration for the deceased's acquisition of the real property then the margin is calculated under paragraph 75-11(3)(d) or 75-11(3)(e) of the GST Act.

Paragraph 53 of the GSTR 2006/7 states:

Paragraph 75-11(3)(d) applies if, immediately before the time that you inherited the real property, the deceased was neither registered or required to be registered. If paragraph 75-11(3)(d) applies, the margin for the supply is the amount by which the consideration for the supply exceeds an approved valuation of the real property as at the latest of:

· 1 July 2000;

· The day on which you inherited the real property; or

· The first day on which you were registered or required to be registered for GST.

In this case the deceased was not registered or required to be registered before you inherited the property. Furthermore, you have confirmed that you have carried out a valuation at the time you inherited the property when the deceased passed away in 20XX.

Therefore, you are entitled to use the margin scheme when you sell the subdivided lots of land, under paragraph 75-11(3)(d) of the GST Act. The GST on the margin will be one eleventh of the consideration you will receive for each sale less the approved valuation.