Edited version of your private ruling

Authorisation Number: 1012579076345

Ruling

Subject: GST and the margin scheme

Question 1

Is A entitled to apply the margin scheme under Division 75 of the A New System (Goods and Services Tax) Act 1999 (GST Act) to calculate the goods and services tax (GST) liability payable on the sale of new residential premises constructed on A's land (the Lots).

Answer

Yes

Question 2

Can A use the purchase price paid or payable for the acquisition of the Lots as the consideration of the acquisition under subsection 75-10(2) and section 75-15 of the GST Act?

Answer

The consideration A actually paid (for Stage 1 Land) is used to calculate the margin for the whole land rather than the total consideration. However, a decreasing adjustment can arise for later payment of consideration (for Stage 2 Land).

Relevant facts and circumstances

· B was the owner of the land located in a State of Australia.

· A state Authority approved B to carry out certain works on the land and otherwise develop the Site.

· The State Approval required B to formalise development contributions with the local Council prior to the lodgement of any applications to carry out the Project on the Land. B entered into a Deed of Agreement with the local Council.

· Later B and A entered into a Deed for Redevelopment of the Site (the Deed).

· The Deed contemplates the development of the Site by A and B with A obtaining legal ownership and developing a number of Lots of the Site (the Lots") and B developing the rest of the Site ('B Lot').

· Key provisions of the Deed include the following:

· The Lots are acquired in two stages. 'Stage 1 Land' consists of a number of lots and 'Stage 2 Land' consists of a number of lots.

· B retains ownership of the rest, which will be the location of the new, purpose built facility once it is constructed.

· A is required to pay a Stage 1 Call Option Fee and a Stage 2 Call Option Fee on the date of the Deed. The call option fees payable totalled $xxx plus GST in return for which B grants A an option to purchase the Stage 1 Land and Stage 2 Land respectively.

· A put option for Stage 1 Land and Stage 2 Land was also granted to B by A for nominal consideration allowing B to require A to purchase the Stage 1 Land and Stage 2 Land.

· A was also required to give certificates under a number of sections of the State Conveyancing Act to waive any cooling off periods in respect to the acquisition of the Stage 1 Land and Stage 2 Land.

· B granted A a non-exclusive licence to enter the Site to make inspections, surveys and carry on any necessary works. A acknowledges and agrees that B will be developing the B Lot being retained by it for the new building.

· Both parties agreed at the time of entry into the Deed that the purchase price payable for the Lots was $XXXXXX (GST-exclusive).

· The Deed contemplates the redevelopment of the Site as a whole by the references to defined terms in the Deed such as the Lots.

· A was unable to acquire all the Lots in one contract of sale due to the existence of the existing Building on the Stage 2 Land and the fact that B could not relocate these occupants until the construction of the new building (or temporary building) was made available. Pursuant to the Deed, A was unable to acquire the Stage 2 Land and exercise the Stage 2 Call Option until the date when the occupants of the Stage 2 Land had been relocated or a certain date (whichever is the later). However the Deed and all other correspondence and documentation between the parties demonstrate that A and B's intention was always to acquire the entirety of the Lots.

· A contends it is entitled to allocate the cost base on an 'anticipated selling price' basis.

STAGE 1 Acquisition

· Under a Contract of Sale B sold the Stage 1 Land to A. The GST-inclusive purchase price payable A was $XXXX, plus settlement adjustments. The Contract of Sale confirms the parties elected to apply the margin scheme to calculate the GST payable on the sale. Settlement of Stage 1 Land has already occurred.

· B has now relocated all occupants from the Stage 2 Land and accordingly the purchase of the Stage 2 Land will proceed via the execution of the Stage 2 Call Option or Stage 2 Put Option pursuant to the Deed.

STAGE 2 Acquisitions

· The Contract of Sale for Stage 2 Land is expected to be executed soon. There is no intention on either party that the Stage 2 Call Option or Stage 2 Put Option will not be exercised. Since B has relocated all occupants and is constructing a new building on its Lot, it no longer requires ownership of the Stage 2 Land. As per the Deed, it was always the intention of the parties that the Lots would be sold.

· Since the parties have already agreed on a purchase price for the sale of the Lots, and $XXXXX million (GST exclusive) has already been paid for the Stage 1 Land, the consideration payable for the Stage 2 Land will be $YYYYYY (GST exclusive). The total purchase price paid for the Lots will be $ZZZZZZ as agreed earlier.

THE DEVELOPMENT OF STAGE 1

· A intends to construct new residential dwellings on the Lots totalling xxxx strata units and yyyy freehold new residential premises. The master plan and commercial assessment undertaken by A contemplated that the development was one site from A's perspective.

· A also intends to apply the margin scheme in calculating any GST liability payable on the sale of new residential dwellings constructed on the Lots.

Since A acquired the Stage 1 Land it has been constructing new residential premises on the land with a number of properties completed or nearing completion. A has executed a number of sale contracts and some contracts have already settled.

Assumptions

The supply of the land in both stages from B to A meets or will meet all of the requirements under Division 75 of the GST Act so that A can apply the margin scheme on subsequent supplies of the developed land.

Relevant legislative provisions

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

Section 9-5

Section 9-15

Section 75-10

Section 75-12

Section 75-15

Section 75-27

Reasons for decision

Question 1

Summary

As the requirements under Division 75 of the GST Act are met,A can apply the margin on the subsequent supplies of the land.

Detailed reasoning

It is not disputed that A makes a taxable supply of new residential premises under section 9-5 of the GST Act. Generally, under Subdivision 9-C of the GST Act, the GST payable on a taxable supply is 1/11 of the price of the supply.

However, Division 75 of the GST Act allows an entity making a taxable supply of real property and the recipient of the taxable supply to use the margin scheme in working out the amount of GST payable on the supply.

Conditions for applying the margin scheme

To apply the margin scheme all of the following conditions must be satisfied:

· The supply (to A) is a taxable supply of freehold interest in land (paragraph 75-5(1)(a))

· The supplier and recipient have agreed in writing as required under subsections 75-5(1) and 75-5(1A) of the GST Act that the margin scheme is to apply.

· Subsections 75-5(2) and 75-5(3) of the GST Act do not operate to make the margin scheme ineligible.

A has advised that the subsequent supply of the properties will meet all of the requirements under the above provisions of the GST Act as:

· the supply of the land (Stage 1) is a supply of freehold interest in land, is taxable supply and GST on the supply was calculated applying the margin scheme

· the supply of the land (Stage 2) will also be a supply of freehold interest in land, will be a taxable supply and GST on the supply will be calculated applying the margin scheme

· A and the purchaser of the new residential premises will agree in writing that margin scheme is to apply

· None of the exclusions under subsection 75-5(3) apply to either Stage of Land acquisitions.

Therefore, A can apply the margin scheme in calculating the GST payable on the supply of the new residential premises completed in Stage 1 and intended to be completed in Stage 2 of the development.

Question 2

Summary

A can only apply the consideration actually paid for the acquisition of the land (Stage 1 Land) not the full consideration for the acquisition. However, a decreasing adjustment can arise for later payment of consideration (for Stage 2 Land).

Detailed reasoning

The amount of GST payable under the margin scheme in provided under section 75-10 of the GST Act which states:

· 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.

· The asterisk denotes a defined term in the GST Act.

The margin for the supply is the amount by which the consideration for the supply (the sale of the new residential premises built on the land) exceeds the consideration for the acquisition of the land.

As the supply of the new residential premises relates only to part of the land that A acquired (the Lots), under section 75-15 of the GST Act, the consideration for A's acquisition of that part is the corresponding proportion of the consideration for the land that A acquired.

In summary, the margin of each supply of new residential premises is the difference between:

· The consideration for the acquisition of that part of the land is the corresponding proportion of the consideration for the acquisition of the whole land (the consideration for the allotment); and

· The consideration for the supply of the new residential premises on the allotment.

The following need to be considered to work out the apportioned consideration for the allotment:

· The consideration for the acquisition of the land (so that the apportionment method can be applied)

· The apportionment method.

The consideration for the acquisition of the land

Generally the consideration for the acquisition is the original purchase price for the land after taking into account adjustments on settlement that are commonly made for rates, land taxes and other outgoings.

The issue needs to be considered is whether the consideration for the acquisition is the consideration for the whole land or consideration for each stage land

As has provided that its intention is to acquire and develop the land as a whole:

· A and B entered into the Deed to redevelop the entire land. At the time the Deed was entered into, the agreed purchase price for the land was $xxxxxx. This the combined purchase price of Stage 1 Land and Stage 2 Land that A paid for Stage 1 Land and will pay for Stage 2 Land.

· A is required to pay the Stage 1 Option fee and Stage 2 Option fee on the date of the Deed. The fees are the consideration for B to grant A an option to acquire Stage 1 and Stage 2 Land.

· A was required to give certificates under the State Conveyancing Act to waive any cooling off periods in respect to the acquisition of the Stage I Land and Stage 2 Land.

· On the same date that the Deed was entered into, the local Council, A and B entered into a Deed of Novation to novate the rights and obligations of B under the Planning Deed to A.

· On and from the date of the Deed of Novation, A:

· is entitled to all rights and benefits to which B would have been entitled in respect of the Lots; and

· must comply with all obligations and discharge all liabilities under the Planning Deed which B would have been required to comply with or discharge in respect of the Lots,

· as if A had entered into and executed the Planning Deed in place of B in respect of the Lots.

· A intends to construct new residential dwellings on the Lots totalling xxxx strata units and yyy freehold new residential premises. The master plan and commercial assessment undertaken by A contemplated that the development was one site from A' perspective.

However, A was unable to acquire all the Lots in one contract of sale due to:

· the existence of the existing Building on the Stage 2 Land

· RRCS could not relocate until the construction of the new building (or temporary building) was made available. Pursuant to the Deed, A was unable to acquire the Stage 2 Land and exercise the Stage 2 Call Option until the date when the occupants of the Stage 2 Land had been relocated or a certain date (whichever is the later).

The fact above indicates the intention of A to acquire the Lots as one acquisition and one purchase price for the acquisition.

However, under section 75-12 of the GST Act, where a supply of a freehold interest, stratum unit or long-term lease is made on or after 17 March 2005, the margin must be calculated by reference to the amount the acquisition consideration that has actually paid, rather than the total consideration.

Section 75-12 states:

· Working out margins to take into account failure to pay full consideration  

· In working out the *margin for a *taxable supply of *real property you make (the later supply), if:

· (a)  you had acquired the interest, unit or lease in question through a supply (the earlier supply); and

· (b)  the *consideration for:

(i) if your acquisition was not an acquisition from a *member of a *GST group of which you were also a member at the time of the acquisition - the earlier supply; or

(ii)  if your acquisition was such an acquisition - the last supply of the interest, unit or lease at a time when the supplier of that last supply was not, but the *recipient of that last supply was, a member of the GST group;

· had not been paid in full at the time of the later supply;

· treat the amount of the consideration as having been reduced by the amount of unpaid consideration referred to in paragraph (b).

A has provided that it has only actually paid the consideration for Stage 1 Land, the rest will be paid on the settlement of Stage 2 Land.

As only part of the total consideration has been paid (consideration for Stage 1 Land), section 75-12 of the GST Act applies.

Therefore, the consideration for the Lots to be apportioned for the total of xxx strata units and yyy freehold new residential premises is the consideration that A actually paid for Stage 1 Land.

Please note that when A makes payment of an additional payment for the Stage 2 Land, the consideration for the land will be the total amount paid for the Lots.

The corresponding consideration for each allotment can be revised to reflect the full sale price paid for the Lots. Under section 75-27 of the GST Act, A will be entitled to a decreasing adjustment for the allotments already sold using the partly paid consideration basis for the apportionment. The amount of the adjustment is 1/11 of the reduced margin which is based on the full consideration basis for the apportionment.

The apportionment methods

Goods and Services Tax Ruling GSTR 2006/8 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 an entity. Paragraph 58 of GSTR 2006/8 provides:

To ascertain the proportion of the purchase price that relates to the subdivided allotment or stratum unit, you may use any fair and reasonable method of apportionment. The method of apportionment used must result in the sum of the proportionate amount of the purchase price that relates to each subdivided allotment or stratum unit equalling in total, the actual consideration for the acquisition. You cannot change the method of apportionment after sales of allotments or stratum units have been made unless the changed method is applied to calculate the margin for all the sales.

Paragraph 59 of GSTR 2006/9 provides a number of apportionment methods that A can use. They include the 'anticipated selling price' where the consideration for the real property is apportioned on the basis of the proportion of the total anticipated selling price of the development represented by the particular allotment.

Paragraph 60 of GSTR 2006/8 further provides that the methods in paragraph may be used provided they give a fair and reasonable result. Use of lots or sites as an apportionment method would not give a fair and reasonable result if the size or value of the allotments or sites varies significantly.