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Edited version of your private ruling
Authorisation Number: 1012581352307
Ruling
Subject: GST and the margin scheme
Question 1
Will the margin scheme apply to sales of strata units by the entities if they agree in writing with the purchasers, on or before the supply of the strata units, to apply the margin scheme?
Answer
Yes, the margin scheme will apply to sales of strata units by the entities if they agree in writing with the purchasers, on or before the supply of the strata units, to apply the margin scheme.
Question 2
If necessary, will the Commissioner exercise his discretion pursuant to paragraph 75-5(1A)(b) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) to extend the period for the entities to make an agreement in writing to apply the margin scheme (with respect to the previous supply of the underlying property)?
Answer
Yes, if necessary the Commissioner will exercise his discretion pursuant to paragraph 75-5(1A)(b) of the GST Act to extend the period for the entities to make an agreement in writing to apply the margin scheme (with respect to the previous supply of the underlying Property).
Relevant facts and circumstances
The entities wish to confirm with the Commissioner that they are eligible to apply the margin scheme to the sales of the units and seek confirmation that the supply of the property several years ago to one of the entities was not ineligible for the margin scheme.
One of the entities acquired the Property by way of a Memorandum of transfer for the purposes of development of units for sale.
The property was not acquired through taxable supplies on which GST was calculated without applying the margin scheme.
Pursuant to an undated annexure to contract the recipient of the property agreed to apply the margin scheme in relation to the supply of the Property.
At first sight, it is not clear whether the undated annexure to contract was executed on or before the supply of the property.
However, the director of the relevant entity has informed us that he believes the annexure was in fact, executed on or before the supply of the Property.
The Settlement Statement dated aa bb cccc clearly states:
"Purchase Price (incl. of GST) Vendor using Margin Scheme $xxxxxxx"
At first sight, assuming the annexure to contract was executed by both parties on or before the supply and provided the supply of the property was not ineligible for the margin scheme, the parties would have been entitled to calculate GST on the basis that the margin scheme had applied.
The GST on the supply of the property would have therefore been $xxxxxx, i.e. 1/11th of the margin.
An accounting firm advised that the ATO has agreed that the margin scheme applied to the supply.
Since the GST was calculated on the basis that the margin scheme applies to the property then the margin scheme should also apply to sales of the strata units.
Relevant legislative provisions
A New Tax System (Goods and Services Tax) Act 1999 section 75-5,
A New Tax System (Goods and Services Tax) paragraph 75-5(1A)(b) and
A New Tax System (Goods and Services Tax) Act 1999 section 105-5.
Reasons for decision
1. Under subsection 75-5(1) of the GST Act, the margin scheme may only apply in working out the amount of GST on a taxable supply of real property if the supplier and recipient of the supply have agreed in writing that the margin scheme is to apply to the supply. The agreement must be made on or before the making of the supply, or within such further period as the Commissioner allows.
The supply in this case was made after 29 June 2005.
In this particular case we are informed that originally an entity acquired the property from entities who themselves did not acquire their interests through taxable supplies on which GST was calculated without applying the margin scheme.
One of the concerned entities subsequently acquired the property by way of a Memorandum of transfer.
A dispute arose between the Tax Office and the supplier of the property as to whether the supply made to one of the concerned entities was fully taxable or made under the margin scheme. The Tax Office reached an agreement in relation to the GST amount applicable on the sale and decreased the GST payable by half.
As a result of the agreement the Tax Office seemed to have recognised the application of the margin scheme to the supply of the property by the supplier to one of the concerned entities. This means that the margin scheme will be available to the concerned entities.
Therefore, according to the circumstances described above and based on the facts presented we are of the view that the margin scheme will apply to the sales of strata units, if each party agree in writing with the purchasers, on or before the supply of the strata units, to apply the margin scheme.
2. Under subsection 75-5(1A) of the GST Act, the Commissioner has the discretion to allow a further period of time, after the making of the supply, for the supplier and recipients of the supply to make the agreement in writing.
The Law Administration Practice Statement PS LA 2005/15 sets out the circumstances in which the Commissioner may exercise his discretion under subsection 75-5(1A) of the GST Act. The discretion may be exercised where the Commissioner is satisfied that:
· all the requirements to apply the margin scheme, other than the requirement for the agreement in writing, are met; and
· there is no arrangement that has the effect of producing an outcome contrary to the policy of the legislation.
Other than satisfying the requirement of the written agreement, to apply the margin scheme, an entity must be making a taxable supply by:
· selling a freehold interest in land;
· selling a stratum unit; or
· supplying a long term lease.
Subsection 75-5(3) of the GST Act provides that an entity will not be able to use the margin scheme if it sells real property that it:
· acquired through a taxable sale on which the margin scheme was not used;
· inherited from a person who would not have been able to use the margin scheme;
· acquired from a member of the same GST group who would not have been able to use the margin scheme; or
· as a participant in a GST joint venture, acquired from the joint venture operator who would not have been able to use the margin scheme.
In view of the facts of this case, if necessary, the Commissioner will exercise his discretion pursuant to section 75-5(1A)(b) of the GST Act to extend the period for the entities to make an agreement in writing to apply the margin scheme (with respect to the previous supply of the underlying property.