Edited version of private advice

Authorisation Number: 1012629290708

Ruling

Subject: Calculation of the margin under the margin scheme.

Question

When calculating the margin on the sale of the property, do we add the money paid as interest to determine the acquisition price?

Answer

No. You do not add the money paid as interest to determine the acquisition price when calculating the margin.

Relevant facts and circumstances

• You are the trustee for a family trust.

• You are carrying on an enterprise and are registered for the goods and services tax (GST).

• In the course of your enterprise, you acquired a property.

• The property was acquired after 1 July 2000.

• The purchase price of the property was stated in the contract of sale.

• Clause 9 in Special Conditions of the Schedule in the contract of sales states that "Should the Purchaser defaults in payment of any money due under this Contract, then interest at the rate of xxx per annum shall be paid on demand by the Purchaser to the Vendor upon the money overdue. The said interest shall be computed from the due date herein provided for the payment of the said money until such monies are paid and shall be payable by the Purchaser to the Vendor upon demand without the necessity for any notice in writing whether under Condition 6 of the said Table A or otherwise. The exercise of the Vendor's rights hereunder shall be without prejudice to any other rights powers and remedies of the Vendor under this Contract or otherwise. The provision of Condition 4 of the said Table A shall not apply to this Contract."

• You defaulted in the payment of money due under the Contract and, as per Clause 9, and paid a sum of money as interest.

• You now intend to sell the property under the margin scheme.

Relevant legislative provisions

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

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

A New Tax System (Goods and Services Tax) Regulations 1999 - Subregulation 40-5.09

Reasons for decision

Under subsection 75-10(2) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), the "margin" for a 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 term "consideration" is defined in the GST Act to include, among other things, any payment, or any act or forbearance, in connection with a supply of anything.

In this case you entered into a contract to purchase real property for an agreed sum. This sum is the consideration for the supply of the property.

However, the contract also stipulated conditions in situations where you default on making the payment on the due date as per the contract. Under the contract, the supplier agrees to allow an extension of time to make the consideration for the supply, but you were required to pay interest on the consideration owing at a stipulated annualised rate.

You defaulted on making the consideration on the due date and consequently paid an extra amount as interest.

We consider that the extra amount you paid to the supplier of the property was for a different supply to that of the supply of property.

Goods and services tax ruling: making adjustments under Division 19 for adjustment events (GSTR 2000/19), explains how the GST Act deals with adjustments events. Paragraph 19-10(1)(b) of the GST Act states that an adjustment event is, among other things, any event which has the effect of changing the consideration for a supply or an acquisition. Whether or not an event has the effect of changing the consideration for a supply is dealt with in GSTR 2000/19.

Pertinent to this case are paragraphs 30 to 32 of GSTR 20001/19, which states:

30. Where an amount is required to be paid by a specified date, but an additional charge becomes payable if the primary amount is not paid by the due date, the additional charge is consideration for the supply of an interest in a credit arrangement and, as such, is consideration for a financial supply. This is so whether the payment is in the nature of an accruing interest charge (for example, 10% per annum), a flat percentage of the amount due (for example, 10% of the amount due) or a fixed amount (for example, $20).

Example - interest charge

31. Henry supplies goods to Andrew under terms that require the amount invoiced to be paid within 30 days, after which time, interest will accrue at 14% per annum. In addition to the amount originally invoiced to Andrew, Henry demands payment of the interest. As the agreement contemplates late payment, Henry has supplied Andrew with an interest in a credit arrangement. The late payment charge is consideration for a financial supply and is not an adjustment event.

Example - flat charge

32. George's Plumbing sells goods to Jasper on the basis that if payment is not received within 30 days, a fee of 2% of the amount due will be payable. The terms of trading refer to this as a 'fee for account keeping services'. However, no additional services are provided to Jasper by George's Plumbing. Jasper makes the payment (including the 2% fee) after the due date. Although described by the parties as a fee for account keeping services, the fee is in reality a charge for late payment. The fee is consideration for the supply of an interest in a credit arrangement and is therefore consideration for a financial supply.

It will be seen from the above that the transaction in this case is similar to the two examples given above.

Therefore, the interest paid as a result of defaulting on the payment for the supply by the due date as per the contract should not be included as consideration for the supply of the real property.

Please note:

The meaning of "supply" is given in section 9-10 of the GST Act to include a financial supply. Financial supplies are defined in A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations). Under subregulation 40-5.09 of the GST Regulations, an interest in or under a debt, credit arrangement or right to credit, including a letter of credit is a financial supply.

Under Division 40 of the GST Act, a financial supply is input taxed and no GST is payable on the supply. Also, there is no entitlement to an input tax credit for the acquisition of a financial supply.