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Edited version of your written advice
Authorisation Number: 1012736079162
Ruling
Subject: GST and the sale of real property under the margin scheme
Question 1
Will your supply of Lots X and Y be a taxable supply pursuant to section 9-5 of the GST Act?
Answer
No, it will be a mixed supply, partly taxable and partly input taxed. You may use any reasonable method to apportion the supply.
Question 2
How will the GST payable on the taxable portion of Lot X be calculated where you choose to apply the margin scheme?
Answer
The GST payable will be 1/11th of the margin.
Relevant facts and circumstances
You are registered for GST.
You own two properties, being Lot X and Lot Y (the Property).
Lot X, is located in Australia. It is X hectares. It was purchased as vacant land in 19XY. In 19XZ the church and ancillary buildings were constructed. In 19AB, a hall was constructed and in 19XC a residence was built and occupied up until the current time. The residence is fenced. The church is not. The balance of the land is vacant and unused. The property was originally zoned rural residential, but has since been rezoned to high density residential.
Lot Y, is located in Australia and is X hectares in size. It was acquired in 200X. It contains a residence surrounded by bushland. The perimeter of the property is fenced, but there is no fence separating the bushland from the cottage. The house was leased under a fixed term lease until May 20ZZ and has been leased on a month by month basis since that time.
In ddmmyyyy you entered into an option agreement with Entity Y, whereby you granted them first option to buy the two lots for $XX million. On the same day, in anticipation of the option being exercised, you filled in a 'Contract for the sale of land'. The purchase price is not allocated between the two lots.
The Property will be sold with vacant possession. However, the vendor has agreed to lease back the residence and the church on Lot X for $X per week for a period of up to Y months while you build elsewhere. There is no formal lease for the lease back. The sale contract specifies that, to the extent that the supply is a taxable supply, the margin scheme will be used to calculate the GST payable.
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 40-65 and
A New Tax System (Goods and Services Tax) Act 1999 Section 75-5.
Reasons for decision
Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that you make a taxable supply if you meet all of the conditions of paragraphs (a) to (d) of section 9-5 of the GST Act and your supplies are not GST free or input taxed. Where you do not meet one of the requirements, your supply will not be taxable.
On the facts supplied, your supply of the Property meets the conditions of paragraphs (a) to (d) of section 9-5 of the GST Act and is not GST-free.
Therefore it is necessary to determine if any portion of the property would be input taxed.
Section 40-65 provides that:
(1) A sale of real property is input taxed, but only to the extent that the property is residential premises to be used predominantly for residential accommodation (regardless of the term of occupation).
(2) However, the sale is not input taxed to the extent that the residential premises are:
(a) commercial residential premises; or
(b) new residential premises other than those used for residential accommodation (regardless of the term of occupation) before 2 December 1998.
The houses on each lot have the physical characteristics of residential premises and have been used predominantly for residential accommodation. Further, they do not meet the definitions of commercial residential premises or new residential premises. Therefore your supply of the houses will be an input taxed supply of residential premises.
Lot Y
Paragraph 46 of Goods and Services Tax Ruling GSTR 2012/5 Goods and services tax: residential premises (GSTR 2012/5) explains that, in considering land supplied with a building, the extent to which the land forms part of residential premises to be used predominantly for residential accommodation is a question of fact and degree. The most relevant factor is the extent the land is to be enjoyed in conjunction with the relevant building.
Lot Y includes a residence and bushland. There is no clear delineation to show that any of the bushland is not available for enjoyment in conjunction with the residence. The bushland and the area adjoining the house are not used for any other purpose.
We accept that the entirety of Lot Y forms part of the residential premises and that the bushland is to be enjoyed in conjunction with the residential premises. Therefore your supply of Lot Y will be an input taxed supply of residential premises and there will be no GST payable on your supply of Lot Y.
Lot X
Lot X contains a residence, a church and vacant land. The residence is separated from the church and the vacant land by a fence which surrounds it. The vacant land has been cleared and is separate to the house.
Paragraph 47 of GSTR 2012/5 explains that vacant land is not capable of being occupied as a residence or for residential accommodation as it does not provide shelter and basic living facilities.
Therefore as outlined in paragraph 46 and 47 of GSTR 2012/5 we consider that
1. the house on the land constitutes residential premises for the purposes of the GST Act and
2. neither the vacant land nor the church forms part of the residential premises.
Therefore your supply of Lot X will be a mixed supply, consisting of an input taxed supply of residential premises, a taxable supply of the church and a taxable supply of vacant land.
How will the GST payable on the taxable portion of Lot X be calculated where you choose to apply the margin scheme?
You expect to utilise the margin scheme when you sell Lot X. The margin scheme is only applicable to the taxable portion of Lot X.
Under subsection 75-5 (1), if you make a taxable supply of real property by selling a freehold interest in land, you may choose to apply the margin scheme in working out the amount of GST payable on the supply if you and the purchaser agree in writing that the margin scheme is to apply.
Subsection 75-5(3) lists the circumstances in which a supply is ineligible for the margin scheme. On the facts provided, your supply of the taxable portion of Lot X is not ineligible for the margin scheme.
As stated in subsection 75-10(1), under the margin scheme, the GST payable on the supply of real property is 1/11th of the margin for the supply.
The margin for the supply is the amount by which the consideration for the supply exceeds (a) the consideration for your acquisition of the interest, unit or lease in question (consideration method) or (b) an approved valuation of the freehold interest, stratum unit or long term lease as at the relevant date (valuation method). The relevant date is 1 July 2000. As you acquired Lot X before 1 July 2000, you have the option of using either method.
The combined sale price of $X million was not apportioned between the two lots. Therefore, you are required to apportion the total consideration between the two lots and the taxable and input taxed portions of Lot X.
You may use any reasonable basis to apportion the consideration to the taxable and input taxed components. The basis you choose must be supportable in the particular circumstances. Goods and Services Tax Ruling (GSTR) 2001/8 Goods and services tax: Apportioning the consideration for a supply that includes taxable and non-taxable parts (GSTR 2001/8) provides guidance in this matter.
Paragraphs 81Q to 81T of GSTR 2001/8 provide the following advice:
81Q Depending on the facts and circumstances in any particular case a direct or indirect method may be appropriate to determine the value of the taxable part for the purposes of calculating the taxable proportion. This is discussed at paragraphs 97 to 111 of this Ruling.
81R At paragraphs 92 to 113 of this Ruling guidance is provided as to what is a fair and reasonable measure of value of the taxable part of the supply in different factual situations.
81S. The value should be based on a consideration of all the facts and circumstances including the relationship that component of the supply has with the price of the actual supply and not because it gives you a particular result (see paragraph 95 of this Ruling).
81T. You need to keep records that explain the transaction and the basis of your valuation.
Similarly, you may use any reasonable basis to apportion the consideration or valuation for your acquisition of Lot X between the taxable and input taxed components.
Goods and Services Tax Ruling (GSTR) 2006/7 Goods and services tax: 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 (GSTR 2006/7) provides guidance in calculating the GST payable on a supply of real property where the GST payable is calculated using the margin scheme.