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Edited version of your written advice
Authorisation Number: 1012777525054
Ruling
Subject: GST and use of valuation to calculate the margin scheme
Question
Are you entitled to use a valuation to calculate the margin on the sale of new residential units developed on the property?
Answer
No.
This ruling applies for the following periods:
Not applicable
The scheme commences on:
Not applicable
Relevant facts and circumstances
• You are registered for goods and services tax (GST) and are carrying on an enterprise of property development.
• You purchased land (property) for $xxx after 1 July 2000.
• The vendor of the property was not registered for GST and no margin scheme was used on the sale of the property.
• You built villas on part of the property and sold them as taxable supplies and you did not use the margin scheme on the sale of these villas.
• The remaining property became a new registered lot and was not developed until approximately 20YY to 20ZZ. It was valued for $yyy as at 20YY.
• You built more villas and requested the Commissioner to confirm whether you can use the valuation to calculate the margin on the sale of these villas.
Relevant legislative provisions
A New Tax System (Goods and Services Tax) Act 1999 - section 75-5, 75-10, 75-15
Reasons for decision
Division 75 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) contains the provisions relevant to the margin scheme. Section 75-5 of the GST Act stipulates when you may apply the margin scheme:
• If you make a taxable supply of real property by:
(a) selling a freehold interest in land; or
(b) selling a stratum unit; or
(c) granting or selling a long-term lease;
You may choose to apply the margin scheme in working out the amount of GST on the supply, if you and the purchaser have agreed in writing that the margin scheme is to apply.
• However, you cannot choose to apply the margin scheme if you acquired the freehold interest, stratum unit or long-term lease through a supply that was ineligible for the margin scheme. For example, you cannot use the margin scheme where your acquisition was through a taxable supply on which the GST was worked out without applying the margin scheme.
The acquisition of the property was not a taxable supply to you as the vendor of the property was not registered for GST. Based on the facts provided, you may be entitled to apply the margin scheme on the sale of new villas developed.
The amount of GST on these supplies is provided under section 75-10 of the GST Act:
• 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.
• 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.
• However, if:
(a) the circumstances specified in an item in the second column of the table in this subsection apply to the supply; and
(b) a valuation of the freehold interest, stratum unit or long-term lease, as at the day specified in the corresponding item in the third column of the table, has been made that complies with any requirements determined in writing by the Commissioner for making valuations for the purposes of Division 75;
the margin for the supply is the amount by which the consideration for the supply exceeds that valuation of the interest, unit or lease.
Use of valuations to work out margins | ||
Item |
When valuations may be used |
Days when valuations are to be made |
1 |
The supplier acquired the interest, unit or lease before 1 July 2000, and items 2, 3 and 4 do not apply. |
1 July 2000 |
2 |
The supplier acquired the interest, unit or lease before 1 July 2000, but does not become *registered or *required to be registered until after 1 July 2000. |
The date of effect of your registration, or the day on which you applied for registration (if it is earlier) |
2A |
The supplier acquired the interest, unit or lease on or after 1 July 2000, but the supply to the supplier: (a) was *GST-free under subsection 38-445(1A); and (b) related to a supply before 1 July 2000, by way of lease, that would have been GST-free under section 38-450 had it been made on or after 1 July 2000. |
1 July 2000 |
3 |
The supplier is *registered or *required to be registered and has held the interest, unit or lease since before 1 July 2000, and there were improvements on the land or premises in question as at 1 July 2000. |
1 July 2000 |
4 |
The supplier is the Commonwealth, a State or a Territory and has held the interest, unit or lease since before 1 July 2000, and there were no improvements on the land or premises in question as at 1 July 2000. |
The day on which the *taxable supply takes place |
(* denotes a term defined in the section 195-1 of the GST Act).
In this case, although you may be entitled to apply the margin scheme under the relevant provisions of the GST Act, you will not be entitled under those same provisions to substitute a valuation for the purchase price.
A valuation is used to ensure that GST is payable on the value added after the commencement of the GST system. As you acquired the property post-July 2000, any value added has arisen subsequent to the introduction of the GST system. Consequently, a valuation is not required to calculate the relevant margin.
In circumstances like yours, the legislation specifically states that the margin is the amount by which the consideration for the supply exceeds the consideration for the acquisition. As the operation of the provisions specifically requires the consideration paid on the acquisition to be used in calculating the margin, no other value can be substituted for this amount.
As such, the original cost you paid for your property is considered to be the cost of the property for margin scheme calculations when that property is used in a commercial development.
Section 75-15 of the GST Act deals with the margin scheme and subdivided land. Section 75-15 of the GST Act provides that, for the purposes of sections 75-10 to 75-14 of the GST Act, if the interest, unit or lease that you supply relates to only part of the land (that is, where land has been subdivided) or premises that you acquired, the consideration for the acquisition of that part is the corresponding proportion of the consideration for the land or premises that you acquired.
In order to ascertain the proportion of the purchase price that relates to each villa, you may use any fair and reasonable method of apportionment.
The margin for each villa will be the difference between a fair and reasonable apportioned amount of the consideration for your acquisition as determined under section 75-15 of the GST Act in respect of each villa and the consideration that you receive for the taxable supply of each villa. Your liability for GST in respect of each taxable supply of the villa will be 1/11th of the margin for the supply of each villa.