Edited version of your written advice

Authorisation Number: 1012789002255

Ruling

Subject: GST and sale of land.

Question 1

Does the margin scheme apply to your supply of the property to a prospective purchaser?

Answer

Yes

Question 2

If yes, should any rebate that may be offered by you to a prospective purchaser for the supply of the property be treated as reducing the selling price of the land for GST purposes?

Answer

Yes

Relevant facts and circumstances

You are registered for GST.

You acquired the property from Entity B with the ultimate intention of developing a residential community. However, you are now seeking to sell the property.

Entity B acquired the property in mmyyyy. Entity B is in the business of breeding and selling livestock, the grazing of livestock and the cropping of hay and has used the property in connection with such activities since yyyy. It continues to use the property for these activities as of today.

You acquired the property from Entity B in mmyyyy for $xx plus GST. The sale was treated as a taxable supply. The margin scheme was not used and you claimed an input tax credit of $x.

Pursuant to the Special Condition X of the sales contract, you agreed to lease the property to Entity B from the settlement date until such time as you provided written notice to Entity B to terminate the lease. The lease over the property is still in existence and Entity B continues to conduct its farming activities.

You and Entity B also entered into a formal lease agreement dated ddmmyyyy to reflect this arrangement.

You now intend to sell the property to an unrelated third party and not develop as originally intended. You have commenced an informal process for the sale, but to date, have not received any formal offers.

Given the current state of the property market, as an incentive to further entice a prospective purchaser, you are offering a rebate. The size of the rebate will depend on the ultimate purchase price, but could be as high as $x to a prospective purchaser of the property. The rebate will be payable at the time of settlement.

The rebate amount will not, at any stage, be payable by you to the prospective purchaser. Rather, a net amount will be paid by a prospective purchaser to you, meaning the rebate will be deducted from the purchase price. Accordingly, where the contract of sale is executed and settlement occurs, the prospective purchaser will be liable to pay you a single sum, inclusive of any GST applicable.

There are no obligations imposed upon the prospective purchaser in order to receive the rebate, other than the requirement to enter into (and settle) the contract of sale for the property with you.

Should the sale of the property be eligible under the margin scheme for GST purposes, the prospective purchaser and you will agree in writing, in the contract of sale for the property that the margin scheme applies.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Division 19

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

A New Tax System (Goods and Services Tax) Act 1999 section 38-475

A New Tax System (Goods and Services Tax) Act 1999 section 38-480

Reasons for decision

Note: In this reasoning, unless otherwise stated,

• all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)

• all legislative terms of the GST Act marked with an asterisk are defined in section 195-1 of the GST Act

Question 1 - margin scheme eligibility

Subsection 75-5(1) provides that the margin scheme applies in working out the amount of GST on a taxable supply of real property that you make by:

a. Selling a freehold interest in land; or

b. Selling a stratum unit; or

c. Granting or selling a long-term lease;

if you and the recipient of the supply have agreed in writing that the margin scheme is to apply.

However, subsection 75-5(2) provides that the margin scheme does not apply if you acquired the entire freehold interest, stratum unit or long term lease through a supply that was ineligible for the margin scheme.

If the land is not ineligible for the margin scheme, the GST on any sale will be calculated as 1/11th of the relevant margin, i.e. 1/11th of the amount by which the consideration for the supply exceeds the valuation of the interest, unit or lease.

Eligibility

Subsection 75-5(3) lists the circumstances in which you acquire the entire freehold interest, stratum unit or long term lease through a supply that was ineligible for the margin scheme.

Relevantly, under paragraph 75-5(3)(a), a supply is ineligible if it is a taxable supply on which the GST was worked out without applying the margin scheme.

The supply of the property to you was treated as a taxable supply on which the GST was worked out without applying the margin scheme. Consequently, the supply would ordinarily be ineligible to use the margin scheme.

However, under section 38-480, the supply of a freehold interest in land is GST-free if:

• the land is land on which a farming business has been carried on for at least the period of 5 years preceding the supply; and

• the recipient of the supply intends that a farming business be carried on, on the land.

Under subsection 38-475(2), farming business includes maintaining animals for the purpose of selling them or their bodily produce (including natural increase).

Entity B carried on a farming business on the the property land from yyyy until it sold the property to you in mmyyyy. Entity B has continued to carry on its farming business on the property from settlement until now.

As stated at item 6.2.4 of the Primary Production Industry Partnership - issue register, the important factor to consider, in determining whether a supply of farm land is GST-free under section 38-480, is the use of the land as opposed to the ownership of it. Therefore, the recipient of the supply need only intend that a farming business be carried on, on the land. Paragraph 38-480(b) does not require purchasers to carry on the farming business themselves.

Your agreement to lease the property to Entity B, from the settlement date until such time as you provided written notice to Entity B to terminate the lease, demonstrated your intention that a farming business was to be carried on, on the land. The lease over the property is still in existence and Entity B continues to conduct its farming activities.

Entity B's sale of the property to you satisfied all of the requirements of section 38-480. Accordingly, the sale of the land to you was a GST-free supply. This is so, despite the fact that it was treated as a taxable supply.

Paragraph 75-5(3)(a) does not apply to Entity B's sale of the land to you. Further, on the facts supplied, none of the other paragraphs of subsection 75-5(3) applies to the sale of the land to you. Therefore, you did not acquire the property through a supply that was ineligible for the margin scheme.

You and the prospective purchaser will agree in writing, in the contract of sale for the property that the margin scheme applies. Therefore, the margin scheme will apply to your sale of the property.

Question 2 rebate

Rebates are generally offered by suppliers to provide a particular incentive to purchasers, or prospective purchasers. The payment of a rebate may have the following GST effects:

• The rebate may result in an adjustment to the price of the supply and thus trigger an adjustment event pursuant to Division 19-A; or

• The rebate may represent consideration for a separate supply by the purchaser.

In your circumstances, there is no separate supply by the purchaser for which the rebate is consideration. The purchaser's only obligation is to enter into (and settle) an agreement for the sale of the property.

Therefore, we must consider whether the rebate results in an adjustment to the price of the supply. It is necessary to identify the true character of the rebate by considering the intention of the relevant parties to the agreement in light of all the circumstances.

The rebate will be offered as an incentive to further entice a prospective purchaser to enter into a contract for the sale of the property. The rebate will not, at any stage, be payable by you to the prospective purchaser. Rather, a net amount will be paid by a prospective purchaser to you, meaning the rebate will be deducted from the purchase price.

The effect of this is that, whilst the contract of sale will state a purchase price, both parties will enter into the contract on the basis that the rebate will be payable at the time of settlement. The intention of both parties is that the purchaser will actually pay a reduced purchase.

Paragraph 20 of GST Ruling 2000/19, Goods and services tax: making adjustments under Division 19 for adjustment events (GSTR 2000/19), discusses discounts that arise after a supply has occurred. In these instances, there is a change to the consideration for the supply.

Paragraph 21 contrasts a discount that arises after a supply has occurred with a 'discount' that is offered in negotiating a price for the acquisition. In this situation, the 'discount' is used to arrive at the consideration for the supply at the time the invoice is issued. The 'discounted price' is the consideration for the supply.

Similarly, at settlement, the rebate that you offer will be used to arrive at the consideration for your supply of the property ie a single amount being the stated purchase price reduced by the rebate and inclusive of any GST applicable.

Accordingly, any rebate that may be offered by you to a prospective purchaser for the supply of the property will reduce the selling price of the property for GST purposes. There is no adjustment event in these circumstances.