Edited version of your written advice

Authorisation Number: 1012835876285

Date of advice: 8 July 2015

Ruling

Subject: GST and sale of property

Question 1

Are you entitled to apply the margin scheme to all supplies of the subdivided lots of the Project, subject to making an increasing adjustment pursuant to subsection 75-22(1) of the A New Tax System (Goods and Services Tax) Act 1999?

Answer

Yes, provided you agree in writing with purchasers to use the margin scheme.

Question 2

If the answer to Question 1 above is yes, when are you obliged to make the increasing adjustment(s)?

Answer

You are required to make the increasing adjustments in the same tax period as each lot sale settlement, using a fair and reasonable proportionate approach.

Question 3

Is the "consideration for your acquisition" for margin scheme purposes (i.e., the margin scheme cost base) the total of the purchase price for the four adjoining parcels of land?

Answer

Yes, in relation to each supply, consideration for acquisition is the corresponding proportion of the consideration paid for the amalgamated lot now being subdivided, (subject to settlement adjustments).

Relevant facts and circumstances

You are part of the XXX group which builds and develops residential premises and has a number of projects currently ongoing.

Generally, the group will acquire a site and seek to subdivide the site into a number of lots.

Depending on the project and the state of the market, the group will either construct and sell a "house and land" package under a single contract or sell the subdivided land only, with the purchaser retaining the option of separately engaging you to undertake the contract build.

The head company of the group is XXX Limited. The group has elected to form a GST group pursuant to Division 48 of the A New Tax System (Goods and Services Tax) Act 1999.

You are the representative member of the GST group. For the purposes of this request for a private binding ruling, and unless the context requires otherwise, any references to you are references to you either acting in your own right or as representative member of the XXX GST group.

Project

You intend to develop a new project ('the Project"). In YYYY, you acquired four adjoining parcels of land, in the following circumstances, as detailed below:

¹ Excluding settlement adjustments

Collectively, the land encompasses a site area of approximately xx hectares, with road frontage of about xx metres. You will amalgamate title to all four lots into a single title. Once amalgamated, you intend to develop the site into approximately xx vacant residential lots for sale to third parties over xx stages. Lot sizes will range from xx square metres to xx square metres.

The final site layout and number of subdivided lots is potentially subject to change depending on factors such as development and council approvals, the state of the market and whether you successfully acquire any additional neighbouring sites. Nevertheless, it is expected that any variations to this proposed plan will not be significant.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 section 7-1

A New Tax System (Goods and Services Tax) Act 1999 section 29-20

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

A New Tax System (Goods and Services Tax) Act 1999 section 75-22

Reasons for decision

Note: In this ruling, 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

Pursuant to section 7-1, GST is payable on all taxable supplies.

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 supply of land to you was not ineligible for the margin scheme and you choose to apply the margin scheme to your supply, the GST on any sale will be calculated as 1/11th of the relevant margin, i.e. 1/11^th of the amount by which the consideration for your supply exceeds the consideration for your acquisition of the interest, unit or lease in question.

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 is ineligible for the margin scheme.

While three of the four lots were acquired from unregistered vendors and thus not taxable supplies, the ZZZZ Land was acquired as a fully taxable supply

Paragraph 75-5(3)(a) provides that a supply is "ineligible for the margin scheme" if, it is a taxable supply on which the GST was worked out without applying the margin scheme.

Accordingly, the supply of the ZZZZ Land to you was a supply which was "ineligible for the margin scheme".

Notwithstanding paragraph 75-5(3)(a) and that the supply of the ZZZZ Land to you was a supply which was "ineligible for the margin scheme", you may still be entitled to apply the margin scheme on your lot sales, provided you meet the requirements of subsection 75-22(1), which provides that you have an increasing adjustment if:

a) you make a taxable supply of real property under the margin scheme; and

b) an acquisition that you made of part of the interest, unit or lease in question was made through a supply that was ineligible for the margin scheme, and

c) you were, or are, entitled to an input tax credit for the acquisition.

The amount of the increasing adjustment is an amount equal to the previously attributed input tax credit amount for the acquisition.

Paragraph 150 of Goods and Services Tax Ruling GSTR 2006/8 Goods and services tax: the margin scheme for supplies of real property acquired on or after 1 July 2000 (GSTR 2006/8) explains that if you acquire adjoining properties, one of which is acquired through a supply that is ineligible for the margin scheme, and you subdivide the properties, the margin scheme can be used for the supply of some of the subdivided lots.

Paragraph 151 of GSTR 2006/8 further explains that the margin scheme:

• can be applied for the supply of those lots that were derived entirely from land that was acquired through a supply that was eligible for the margin scheme (without the requirement for any increasing adjustment)

• can be applied to those lots derived partly from land that was acquired through a supply that was ineligible for the margin scheme as subsection 75-5(2) does not apply, provided that an increasing adjustment to the extent of the ITC entitlement for the acquisition of these lots is recognised, and

• cannot be applied for the supply of those lots that were derived entirely from land that was acquired through a supply that was ineligible for the margin scheme as subsection 75-5(2) applies.

You will amalgamate title to all four lots into a single title. Once the titles are amalgamated, you intend to develop the site into vacant residential lots. These lots will be derived partly from land that was acquired through a supply that was ineligible for the margin scheme - similar to lots 4-6 in paragraph 152 of GSTR 2006/8.

Therefore, as explained in paragraphs 151 and 155 of GSTR 2006/8, the margin scheme can be applied to your supplies of the vacant residential lots (or house and land packages). If the margin scheme is applied to your supplies of the vacant residential lots (or house and land packages), there are increasing adjustments under subsection 75-22(1). The increasing adjustment for each supply is a proportionate amount of the previously attributed input tax credit amount for the acquisition of the land. You may use any fair and reasonable basis of apportionment to work out the increasing adjustment.

Question 2

Under subsection 29-20(1), an adjustment that you have is attributable to the tax period in which you become aware of the adjustment.

Your supply of the land is eligible for the margin scheme. You intend to apply the margin scheme and it is likely that the purchasers will agree to apply the margin scheme. However, this is not certain until settlement occurs.

Therefore, you will not be aware of the adjustment for each supply until each lot is settled under the margin scheme. It follows that adjustments will be made as a series of adjustments in proportion to, and in the same tax period as, lot sale settlements occur.

Question 3

As explained in paragraphs 47-49 of GSTR 2006/8, in relation to each supply, consideration for acquisition is the corresponding proportion of the consideration paid for the amalgamated lot now being subdivided (subject to settlement adjustments).