Edited version of your written advice

Authorisation Number: 1012882676831

Date of advice: 6 November 2015

Ruling

Subject: GST and the application of the margin scheme

Question 1

Are you entitled to apply the margin scheme to your supply of developed properties?

Answer

Yes you can apply the margin scheme to your supply of developed properties.

Question 2

If the answer to question 1 is yes, then what percentage of your supply will be subject to the margin scheme?

Answer

You can use any fair and reasonable basis of apportionment to work out the extent of the increasing adjustment applicable. See reasons for decision below.

Relevant facts and circumstances

You are registered for goods and services tax (GST).

You entered into a Contract for the sale of land with Entity A for the purchase of Property 1.

Property 1 comprised of vacant land (safe for facade). The contract stipulated that the sale was a taxable supply to you to which the margin scheme did not apply and that the purchase price was inclusive of the GST amount. You have claimed an input tax credit equivalent to 1/11 of the purchase price in your business activity statement (BAS).

You also entered into a Contract for the sale of land with Entity B for the purchase of Property 2.

Property 2 comprised of a residential premises and the contract stipulated that the house was acquired vacant possession. The contract also stipulated that the sale to you was not a taxable supply as it was an input taxed supply of eligible residential premises.

Property 1 comprises of X square metres and Property 2 comprises of Y square metres. You have received approval to subdivide and develop these two properties into a commercial site and residential apartments spanning both properties and which will be supplied as stratum units.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999:

Subsection 75-5(1)

Subsection 75-5(1A)

Subsection 75-5(2)

Paragraph 75-5(3)(a)

Subsection 75-10(2)

Subsection 75-10(3)

Section 75-11

Subsection 75-22(1)

Section 195-1

Reasons for decision

Under the basic rules, GST is generally calculated on the full value of the real property. However, an entity may be able to choose to calculate the GST payable on its supply of real property by using the margin scheme provided for in Division 75 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

Subsection 75-5(1) of the GST Act states:

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.

(*denotes a term defined in section 195-1 of the GST Act).

Further, subsection 75-5(1A) of the GST Act states:

The agreement must be made:

(a)  on or before the making of the supply; or

(b)  within such further period as the Commissioner allows.

Under the margin scheme, the GST payable on the supply of certain real property is 1/11 of the margin on the supply. Subsection 75-10(2) of the GST Act provides that the margin for the supply is the difference between the consideration for the supply and the consideration for the acquisition of the interest, unit or lease unless subsection 75-10(3) or section 75-11 of the GST Act applies.

However, you will not be able to use the margin scheme if you acquired the entire freehold interest, stratum unit or long term lease through 'a supply that was ineligible for the margin scheme' (Subsection 75-5(2) of the GST Act).

Under paragraph 75-5(3)(a) of the GST Act, 'a supply is ineligible for the margin scheme' if it is a taxable supply to you on which the GST was worked out without applying the margin scheme. That is, you cannot use the margin scheme if when you first purchased the property the sale to you was fully taxable and the margin scheme was not used.

In accordance with the contract of sale, you acquired Property 1 as a taxable supply on which the GST was worked out without applying the margin scheme. Hence the GST was calculated as 1/11 of the purchase price and you have claimed an input tax credit equivalent to this amount in your BAS for the relevant quarter.

Therefore you acquired Property 1 through a supply that was ineligible for the margin scheme.

You can apply the margin scheme to your taxable supply where you purchased the property from someone who sold you existing residential premises. This would apply to Property 2 which you acquired as an input taxed supply of residential premises.

However where two adjoining properties are purchased and undergo a single development, as is in your case, special rules apply.

Goods and Services Tax Ruling Goods and services tax: the margin scheme for supplies of real property acquired on or after 1 July 2000 (GSTR 2006/8) explains how the margin scheme applies in these circumstances.

Relevantly, paragraphs 156 to 166 of GSTR 2006/8 deal with subdivision and stratum units.

Paragraphs 156 to 166 of GSTR 2006/8 provides that where you acquire adjoining properties, one of which was acquired through a supply that is ineligible for the margin scheme, and you then construct stratum units on the properties, then ordinarily some part of the common property will be constructed on land that was acquired through a supply that is:

• eligible for the margin scheme; and

• ineligible for the margin scheme.

In relation to this, paragraph 161 of GSTR 2006/8 states:

161. In these circumstances, all of the stratum units have been partly derived from land that was acquired through a supply that was ineligible for the margin scheme. The supply of these units can be made under the margin scheme as subsection 75-5(2) does not apply. However, because the units were partly acquired through land that was ineligible for the margin scheme you have an increasing adjustment under subsection 75-22(1). The increasing adjustment is the proportionate amount of the input tax credits for the acquisition of the land referable to the supply of each stratum unit.

Example 16 contained in paragraphs 163 to 166 of GSTR 2006/8 illustrates this diagrammatically. Paragraph 165 of GSTR 2006/8 provides that in these instances the margin scheme can apply to the supply of all the stratum units as the entire interest in each of the stratum units, including the common property, was not acquired through a supply that was ineligible for the margin scheme. They are therefore not excluded from the margin scheme by subsection 75-5(2).

Paragraph 166 of GSTR 2006/8 further provides that where the margin scheme is applied to the supply of the stratum units, there is an increasing adjustment under subsection 75-22(1). The increasing adjustment is equal to the proportion of the input tax credit for the acquisition of the land that relates to the stratum unit supplied. You can use any fair and reasonable basis of apportionment to work out the extent of the increasing adjustment applicable to each stratum unit supplied. Paragraphs 58 to 68 of GSTR 2006/8 discuss various apportionment methods and whilst these apportionment methods are discussed in terms of apportioning the purchase price the principle will be equally applicable in this case.