Edited version of your written advice

Authorisation Number: 1012898335383

Date of advice: 22 October 2015

Ruling

Subject: GST and the purchase of property

Question 1

Is Entity C entitled to an input tax credit in respect of the purchase of the Property from the Entity B Fund (the Vendor).

Answer

No.

Question 2

How is your GST liability calculated on the sale of new residential premises to a new purchaser where:

i. The Vendor and you agree in writing that the sale of the property is a GST-free supply of a going concern; and

ii. You develop the property into new residential premises; and

iii. The subsequent supply of new residential property by you to a "new purchaser" is a supply made under the margin scheme. An agreement is made in writing prior to settlement that the margin scheme is to apply.

Answer

The margin for the supply of new residential premises by you is the amount by which the consideration for the supply exceeds an approved valuation on the interest in the property at 1 July 2000.

Question 3

How is your GST liability calculated on the sale of new residential premises to a new purchaser where:

i. The Vendor and you do not agree in writing that the sale of the property is a GST-free supply of a going concern nor do they agree that it is a supply made under the margin scheme; and

ii. You develop the property into new residential premises; and

iii. The subsequent supply of new residential property by you to a "new purchaser" is made (noting the margin scheme is not available because you acquired the property as a taxable supply).

Answer

The sale of new residential premises by you will be ineligible for the margin scheme and GST on the supply of the residential premises will be calculated pursuant to section 9-70.

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

Entity A as trustee for the Entity B Fund acquired the commercial Property in xxyyyy.

The transfer of title to the land was registered on xxyyyy.

The Entity B Fund is registered for GST and has been registered since 1 July 2000.

The Property has been leased since 1 July 2000 and GST has been charged on the lease.

An independent market valuation for the property as at 1 July 2000 has been obtained. The valuation was performed on xxyyyy. The market value at 1 July 2000 was assessed by the Independent Valuer as $X.

On xxyyyy, the Entity B Fund entered into a contract with Entity C to sell the property.

Entity C (you) is registered for GST.

On xxyyyy, the Entity B Fund entered into a Deed of Variation of Contract.

The Deed of Variation of Contract details changes to the original contact including the following stated in Clause X.X:

• The Price is $X

• Completion date is xxyyyy

• The sale is the supply of a going concern under section 38-325 of the GST Act.

• The supply of the property is subject to the current lease to Entity D which expires in xxyyyy.

Clause X.X of the Deed of Variation of Contract states that the sale of the property is subject to the current lease to Entity D.

Subsequent development and sale of new residential premises by Entity C:

In subsequent years, you intend to develop the property into new residential premises.

You intend to sell the new residential premises once developed (the premises are not intended to be used by you for deriving rental income, but will be actively marketed for sale)

The following clauses pertaining to documents supplied are relevant for the purposes of this ruling:

Contract for sale of Land between Entity A and Entity C

Attached to the Contract is the Lease between Entity A and Entity D dated xxyyyy and the Reference Schedule detailing the rent and related matters at Items 1 to 11.

Deed of variation of contract

Clause X.X The vendor and Purchaser agree to vary the Contract as follows:

a. Front page of the Contract under Tax Information, GST: taxable supply unmark "yes in full" and mark "No" and mark the box "GST-free because the sale is a supply of a going concern under section 38-325.

…

j. Add additional clause 47 as follows:

"47 GST Private Ruling

47.1 The purchaser will promptly at the purchaser's expense apply to the Commissioner for a GST private Ruling to confirm the value of the concession to the Purchaser by having the sale of the property from the Vendor to the Purchaser being treated as a GST-free supply as opposed to a taxable supply applying the ordinary method. For clarity, the concession referred to in this clause is the GST saving to the Purchaser in being able to use the margin method (instead of the ordinary method) in its sale of residential home units after the site has been developed.

m. Add additional clause 44.4 as follows:

44.4 Notwithstanding any other provision of this Contract, the sale of the Property is subject to the current lease to Entity D which expires on xxyyyy, a copy of which is annexed hereto (and it is noted that the previous lease to Entity D expired on xxyyyy)

Clause X.X Subject to Lease

Notwithstanding any other provision of the Contract, the sale of the Property is subject to the current lease to Entity D which expires on xxyyyy, a copy of which is annexed to this Deed.

Attachment - Lease Details

Lessor Entity A

Lessee Entity D

Commencement Date xxyyyy

Termination Date xxyyyy

Reference Schedule Item 1 to Item 11

Further information

• X is a member of the Australian Property Institute and is accredited as a Certified Practising Valuer.

• X provided the following documentation:

• a letter confirming that he is an Associate Member of the Australian Property Institute and accredited as a Certified Practising Valuer as required under paragraph 130 of GSTR 2006/8.

• Certificate of Registration from the Office of Fair Trading NSW confirming registration under the provisions of the Valuers Act 2003

• Certificate of Compliance from the Australian Property Institute.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Section 38-325 and

A New Tax System (Goods and Services Tax) Act 1999 Division 75.

Reasons for decision

Question 1

Is Entity C entitled to an input tax credit in respect of its purchase of the Property from the Entity B Fund (the Vendor).

Entity C (You) are entitled to input tax credits in respect of any creditable acquisition that you make.

Creditable acquisition is defined in section 11-5 and states:

You make a creditable acquisition if:

(a) you acquire anything solely or partly for a *creditable purpose; and

(b) the supply of the thing to you is a *taxable supply; and

(c) you provide, or are liable to provide, * consideration for the supply; and

(d) you are *registered, or *required to be registered.

In your case, you have acquired the property for a creditable purpose (as defined), you have provided consideration for the purchase and you are registered for GST.

The only remaining requirement is that the supply of the property to you is a taxable supply.

Section 9-5 provides that a supply is not a taxable supply to the extent that it is GST-free or input taxed.

Pursuant to clause X.X of the Deed of Variation of the Sale Contract (Deed of Variation), entered into between Entity A as trustee for the Entity B Fund (the Vendor) and Entity C (the Purchaser), the Vendor and the Purchaser have agreed that the sale of the property is a supply of a going concern under section 38-325.

Subsection 38-325(2) defines the supply of a going concern for GST purposes as a supply under an arrangement which:

(a) the supplier supplies to the recipient all of the things that are necessary for the continued operation of an enterprise; and

(b) the supplier carries on, or will carry on, the enterprise until the day of the supply.

Goods and Services Tax Ruling GSTR 2002/5 Goods and services tax: when is a 'supply of a going concern' GST-free? (GSTR 2002/5) provides guidance on the operation of section 38-325 of the GST Act. The principles outlined in GSTR 2002/5 have been applied in this case.

The conditions in paragraphs 38-325(2)(a) and (b) must be satisfied in relation to an 'identified enterprise'.

Enterprise

The term 'enterprise' is defined in section 9-20 and includes an activity, or series of activities, done in the form of a business or in the form of an adventure or concern in the nature of trade. This is the enterprise for which the supplier must supply all things that are necessary for its continued operation. Also, the supplier must carry on this enterprise until the day of the supply.

The property is a double storey building comprising an open span area and office areas on the lower level and an open plan office on the upper level. It is currently leased to Entity D until xxyyyy.

Consequently, the Vendor is conducting an enterprise of property leasing in relation to the Property.

Things that the supplier can supply

Paragraph 38-325(2)(a) requires that the supplier supplies to the recipient all of the things that are necessary for the continued operation of the enterprise. The recipient must be put in a position on the day of the supply where it can, if it so chooses, continue to operate that enterprise.

Two elements are essential for the continued operation of an enterprise:

• The assets necessary for the continued operation of the enterprise including where appropriate, premises, plant and equipment, stock-in-trade and intangible assets such as goodwill, contracts, licences and quotas; and

• The operating structure and process of the enterprise consisting of the commercial or economic activity relevant to the type of enterprise being conducted, for example, ongoing advertising and promotion.

In this case, the Vendor will be supplying the Property. In addition, pursuant to clause X.X of the Deed of Variation, the Vendor is supplying the property subject to the current lease to Entity D, thereby providing all things necessary to the purchaser for the purpose of undertaking the commercial leasing enterprise.

Supplier carries on the enterprise until the day of the supply

The supply of everything necessary for the continued operation of an enterprise will only be a 'supply of a going concern' where the enterprise is carried on by the supplier until the day of the supply. All of the activities of the enterprise must be active and operating on the day of the supply. The activities must be capable of continuing after the transfer to new ownership.

In this case, the Vendor's commercial leasing enterprise is ongoing at the date of completion of the sale, being xxyyyy. Consequently, paragraph 38-325(2)(b) is satisfied.

As such, the sale of the Property is considered to be a supply of a going concern for the purposes of the GST legislation. The supply of a going concern will be GST-free under subsection 38-325(1) of the GST Act where all of the following criteria are met:

• the supply is for consideration;

• the recipient is registered for GST; and

• the supplier and the recipient agree in writing that the supply is of a going concern.

In this case, the supply is for consideration, the Purchaser is registered for GST and both the Vendor and the Purchaser have agreed in writing that the supply is of a going concern. Therefore, the supply of the Property by the Vendor to the Purchaser will be a GST-free supply.

Consequently, paragraph 11-5(b) is not satisfied and you have not made a creditable acquisition as the supply by the Vendor to you is not a taxable supply but a GST-free supply of a going concern. You are therefore not entitled to input tax credits.

Question 2

How is Entity C's GST liability calculated on the sale of new residential premises to a new purchaser where:

i. The Entity B Fund and Entity C agree in writing that the sale of the property is a GST-free supply of a going concern; and

ii. Entity C develops the property into new residential premises; and

iii. The subsequent supply of new residential property by Entity C to a "new purchaser" is a supply made under the margin scheme. An agreement is made in writing prior to settlement that the margin scheme is to apply.

Under subsection 75-5(1), you may apply the margin scheme if you and the recipient have agreed in writing that the margin scheme is to apply and you make a taxable supply of real property by:

(a) selling a freehold interest in land;

(b) selling a stratum unit; or

(c) granting or selling a long-term lease,

The margin for the supply is the amount by which the consideration for the supply exceeds the consideration for the acquisition of the real property unless subsection 75-10(3) or section 75-11 applies. Section 75-11 applies to supplies made on or after 17 March 2005.

In your case, you will make a taxable supply of real property by selling a freehold interest in new residential premises. Furthermore, an agreement will be made in writing between you and the purchaser of new residential premises (prior to settlement) that the margin scheme is to apply.

Consequently, you can apply the margin scheme to the supply of new residential premises that you make unless subsection 75-5(3) applies to your circumstances. Of relevance in your case is paragraph 75-5(3)(e). This paragraph states:

(3) A supply is ineligible for the margin scheme if:

(e) it is a supply in relation to which all of the following apply:

(i) you acquired the interest, unit or lease from an entity as, or as part of, a *supply of a going concern to you that was * GST-free under Subdivision 38-J;

(ii) the entity was * registered or * required to be registered at the time of the acquisition;

(i) the entity had acquired the entire interest, unit or lease through a taxable supply on which the GST was worked out without applying the margin scheme;

You will acquire the interest in the property as a going concern pursuant to Question 1. The Entity B Fund is registered for GST. Entity A as trustee for the Entity B Fund acquired the property in yyyy and was the owner of the land at 1 July 2000 prior to the introduction of GST. Consequently, subparagraph 75-5(3)(e)(iii) is not met and therefore paragraph 75-5(3)(e) does not apply to make a supply by you, of new residential premises, ineligible for the margin scheme.

How is the margin for a supply calculated?

Under subsection 75-10(2), the margin for the supply is the amount by which the consideration for the supply exceeds the consideration for the acquisition of the real property.

Section 75-11 discusses margins for supplies of real property in particular circumstances. Subsection 75-11(5) is relevant in your case and states:

Margin for supply of real property acquired as a GST-free going concern or as GST-free farm land

(5) If:

(a) you acquired the interest, unit or lease in question from an entity as, or as part of:

(i) a *supply of a going concern to you that was *GST-free under Subdivision 38-J; or

(ii) a supply to you that was GST-free under Subdivision 38-O; and

(b) the entity was *registered or *required to be registered, at the time of the acquisition; and

(c) none of subsections (1) to (4) applies;

the margin for the supply you make is the amount by which the *consideration for the supply exceeds:

(d) if that entity had acquired the interest, unit or lease before 1 July 2000 and on that day was registered or required to be registered:

(i) if you choose to apply an *approved valuation to work out the margin for the supply - an approved valuation of the interest, unit or lease as at 1 July 2000;or

(ii) if subparagraph (i) does not apply - the *GST inclusive market value of the interest, unit or lease as at 1 July 2000; or

(e) …

(f) …

In your case, we have determined under Question 1 that you will acquire the interest in the property from the Vendor as a supply of a going concern. The Vendor was registered at the time of your acquisition of the property and none of subsections 75-11(1) to 75-11(4) applies. Consequently, paragraph 75-11(5)(d) is applicable in your case.

The vendor acquired the property in xxyyyy and was registered for GST from 1 July 2000. You have chosen to obtain a valuation of the property at 1 July 2000 from X of Real Estate Pty Ltd.

Section 75-35 applies to supplies made on or after 17 March 2005. It provides that the Commissioner may by legislative instrument 'determine in writing requirements for making valuations' for the purposes of the margin scheme. Section 75-35(2) states further that a valuation made in accordance with those requirements is an approved valuation.

Determination MSV 2005/3 specifies the requirements for making valuations for calculating the margin for taxable supplies of real property on or after 1 December 2005 for the purposes of Division 75.

Question 3

How is Entity C's GST liability calculated on the sale of new residential premises to a new purchaser where:

i. The Entity B Fund and Entity C do not agree in writing that the sale of the property is a GST-free going concern nor do they agree that it is a supply made under the margin scheme) and

ii. Entity C develops the property into new residential premises ; and

iii. The subsequent supply of new residential property by Entity C to a "new purchaser" is made (noting the margin scheme is not available because Entity C acquired the property as a taxable supply).

Where the Vendor and the Purchaser have agreed that the sale of the Property is a taxable supply to which the margin scheme does not apply, the subsequent sale of new residential premises by the purchaser will be ineligible for the margin scheme pursuant to subparagraph 75-5(3)(a). Consequently, the GST on the supply of the new residential premises will calculated pursuant to section 9-70.