Edited version of your written advice

Authorisation Number: 1012904054566

Date of advice: 2 December 2015

Ruling

Subject: Goods and services tax (GST) and the margin scheme

Question

Can Entity A (you), a council, apply item 4 of the table in subsection 75-10(3) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) in working out the margin for a supply of real property by way of selling a freehold interest in land that was vested in you for no consideration on or after 1 July 2000, but was held by another council (former councils) since before 1 July 2000?

Answer

Yes, provided you and the recipient agree in writing, on or before the making of the supply, that the margin scheme is to apply.

All legislative references are to the GST Act unless otherwise stated.

Section 7-1 provides that GST is payable on taxable supplies. However, special rules in Division 75 allow you to use a margin scheme for your taxable supplies of real property.

Subsection 75-10(3) specifies circumstances in which an approved valuation, made as at a specified date, is to be used in working out the margin for a supply of real property.

In particular, the second column in item 4 of the table in subsection 75-10(3) (Item 4) specifies the following circumstances relating to supplies of real property made by way of selling a freehold interest in land:

• the supplier is the Commonwealth, a State or a Territory, and

• the supplier has held the freehold interest being sold since before 1 July 2000, and

• there were no improvements on the land or premises as at 1 July 2000.

Of particular relevance in your case, in determining if you can apply Item 4, are the requirements that the supplier is 'the Commonwealth, a State or a Territory' and that the freehold interest being sold has been held since 1 July 2000.

Goods and Services Tax Ruling GSTR 2006/5 provides relevant guidance about the meaning of 'Commonwealth, a State or a Territory' and explains at paragraph 13 that local governments may be a State. The principles developed by the High Court of Australia in cases concerning corporations and the meaning of 'a State' in section 114 of the Australian Constitution, as described at paragraphs 8 to 12 of GSTR 2006/5, are also considered to apply in determining whether a particular local government is a 'State' for the purposes of the GST Act.

Paragraph 11 of GSTR 2006/5 discusses the fundamental principle that, if the corporation is discharging governmental functions as an instrument of the State - that is, the State is carrying on the relevant business or other function through the corporation - the corporation is the State. Paragraph 12 lists principles to be considered in determining if a corporation is to be characterised as being the State and discusses:

• ownership and management

• the purposes the corporation is required to pursue, and

• provision that the corporation must pursue the interests of the State or the public.

Further, paragraph 15 explains that the power delegated to a council by State legislation, which allows the council to levy rates, may be a determinative factor in deciding that a council is the 'State' for the purposes of section 114 of the Constitution.

In your case, you were established pursuant to State legislation as a body corporate. Therefore, consistent with the guidance provided in GSTR 2006/5, it is accepted that you are 'a State' for the purposes of the GST Act.

In examining if you have held the freehold interests being sold since before 1 July 2000, Goods and Services Tax Determination GSTD 2006/4 provides relevant guidance about whether Item 4 applies if real property was vested for no consideration in a government department or agency on or after 1 July 2000 but was held by another department or agency of the Commonwealth or the same State or Territory since before 1 July 2000.

Paragraphs 3 to 6 of GSTD 2006/4 explain that the property is considered to have been held for the entire period for the purposes of the margin scheme and state:

3. In some circumstances, real property that was acquired by one government department or agency is vested in another government department or agency. This may occur as part of a transfer of departmental responsibilities.

4. In item 4, the words 'Commonwealth', 'a State' or 'a Territory' are not limited to a specific government entity but encompass all the departments and agencies that fall within the ambit of the term.

5. This means that where real property is held before 1 July 2000 by a government department or agency and on or after 1 July 2000 that property is vested in another department or agency that is part of the Commonwealth or the same State or Territory, the real property has been held by the 'Commonwealth, a State or a Territory' for the entire period.

6. This is consistent with paragraph 6.108 of the Explanatory Memorandum to the A New Tax System (Goods and Services Tax) Bill 1998. That paragraph confirms that, where the Commonwealth, a State or a Territory holds unimproved land at 1 July 2000 which is subsequently improved and sold, GST is to be payable under the margin scheme on the difference between the selling price and the unimproved value of the land at the date of sale.

In your circumstances, the land previously owned by the former councils was vested in you under State legislation when you were established to replace the former councils.

As discussed above, it is accepted that you are 'a State' for the purposes of the GST Act. Consistent with the principles contained in the guidance in GSTD 2006/4, it is considered that the land has been held by the same State and treated as having been held by you for the entire period since before 1 July 2000.

In relation to the last circumstance specified in Item 4, the facts state that there were no improvements on the land or premises as at 1 July 2000.

Accordingly, as all of the requirements of Item 4 have been satisfied, you can apply Item 4 in working out the margin for a supply of real property by way of selling a freehold interest in land that was vested in you for no consideration on or after 1 July 2000, but was held by former councils. since before 1 July 2000.

Note: There are other requirements which must be satisfied, in addition to those in Item 4, before you can apply the margin scheme. For example, under section 75-5, you and the recipient must agree in writing, on or before the making of the supply that the margin scheme is to apply.

Relevant facts and circumstances

You are registered for GST.

You were established under State legislation as a body corporate to replace the former councils.

Upon being established, you became the owner of freehold interests in land previously owned by the former councils.

You accounted for the land at the book values recorded in the accounting records of the former councils.

The former councils held the land since before 1 July 2000.

Relevant legislative provisions

Australian Constitution section 114

References to the GST Act:

• section 7-1

• Division 75

• section 75-5

• subsection 75-10(3).