Edited version of your written advice

Authorisation Number: 1012988387573

Date of advice: 4 April 2016

Ruling

Subject: GST and valuation date for use of the margin scheme

Question

As of what date should the valuation of the property be made for GST Margin Scheme purposes?

Answer

The margin scheme applies in working out the amount of GST on a taxable supply of real property that an entity makes. Where a supply is not taxable an entity cannot use the margin scheme.

According to the facts of this case your supply of real property will not be taxable; consequently the margin scheme will not be available to you.

Relevant facts and circumstances

You purchased a rental property (house) prior to 2000.

The property has been rented out from that day onwards and has never been your personal private residence.

You began thinking of selling the property some years ago and after some research realised that you would probably get a higher value if the property was sold with a planning permit.

You put in the Town Planning Application and the plans were approved by Council.

You finally had the go ahead to try and sell the property as it was along with an approved planning permit.

While you were speaking with agents you came to the conclusion that based on the current property prices you would keep the property and pay to get the property developed yourself.

The old house was demolished and you started building numerous units on the land; each with its own title.

The construction of the units is almost completed. You intend to start renting the units out.

To date you have made no supply in relation to the development.

You plan on keeping the units as rental properties. If you are unable to maintain the level of debt then you will have to start selling them after a period of renting, until you reach a debt level you can maintain. You will then keep the remaining properties as rentals.

If you have to sell any units in the future you will use a real estate agent and use what is the best method to sell at the time. You will not try to sell them yourself.

You are not currently registered for GST.

You currently do not carry on and do not intend to carry on any other enterprise apart from the leasing of the residential units.

Relevant legislative provisions

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

section 9-20; section 188-25; and subsection 75-10(3).

Reasons for decision

The term 'enterprise' is defined in section 9-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) to include, among other things, an activity, or series of activities, done on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property.

You purchased the property prior to 2000 and have rented it from that day onwards. The house was demolished and construction of numerous units is almost completed. Though to date you have made no supply in relation to the development, you intend to start renting the units out soon. Therefore, your intention is to continue your leasing enterprise.

Will you make a taxable supply if you sell one of the units?

Goods and Services Tax Ruling GSTR 2001/7 Goods and services tax: meaning of GST turnover, including the effect of section 188-25 on projected GST turnover deals with the effect of section 188-25 of the GST Act on the calculation of the projected GST turnover. Paragraphs 29-30 of GSTR 2001/7 have been reproduced below:

Supplies to be disregarded under section 188-25

29. Section 188-25 modifies the effect of section 188-20 by excluding certain supplies made when working out your projected GST turnover. Section 188-25 requires you to disregard the following when calculating your projected GST turnover:

(a)   any supply made, or likely to be made, by you by way of transfer of ownership of a capital asset of yours; and

(b)   any supply made, or likely to be made, by you solely as a consequence of:

(i) ceasing to carry on an enterprise; or

(ii) substantially and permanently reducing the size or scale of an enterprise.

30. Your projected GST turnover does not include supplies that fall within the description in either paragraph 188-25(a) or paragraph 188-25(b) listed above. Your supply does not have to satisfy the descriptions in both paragraph (a) and paragraph (b). When you make a supply that is capable of satisfying the description in both paragraphs, the supply is excluded only once. (See example 3 at paragraph 53.)

In relation to 'capital assets', paragraphs 31-36 of GSTR 2001/7 state:

Meaning of 'capital assets'

31. The GST Act does not define the term 'capital assets'. Generally, the term 'capital assets' refers to those assets that make up 'the profit yielding subject' of an enterprise. They are often referred to as 'structural assets' and may be described as 'the business entity, structure or organisation set up or established for the earning of profits'.

32. 'Capital assets' can include tangible assets such as your factory, shop or office, your land on which they stand, fixtures and fittings, plant, furniture, machinery and motor vehicles that are retained by you to produce income. 'Capital assets' can also include intangible assets, such as your goodwill.

33. Capital assets are 'radically different from assets which are turned over and bought and sold in the course of trading operations'. An asset which is acquired and used for resale in the course of carrying on an enterprise (for example, trading stock) is not a 'capital asset' for the purposes of paragraph 188-25(a).

34. 'Capital assets' are to be distinguished from 'revenue assets'. A 'revenue asset' is 'an asset whose realisation is inherent in, or incidental to, the carrying on of a business'.

35. If the means by which you derive income is through the disposal of an asset, the asset will be of a revenue nature rather than a capital asset even if such a disposal is an occasional or one-off transaction…

36. Over the period that an asset is held by an entity, its character may change from capital to revenue or from revenue to capital. For the purposes of section 188-25 the character of an asset must be determined at the time of expected supply.

Miscellaneous Taxation Ruling MT 2006/1The New Tax System: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number provides some guidance on whether an asset is considered as a trade or an investment asset.

Paragraph 247 of MT 2006/1 provides that if the property acquired provides either an income or personal enjoyment to the owner it is more likely to be an investment than a trading asset.

Paragraph 258 of MT 2006/1 provides that assets purchased with the intention of holding them for a reasonable period of time, to be held as income producing assets or to be held for the pleasure or enjoyment of the person, are more likely not to be purchased for trading purposes.

Paragraphs 259 & 261 of MT 2006/1 have been reproduced below:

259. Examples of investment assets are rental properties, business plant and machinery, the family home, family cars and other private assets. The mere disposal of investment assets does not amount to trade.

261. Investment assets such as business plant and machinery are used by entities in carrying on a business. The purchase and disposal of those types of assets is ordinarily considered not to be an adventure or concern in the nature of trade...

You plan on keeping the units as rental properties and your intention is to use them as part of your long term retirement plan. If you are unable to maintain the level of debt then you will have to start selling them after a period of leasing, until you reach a debt level you can maintain. You will then keep the remaining properties as rentals.

We consider that the sale of a unit that has been used for leasing will be the sale of a capital asset. As discussed above, such sale will not form part of your projected GST turnover.

You are currently not registered or required to be registered for GST. As the sale of a unit will be a sale of a capital asset, it will not be part of your projected GST turnover. Consequently, you will not be required to be registered for GST. Therefore, the sale of your capital asset will not be taxable.

Where a supply is not taxable an entity cannot use the margin scheme. Therefore, under the facts provided there is no need to consider the valuation date for the purposes of the margin scheme.