Edited version of your written advice

Authorisation Number: 1013091882060

Date of advice: 22 September 2016

Ruling

Subject: Application of the Division 165 and the margin scheme to supplies of new residential premises

Question

Do the anti-avoidance provisions, Division 165 of the A New Tax System Goods and Services Tax) Act 1999 (the GST Act) apply to your supplies of residential premises under the margin scheme?

Answer

No

Relevant facts and circumstances

Background

• You are a unit trust established in 200X to make opportunistic investments in Australian real estate on behalf of wholesale investors.

• You are part of a GST group and the various entities within your group acquired X assets during the period 200X to 200Y.

• For tax purposes:

• You are a public trading trust that has chosen to form a consolidated group under the Income Tax Assessment Act 1997; and

• You and each of your Sub-Trusts are members of a GST group. You are the representative member of the GST group.

• The assets acquired by your Sub-Trusts were all office and industrial properties (existing or vacant and suitable for industrial use

• In the course of 200X and 200Y, three Sub-Trusts acquired four adjoining parcels of land.

First and second parcel

• The first two parcels were acquired by Trust 1 for $X.00 million. The parcels contained a tenanted office building and were acquired as a going concern for GST purposes.

• Your original intention in respect of these parcels was the re-development of the property into one level of retail space and X levels of 'A' grade office premises.

Third parcel

• This parcel, acquired as a GST-free supply of a going concern for GST purposes, was acquired by Trust 2 in mmyyyy for $X00 million.

• It contained a tenanted office building and was acquired subject to a development approval for a new façade and other relatively minor works.

• Your initial intention was to either proceed with the development contemplated by the development approval or to amalgamate this parcel with another parcel you owned and undertake a larger office and retail development.

Fourth parcel

• This parcel was acquired as a GST-free going concern by Trust 3, in mmyyyy for $X.00 million.

• At the time of acquisition, this parcel contained a tenanted office building.

• Your original intention in respect of this parcel was the expansion of the amalgamated office and retail development for another parcel you owned.

• This parcel had been owned by the vendor from a date prior to 1 July 2000. It had a market value as at 1 July 2000 of $X million.

Acquisition in separate trusts

• The third and fourth Parcels were acquired in separate trusts because:

• it was your practice to acquire all assets in a separate Sub-Trust. There were no Sub-Trusts that held more than one asset (other than Trust 1 which acquired two adjoining properties from the one vendor);

• acquisition of the parcels in separate Sub-Trusts provided maximum flexibility for you, in the event that you did not receive development approval for the amalgamated development and were required to deal with each parcel individually; and

• at least in the case of one acquisition as a stand-alone development allowed the transaction to proceed within the existing investment parameters of the trust (i.e., that the equity invested in each asset be no more than 20% of the total equity for the trust).

Margin Scheme

• At the time of acquisition of the Parcels, you did not consider whether:

• any of the parcels were eligible for the margin scheme; or

• if so, what the "margin scheme cost base" (MSCB) would be.

• Since your intention at this time was an office and retail development, the margin scheme was not relevant to your GST position.

Timeline

• You continued to progress the amalgamated office and retail development between 200X and 200Y. However, by 200Z the growing market for CBD residential property prompted you to reconsider the future of some of the Parcels.

• You contend that you only first considered the possibility of developing residential lots at the relevant Parcels from mmyyyy.

• You further contend that this demonstrates that you only began considering this option after the time that all of the relevant Parcels had been acquired by your sub-trusts.

• Over the course of 200X and 200Y, a mixed office, retail and residential development for the Parcels became the preferred proposal for that site.

• In mmyyyy, you received development approval for the mixed office, retail and residential development.

• The development approval does not specify the entity in which the parcels must be consolidated.

• The final development of the Parcels is anticipated to consist of approximately X0% residential lots, by value.

• Trust 1, Trust 2 and Trust 3 have entered into "Off the plan" contracts for the sale of the future residential lots.

• Trust 1, Trust 2 and Trust 3 will apply the margin scheme to the supplies of these residential lots.

• In order to comply with the Occupancy Condition, it is proposed that Trust 2 and Trust 3 will transfer their parcels to Trust 1. Trust 1 has been selected as the owner of the "Consolidated Parcel" because:

• it holds the most number of lots; and

• it owns the most valuable lots.

• The transfers of the Parcels to Trust 1 (the intra-group transfers):

• will be disregarded for income tax purposes, as it will occur within a tax consolidated group;

• will not be taxable supplies for GST purposes, as they will occur within a GST group; and

• are expected to qualify for stamp duty corporate reconstruction relief.

• Appendix 'H', included with your ruling request, provides a feasibility study prepared by you, calculating the projected revenue and costs of undertaking the development.

• This feasibility study calculates the projected GST payable in respect of revenue derived from the development without any knowledge of, or reference to, the potential up-lift in the MSCB. It concluded that the development was sufficiently profitable to proceed, even without factoring in the GST benefit.

• In mmyyyy, you requested an Advisor to provide you with tax advice in relation to the proposed intra-group transfers.

• You had already determined to consolidate the Parcels in Trust 1 prior to seeking this advice, and it was only in preparing their advice letter to you that the potential GST benefit arising from the proposed transfers to Trust 1 was first identified and communicated to you.

Relevant legislative provisions

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

A New Tax System (Goods and Services Tax) Act 1999 Division 165.

Reasons for decision

In this reasoning, unless otherwise stated,

• all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)

• all reference materials referred to are available on the Australian Taxation Office (ATO) website www.ato.gov.au

• all legislative terms of the GST Act marked with an asterisk are defined in section 195-1 of the GST Act

Issue 1

Do the anti-avoidance provisions, Division 165 of the GST Act apply to your supplies of residential premises under the margin scheme?

Summary

The Commissioner considers that given the unique factual circumstances outlined in your ruling request, the dominant purpose or principal effect of the scheme could not be said to be the obtaining of any GST benefit.

Detailed reasoning

Division 165 operates if

(a) an entity (the avoider) gets or got a GST benefit from a scheme; and

(b) the GST benefit is not attributable to the making, by any entity, of a choice, election, application or agreement that is expressly provided for by the GST law, the wine tax law or the luxury car tax law; and

(c) taking account of the matters described in section 165-15, it is reasonable to conclude that either:

(i) an entity that (whether alone or with others) entered into or carried out the scheme, or part of the scheme, did so with the sole or dominant purpose of that entity or another entity getting a GST benefit from the scheme; or

(ii) the principal effect of the scheme, or of part of the scheme, is that the avoider gets the GST benefit from the scheme directly or indirectly; and

(d) the scheme:

(i) is a scheme that has been or is entered into on or after 2 December 1998; or

(ii) is a scheme that has been or is carried out or commenced on or after that day (other than a scheme that was entered into before that day).

Subsection 165-1 (2) provides that it does not matter whether the scheme, or any part of the scheme, was entered into or carried out inside or outside Australia.

Subsection 165-1 (3) provides that a GST benefit that the avoider gets or got from a scheme is not taken, for the purposes of paragraph (1)(b), to be attributable to a choice, election, application or agreement of a kind referred to in that paragraph if:

(a) the scheme, or part of the scheme, was entered into or carried out for the sole or dominant purpose of creating a circumstance or state of affairs; and

(b) the existence of the circumstance or state of affairs is necessary to enable the choice, election, application or agreement to be made.

In summary for Division 165 of the GST Act to apply, the following four elements are required:

• One or more of the steps in the arrangement is a 'scheme';

• An entity (the avoider) gets a GST benefit from the scheme;

• The GST benefit is not attributable to the making of a choice, election, application or agreement that is expressly provided for by the GST law; and

• It is reasonable to conclude, taking account of the twelve matters in subsection 165-15(1) that either an entity entered into the scheme with the sole or dominant purpose of getting a GST benefit from the scheme, or the principal effect of the scheme is that the avoider gets a GST benefit from the scheme.

Scheme

Subsection 165-10(2) exhaustively defines a "scheme" as:

(a) any arrangement, agreement, understanding, promise or undertaking:

(i) whether it is expressed or implied; and

(ii) whether or not it is, or is intended to be, enforceable by legal proceedings;

or

(a) any scheme plan, proposal, action, course of action or course of conduct, whether unilateral or otherwise.

We consider that the scheme would, in general terms, consist of a number of steps whereby Parcels were acquire, held and then transferred within the group:

Counterfactuals

The determination of whether a GST benefit can be identified in connection with the scheme requires a comparison between the GST position under the scheme and the GST position under the counterfactual.

You have submitted that any potential counterfactual(s) are limited due to the occupancy condition requiring the ownership of the Parcels to be consolidated. As a result of the necessity to adhere to the occupancy condition, you consider that there are only two potential counterfactuals:

1. The transfer by each Sub-Trust of a proportional interest in their respective lots to the other Sub-Trusts, so that the Sub-Trusts own the Parcels as tenants-in-common; or

2. The transfer of the Parcels into either Trust 2 or Trust 3.

You consider that there are no commercial justifications supporting either of the counterfactuals, and that you do not obtain a tax benefit, as is not reasonable to expect that any of these counterfactuals would have occurred, but for the actual transaction.

GST Benefit

You contend that the intra-group transfers of the parcels will not affect Trust 1's ability to apply the margin scheme in respect of the supply of residential lots as:

• Trust 1 is already eligible to apply the margin scheme in respect the transferred parcels;

• Trust 1 will acquire the additional titles as non- taxable supplies; and

• Pursuant to paragraph 75-5(3)(c) of the GST Act, the members of the GST group are nonetheless entitled to apply the margin scheme.

We advise that any increase in the MSCB as a result of the intra-group transfers of the parcels potentially results in a GST benefit for you pursuant to paragraph 165-10(1)(a) of the GST Act which provides that a GST benefit includes;

'an amount that is payable by the entity under this Act apart from this Division is, or could reasonably be expected to be, smaller than it would be apart from the scheme or a part of the scheme'.

The exclusion

We consider that any GST benefit obtained from the scheme would not be attributable to the making, by any entity, of a choice, election, application or agreement that is expressly provided for by the GST law. The benefit would be attributable to the sequence of steps that make up the relevant scheme.

Conclusion

Division 165 must be considered on a case by case basis to determine whether it would be concluded that the dominant purpose or principal effect of the scheme would be to get a GST benefit. This requires an objective assessment of the scheme against the twelve matters set out in subsection 165-15(1). You have provided significant commercial imperatives in support of the scheme, which include, but are not limited to, the following:

• Your sub-trusts each acquired their respective parcels with the intention of undertaking the development of commercial premises;

• The decision to undertake a residential development was made in 200X, which was subsequent to the acquisition of all the parcels;

• The rationale for the consolidation of the parcels within Trust 1, rather than any of the other Trusts;

• The expected financial returns emanating from the decision to undertake a residential development; and

• Your ignorance of the potential GST benefit emanating from the intra-group transfers until your Advisor identified it in preparing their advice letter to you in mmyyyy, after you had already determined to consolidate the Parcels in Trust 1.

The material provided in support of your ruling request indicates that there are significant commercial reasons for the intra-group transfers of the parcels. The Commissioner considers that given the unique factual circumstances outlined in your ruling request, the dominant purpose or principal effect of the scheme could not be said to be the obtaining of any GST benefit.