Edited version of your written advice

Authorisation Number: 1013139294904

Date of advice: 16 December 2016

Ruling

Subject: Application of the margin scheme

Question

Is the supply of a Property by the Taxpayer to the Purchaser a supply that is 'ineligible for the margin scheme' as defined in section 195-1 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No.

Relevant facts and circumstances

The Taxpayer is registered for GST. In 20XX the Taxpayer purchased the Property which comprised a number of serviced apartments which were leased on a short term basis.

The supply of the Property to the Taxpayer was a GST-free supply of a going concern and the Taxpayer did not claim any input tax credits.

The Taxpayer and the previous owner of the Property were not members of the same GST group. The Taxpayer did not acquire the Property from a joint venture operator of a joint venture at a time when the Taxpayer was a participant in the joint venture.

Following the purchase of the Property the Taxpayer demolished the serviced apartments with a view to developing the Property into new residential units. To that end the Taxpayer obtained approval of a Development Application from the local Council and a Construction Certificate.

Due to a cash flow shortage and depreciation of property prices in the vicinity of the Property the Taxpayer decided not to proceed with construction of the residential units.

Instead the Taxpayer intends to sell the Property to an unrelated property developer (Purchaser). It is anticipated that the Taxpayer and the Purchaser will agree in writing that the margin scheme is to apply to the sale of the Property by the Taxpayer to the Purchaser.

In response to a request for further information from the ATO the Taxpayer advised that the Taxpayer entered into the contract to purchase the Property in 20XX, that settlement of that purchase occurred in 20XX and that no option to purchase the Property was granted to or exercised by the Taxpayer prior to entering into the contract.

Relevant legislative provisions

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

section 75-5

subsection 75-5(1)

subsection 75-5(1A)

subsection 75-5(2)

subsection 75-5(3)

subsection 75-5(4)

Section 195-1

Reasons for decision

Summary

All legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) unless otherwise stated.

As neither paragraphs (a) to (g) of subsection 75-5(3) nor subsection 75-5(4) apply, the Taxpayer did not acquire the Property through a supply that was ineligible for the margin scheme and the Taxpayer may apply the margin scheme to the sale of the Property by the Taxpayer provided the Taxpayer complies with subsections 75-5(1) and 75-5(1A).

Detailed reasoning

Subsection 75-5(1) provides that the margin scheme applies in working out the amount of GST on a taxable supply of real property made by selling a freehold interest in land if the supplier and the recipient of the supply have agreed in writing that the margin scheme is to apply.

In the present case the Taxpayer intends to make a taxable supply of the freehold interest in the Property and to enter into a written agreement with the Purchaser that the margin scheme is to apply.

However subsection 75-5(2) provides that the margin scheme does not apply to the supply of the freehold interest in the Property by the Taxpayer if the Taxpayer acquired the freehold interest through a supply that was 'ineligible for the margin scheme'.

Section 195-1 provides that 'ineligible for the margin scheme' has the meaning given by subsections 75-5(3) and (4).

Paragraphs 75-5(3)(a) to (d):

Section 3 and Item 11 of Schedule 6 to the Tax Laws Amendment (2005 Measures No 2) Act 2005 (2005 Amendment Act) repealed the former subsection 75-5(2) and substituted subsections 75-5(2), (3) and (4) as follows:

(2) However, the * margin scheme does not apply if you acquired the entire freehold interest, * stratum unit or * long-term lease through a supply that was * ineligible for the margin scheme.

Note: If you acquired part of the interest, unit or lease through a supply that was ineligible for the margin scheme, you may have an increasing adjustment: see section 75-22.

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

(a) it is a * taxable supply on which the GST was worked out without applying the * margin scheme; or

(b) it is a supply of a thing you acquired by * inheriting it from a deceased person, and the deceased person had acquired all of it through a supply that was ineligible for the margin scheme; or

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

(i) you were a * member of a * GST group at the time you acquired the interest, unit or lease in question;

(ii) the entity from whom you acquired it was a member of the GST group at that time;

(iii) the last supply of the interest, unit or lease by an entity who was not (at the time of that supply) a member of the GST group to an entity who was (at that time) such a member was a supply that was ineligible for the margin scheme; or

(d) it is a supply in relation to which both of the following apply:

(i) you acquired the interest, unit or lease from the * joint venture operator of a * GST joint venture at a time when you were a * participant in the joint venture;

(ii) the joint venture operator had acquired the interest, unit or lease through a supply that was ineligible for the margin scheme.

(4) A reference in paragraph (3)(b), (c) or (d) to a supply that was ineligible for the margin scheme is a reference to a supply:

(a) that was ineligible for the margin scheme because of one or more previous applications of subsection (3); or

(b) that would have been ineligible for the margin scheme for that reason if subsection (3) had been in force at all relevant times.

Item 28 in Schedule 6 to the 2005 Amendment Act provides that the amendments made by Schedule 6 (other than Items 3 to 7, 9 and 10) apply in relation to supplies made on or after the day the Bill for the 2005 Amendment Act was introduced into the Parliament (i.e. 17 March 2005). Paragraph 29 of Goods and Services Tax Ruling GSTR 2006/8 (GSTR 2006/8) confirms (footnote 16) that the former subsection 75-5(2) applies to supplies made before 17 March 2005 (which implies that the amendments to section 75-5 made by the 2005 Amendment Act apply to supplies made on or after 17 March 2005).

Paragraph 38 of GSTR 2006/8 provides that for the sale of a freehold interest the supply and acquisition is made at settlement as that is when the purchaser (or the purchaser's agent) obtains unconditional possession of a registrable instrument of transferor an instrument of transfer that would be registrable once stamped). In the present case the supply of the Property to the Taxpayer was made pursuant to a contract entered into in 20XX which was settled in 20XX. Consequently the supply of the Property to the Taxpayer was made after 17 March 2005 and subsection 75-5(2) and paragraphs 75-5(3)(a) to (d) as inserted by the 2005 Amendment Act apply to the Taxpayer.

Paragraph 75-5(3)(a):

The test in paragraph 75-5(3)(a) is similar to the test in the former subsection 75-5(2) before it was repealed and replaced by the 2005 Amendment Act, i.e. whether the Taxpayer acquired the freehold interest in the Property through a supply that was a taxable supply on which the GST was worked out without applying the margin scheme. Paragraph 29 of GSTR 2006/8 explains the operation of the test in the former subsection 75-5(2):

29. Under the subsection 75-5(2), prior to its amendment, you could not apply the margin scheme if you acquired the real property through a taxable supply and the GST on the supply was not calculated under the margin scheme. The effect of the former subsection 75-5(2) was that the margin scheme could only apply if the supply of the real property that you acquired was:

● from an entity that applied the margin scheme on the supply to you; or

● not a taxable supply. For example, supplies that are GST-free or input taxed, or from an entity that was not registered or required to be registered for GST purposes.

In the present case the supply of the Property to the Taxpayer was not a taxable supply because it was a GST-free supply of a going concern. Consequently paragraph 75-5(3)(a) does not deem the Taxpayer to have acquired the Property through a supply that was ineligible for the margin scheme.

Paragraph 75-5(3)(b):

Paragraph 75-5(3)(b) ensures that the margin scheme is available in respect of a taxable supply of real property which was acquired by way of inheritance from a deceased person only if the deceased person would have been able to apply the margin scheme to a supply of the real property.

As the Taxpayer did not inherit the Property from a deceased person, paragraph 75-5(3)(b) does not apply to the acquisition of the Property by the Taxpayer and therefore does not deem the Taxpayer to have acquired the Property through a supply that was ineligible for the margin scheme

Paragraph 75-5(3)(c):

Paragraph 75-5(3)(c) ensures that the margin scheme is only available to a member of a GST group if the original acquiring member of the GST group could have used the margin scheme in relation to a supply of the real property to an entity outside the GST group.

It was stated in the ruling request that the Taxpayer and the entity which sold the Property to the Taxpayer were not members of the same GST group. On that basis paragraph 75-5(3)(c) does not deem the Taxpayer to have acquired the Property through a supply that was ineligible for the margin scheme.

Paragraph 75-5(3)(d):

It was stated in the ruling request that the Taxpayer did not acquire the Property from a joint venture operator of a joint venture at a time when the Taxpayer was a participant in that joint venture. On that basis paragraph 75-5(3)(d) does not deem the Taxpayer to have acquired the Property through a supply that was ineligible for the margin scheme.

Paragraphs 75-5(3)(e) to (g):

Paragraphs 75-5(3)(e) to (g) were inserted by section 3 and Item 2 in Schedule 1 to the Tax Laws Amendment (2008 Measures No. 5) Act 2008 (2008 Amendment Act).

Paragraph (1) in Item 13 in Schedule 1 to the 2008 Amendment Act (Item 13) states:

(1) The amendments made by items 1 to 10 and 12 of this Schedule apply in relation to supplies that are supplies of things that the supplier acquired through a new supply to the supplier.

Paragraph (4) of Item 13 states:

(4) In this item:

new supply means a supply that:

(a) is made on or after the commencement of this Schedule; and

(b) is not made:

(i) under a written agreement entered into before that commencement; or

(ii) pursuant to a right or option granted before that commencement;

that specifies in writing the consideration, or a way of working out the consideration, for the supply.

The application of paragraphs 75-5(3)(e) to (g) turns on whether the Taxpayer acquired the Property through a 'new supply' (as defined).

As noted above, paragraph 38 of GSTR 2006/8 provides that, for the sale of a freehold interest, the supply and the acquisition is made at settlement. The Taxpayer advised that settlement of the acquisition of the Property by the Taxpayer occurred in 20XX. We therefore agree with the submission in the ruling request that the Taxpayer did not acquire the Property through a 'new supply' and that paragraphs 75-5(3)(e) to (g) do not apply to make the supply of the Property by the Taxpayer to the Purchaser ineligible for the margin scheme.

Subsection 75-5(4):

As noted above, section 195-1 provides that 'ineligible for the margin scheme' has the meaning given by subsections 75-5(3) and (4).

Subsection 75-5(4) provides that a reference in paragraphs 75-5(3)(b), (c) or (d) to a supply that was ineligible for the margin scheme is a reference to a supply that either was ineligible for the margin scheme because or one or more previous applications of subsection 75-5(3) or would have been ineligible for the margin scheme for that reason if subsection 75-5(3) had been in force at all relevant times.

As there was only one supply of the Property on or after the date when paragraphs (b) to (d) of subsection 75-5(3) came into force (17 March 2005) and paragraphs (b) to (d) of subsection
75-5(3) do not apply to that supply, subsection 75-5(4) does not apply to make the supply of the Property by the Taxpayer ineligible for the margin scheme.

Hence, the supply of the Property by the Taxpayer to the Purchaser is not a supply that is 'ineligible for the margin scheme'. As neither paragraphs (a) to (g) of subsection 75-5(3) nor subsection 75-5(4) apply, the Taxpayer did not acquire the Property through a supply that was ineligible for the margin scheme. Therefore, the Taxpayer may apply the margin scheme to the sale of the Property by the Taxpayer provided the Taxpayer complies with subsections 75-5(1) and 75-5(1A).