Edited version of your written advice

Authorisation Number: 1051330859689

Date of advice: 25 January 2018

Ruling

Subject: Consideration paid for an interest in real property acquired through a taxable supply under the margin scheme.

Question 1

In working out the margin under subsection 75-10(2) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) on your sales of newly developed lots resulting from the Development, should you treat the consideration for the acquisition of their interest in the Land as ’nil’?

Answer

Yes.

Question 2

Will you have a decreasing adjustment under section 75-27 of the GST Act where subsequent to the supply of the newly developed lots, you make cash instalment payments to the Vendors (in accordance with the formula in the contracts with the Vendors)?

Answer

Yes.

Question 3

(a) Notwithstanding the terms of the contract, if prior to supplying the newly developed lots you were to make a part payment to the Vendors towards the final purchase price, would the amount paid be treated as the consideration for your acquisition of the Land?

Answer

Yes.

(b) Would the payments you make to the Vendors subsequent to the supply of the developed lots give rise to a decreasing adjustment under section 75-27 of the GST Act?

Answer

Yes.

Relevant facts and circumstances

● You are registered for GST effective from a certain date and you carry on the enterprise of property development.

● You have acquired parcels of vacant land (the Land) for the purpose of a master planned multistage mixed-use development at a specified location (“the Development”).

● The development will include residential precincts, as well as schools, parks and cafes.

● The development will be undertaken in stages.

● You acquired the various land parcels that comprise of the development from the following vendors as outlined at clause … of the relevant sale of land contracts:

● Entity A, which was registered for GST at the time of the sale of land;

● Entity B, which is registered for GST effective a specified date; and

● Entities C and D, which were both registered for GST effective a specified date;

hereafter, collectively referred to as the “Vendors”.

● The Vendors have agreed the margin scheme is to apply to any taxable supply of the real property (in this case the vacant land) to the extent that the real property the subject of the relevant contract is not ineligible for the margin scheme.

● The payment terms for your acquisition of the various land parcels are detailed under a schedule (the Schedule) in the relevant contracts. The payment terms can be summarised as follows:

● At settlement the Vendors agree to transfer legal title in the land you and instead of receiving the full purchase price, the contract provides for a deferred payment arrangement. The payment for the land is contingent on the profit from the development and sale of the property under your ownership.

● You will only make payments to the Vendors where the project financier has recouped its costs, and all priority costs (including stamp duty, land tax and consultant costs with the implementation of the changes to the project structure) have been paid in full.

● After such payments are made, the Vendors are entitled to receive periodic instalments of cash following the settlement of the sale of any lot (as outlined in clause … in the Schedule) equal to:

(Net Settlement Proceeds minus Transaction Costs) x (Landowners' Share) x (Bypass Rate) x (Agreed Percentage), where:

The Net Settlement Proceeds means the adjusted gross sale proceeds received from the sale of a lot, or any part of it, forming part of the Project less GST;

The Transactions Costs means any costs and expenses (net of input tax credits) incurred by or on behalf of any person in connection with the disposal of the project land;

The Landowners’ share means …%;

The Bypass rate means …% or …%, dependent on whether a specified debt is extinguished; and

The Agreed Percentage under the relevant contracts is …%, …% and …% respectively.

● The periodic instalments must be paid by the end of each month in which you receive net proceeds from the buyer of any lot and where the net settlement proceeds exceed the transaction costs.

● At the conclusion of the development, you will also be liable to pay the Vendors a pre-determined percentage of the profit derived from the development and sale of the developed lots as outlined in clause … in the Schedule, being:

Price = Agreed Percentage x …% x Project Profit, where:

The Agreed Percentage under the relevant contracts is …%, ...% and …% respectively;

The Project Profit is the amounts derived before or after the date of the contract in respect of the Project, minus the amounts incurred or deemed to be incurred before or after the date of the contract in respect of the Project on all costs and expenses required.

● The price above will be reduced by the total instalments and tax amounts already paid to the Vendors.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Section 9-70

A New Tax System (Goods and Services Tax) Act 1999 Section 75-5

A New Tax System (Goods and Services Tax) Act 1999 Section 75-10

A New Tax System (Goods and Services Tax) Act 1999 Section 75-12

A New Tax System (Goods and Services Tax) Act 1999 Section 75-27

Reasons for decision

Note: In these reasons for decision, unless otherwise stated,

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

● reference material(s) referred to are available on the Australian Taxation Office (ATO) website www.ato.gov.au

Question 1

Summary

By virtue of section 75-12, the consideration for your acquisition of the interest in the Land should be treated as ‘nil’ in working out the margin under subsection 75-10(2).

Detailed reasoning

If you make a taxable supply of real property, the GST payable under the basic rule in section 9-70 is 1/11th of the price. However, under subsection 75-5(1), if you make a taxable supply of real property by:

● selling a freehold interest in land;

● selling a stratum unit; or

● granting or selling a long-term lease,

you may apply the margin scheme, if you and the recipient have agreed in writing that the margin scheme is to apply. Under the margin scheme, the GST payable on the supply of real property is 1/11th of the margin for the supply.

On the facts submitted to us, the Land was supplied to you under the margin scheme by the Vendors and therefore you may in turn apply the margin scheme under subsection 75-5(1) on your supplies of the newly developed lots.

Under subsection 75-10(2) the margin for the supply is the amount by which the consideration for the supply exceeds the consideration for your acquisition of the interest, unit or lease in question. Furthermore, as explained at paragraph 171 of GST Ruling GSTR 2006/8 Goods and services tax: the margin scheme for supplies of real property acquired on or after 1 July 2000 (GSTR 2006/8), if an entity makes supplies of real property but does not pay the full contract price for the acquisition of that property, section 75-12 applies. It provides that the margin for the supply is worked out as the amount by which the consideration for the supply exceeds the consideration paid for the acquisition (which may not be the consideration for the acquisition reflected in the contract).

In this case, under the relevant contracts for sale, you will not pay any consideration to the Vendors at settlement and, more importantly, prior to your subsequent supplies of the newly developed lots. Therefore, as the consideration paid by you will be ‘nil’ at the time you supply the newly developed lots, by virtue of section 75-12, the consideration for your supplies of these lots for the purpose of subsection 75-10(2) will be treated as equal to the consideration reflected in the relevant contracts.

Question 2

Summary

As the cash instalments payments (in accordance with the formula in the contracts with the Vendors) represent part payment of the consideration for your acquisition of the Land, section 75-27 will apply to these payments.

Detailed reasoning

Paragraph 174 of GSTR 2006/8 explains that if section 75-12 applies, and you later make a further payment of the acquisition consideration, you have a decreasing adjustment under section 75-27. Subsection 75-27(2), provides that the amount of the decreasing adjustment is equal to 1/11th of the further amount of consideration paid.

As discussed at ‘Question 1’ above, section 75-12 will apply to your supplies of the newly developed lots (where the purchaser agrees with you to apply the margin scheme). Therefore, where subsequent to the supply of the newly developed lots, you make cash instalment payments to the Vendors (in accordance with the formula in the contracts with the Vendors), you will have a decreasing adjustment under section 75-27 amounting to 1/11^th of the amount paid.

Question 3

Summary

If prior to selling the newly developed lots you were to make a part payment, or payments, (for example a pre agreed amount at settlement and other amounts post settlement) to the Vendors towards the final purchase price, the total amount paid as at settlement on the sale of the newly developed lots will be treated as the consideration for your acquisition of the Land. This is because, for the purpose of subsection 75-12(b), ‘…the time of the later supply…’ is at settlement on the sale of the newly developed lots. Payments made after that time will give rise to a decreasing adjustment under section 75-27.

Detailed reasoning

(See ‘Question 1’ and ‘Question 2’ above)