Edited version of your written advice

Authorisation Number: 1051335525471

Date of advice: 15 February 2018

Ruling

Subject: GST and margin scheme

Question

Can the entity, on behalf of Government, 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) when it supplies subdivided land (the Land) which was previously granted to another entity under a rural lease?

Answer

Yes, provided there were no improvements on the land as at 1 July 2000. The entity, on behalf of Government, can apply Item 4 of the table in subsection 75-10(3) of the GST Act when it supplies the Land which was previously granted to another entity under a rural lease.

Relevant facts and circumstances

The Land currently comprises of a number of blocks. The land is located in Australia.

The entity has the following functions:

● to develop land;

● to carry out works for the development and enhancement of land; and

● to carry out strategic or complex urban development projects.

The Land is managed by the entity on behalf of the Commonwealth of Australia.

The land is currently the subject of rural leases and you have provided copies of the rural leases.

Under the Proposed Supplies of the land:

a. all rural leases will be terminated prior to the date of the Proposed Supplies and the responsibility for managing the relevant land will revert to the entity on behalf of the Commonwealth;

b. the entity will facilitate the subdivision of the land, which will be ‘project managed’ by a developer;

c. there is currently no formal ‘joint venture’ agreement in existence between the entity and the developer;

d. the entity will facilitate the Proposed Supplies of the subdivided land under long-term residential leases (residential lease) on behalf of the Commonwealth;

e. You have provided a sample residential lease. You have also provided another document in respect of the sample residential lease. These documents will be similar to those which will be issued in respect of the subdivided lots.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Section 9-5

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

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

A New Tax System (Goods and Services Tax) Act 1999 Subsection 75-5(1)

A New Tax System (Goods and Services Tax) Act 1999 Subsection 75-5(2)

A New Tax System (Goods and Services Tax) Act 1999 Subsection 75-5(3)

A New Tax System (Goods and Services Tax) Act 1999 Subsection 75-10(3)

A New Tax System (Goods and Services Tax) Act 1999 Section 75-11

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 terms marked by an asterisk are defined terms in the GST Act

● all reference materials, published by the Australian Taxation Office (ATO), that are referred to are available on ato.gov.au

Question

Can the entity on behalf of Government, apply item 4 of the table in subsection 75-10(3) when it supplies subdivided land (the Land) which was previously granted to another entity under a rural lease?

Summary

Based on the entity’s circumstances as discussed below, we consider that the Commonwealth has continuously held an interest with a sufficient connection to the new residential leases to be issued for the subdivided lots. This is because, not until a new residential lease for a subdivided lot is granted will the Commonwealth dispose of its maximum interest in that lot. It follows that at the time of issuing the new residential leases, the Commonwealth would have ‘held’ the interest in the land since before 1 July 2000 for the purposes of Item 4. Accordingly, the entity can apply Item 4 of the table in subsection 75-10(3) when it supplies the Land which was previously granted to a third party under a rural lease if there were no improvements on the land as at 1 July 2000.

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 that you make by:

a. selling a freehold interest in land, or

b. selling a stratum unit, or

c. granting or selling a long-term lease;

if you and the recipient of the supply have agreed in writing that the margin scheme is to apply.

However, subsection 75-5(2) provides that 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.

Where the requirements prescribed under the margin scheme provisions apply to a supply of real property, the GST on the sale of that land will be calculated as 1/11th of the relevant margin.

In your case, you have confirmed the following:

1. it is intended that it will be a term and condition of each contract of sale between the prospective parties in respect of each of the Proposed Supplies that the margin scheme is to apply to the sale,

2. each of the Proposed Supplies will be taxable supplies under section 9-5,

3. the relevant supplies of real property will be the granting of long-term leases by the Commonwealth (that is, the residential leases) for at least 50 years,

4. the supply is eligible for the margin scheme as none of the provisions in subsection 75-5(3) apply.

You consider that the requirements outlined in section 75-5 are met and the entity is entitled to apply the margin scheme to calculate the GST on the proposed supplies to end purchasers (lessees). For the purposes of this ruling request, we have accepted this assertion.

Under subsection 75-10(2), the margin for the supply is the difference between the consideration for the supply and the consideration for the acquisition of the real property unless subsection 75-10(3) or section 75-11 applies.

Subsection 75-10(3) provides that if:

● the circumstances specified in an item in the second column of the table in that subsection applies to the supply, and

● an approved valuation of the freehold interest, stratum unit or long-term lease, as at the day specified in the third column in the table has been made,

the margin for the supply is the amount by which the consideration for the supply exceeds that valuation of the interest, unit or lease.

Item 4 in the table in subsection 75-10(3) reads as follows:

In your case, the entity is supplying the land on behalf of the Commonwealth.

The blocks of land (from which the subdivided lots will be carved out) are held under rural leases.

For the purposes of this ruling, the issue to be determined is whether or not, at the time of issuing new residential leases for the subdivided lots after the current rural leases are terminated, the Commonwealth would have held the interest in these blocks of land since before 1 July 2000. You have asked the Commissioner not to rule on the issue of whether or not there were improvements on the land at 1 July 2000.

A strict interpretation of Item 4 would mean that it is the lease that is subject to the relevant supply that must have been held since before 1 July 2000. The entity will be supplying residential leases which will be created on the day that they are supplied, that is, after 1 July 2000.

However, the literal, restrictive interpretation was rejected by the Full Court of the Federal Court in Brady King Pty Ltd v Commissioner of Taxation [2008] FCAFC 118. The Court held that the interest, unit or lease does not have to be a strict identity in juridical terms between what is acquired/held and what is supplied.

In that case, the taxpayer developed an office building into apartments. It entered into a contract to purchase the building on 22 May 2000. It completed the purchase on 25 October 2000 and registered it on 9 November 2000. It then built and sold the apartments. The issue was whether the taxpayer had ‘held’ or ‘acquired’ its interest before 1 July 2000 for the purposes of items 1 or 3:

The Commissioner argued, as did the appellant, that the learned primary judge was wrong in holding that for the purpose of s 75-10(3) there had to be a strict identity in juridical terms between what the taxpayer acquired and what it supplied.

We agree. The beneficial purpose of the Margin Scheme would be frustrated if such a commonplace transaction as the present one were held to be outside s 75-10(3).

Before 1 July 2000 the appellant acquired or held each stratum unit in the sense that it held the property at a specified address from which that unit was later carved out. Reading the Act in this way gives it a practical and fair business operation. It is a construction which is reasonably open and more closely conforms to the legislative intent: …

The Court stated that it was sufficient that the uncompleted contract was ‘the genesis or source of the [taxpayer’s] interest in the stratum unit it supplied.’ Therefore, the Full Court held in Brady King that there was a sufficient connection between the taxpayer’s interest in an unconditional uncompleted contract to purchase an office building held since before 1 July 2000 and the strata units that were created after settlement.

From the above discussion about the Brady King case, it follows that it is possible for the Commonwealth to have held the interest in the land since before 1 July 2000 for the purposes of Item 4 even if the new residential leases to be issued will be created on a day after that date. This will be the case if, despite the fact that the land has been subject to the rural leases, the Commonwealth has continuously held an interest with sufficient connection to the interest to be supplied under the residential leases.

In the context of the land in question, the relevant interest will be ‘held’ until such time as the Commonwealth makes a supply of land under a lease which disposes of the maximum interest the Commonwealth is able to dispose of. This occurs under a residential Lease. Supply of land by way of lease which does not transfer this full interest does not disrupt the Commonwealth’s holding of the relevant interest.

The extent of the interest supplied by the Commonwealth under a lease is determined by the terms and conditions of the lease and the relevant provisions in the relevant legislation.

Most of the rural leases provided do contain different terms and conditions from the standard residential lease and rural leases have additional legislative requirements. Contrary to a residential lease, the Commonwealth retains a level of control over the relevant property under a rural lease, relevantly:

● The Lessee cannot ‘deal’ with the lease – that is transfer, sub-lease, assign etc. without approval of the relevant Authority.

● The Lessee (and any entity the Authority approves as a new lessee etc.) needs to enter into a Land Management Agreement with the relevant Authority which lists responsibilities of both parties.

● Some rural leases have no compensation payable for early termination.

● Some leases allow for the Commonwealth to withdraw land from the lease without the need for compensation or agreement.

● Not all rural leases are long term leases as defined in the GST Act.

Therefore it is accepted that these rural leases do not provide the same interest to the lessee as a residential lease and do not represent the maximum interest that the Commonwealth is able to supply. As a result, these rural leases do not disrupt the ‘held’ requirement in Item 4.