Edited version of private advice

Authorisation Number: 1051377770745

Date of advice: 29 May 2018

Ruling

Subject: GST nomination fees and margin scheme

Question 1

Do payments of the Nomination Fee by you to the Purchasers constitute creditable acquisitions pursuant to section 11-5 of the GST Act?

Answer

Yes

Question 2

If the answer to question one is yes, are you entitled to full input tax credits in the tax period in which you make payment of any part of the Nomination Fee?

Answer

Yes

Question 3

Will you be eligible to apply the margin scheme following the development, sub-division and subsequent sale of the Project Land as new residential premises?

Answer

Yes

Question 4

If the answer to question three is yes, will the consideration for the acquisition of the Project Land for the purposes of applying the margin scheme be equal to the purchase price under the Contracts?

Answer

Yes

Relevant facts and circumstances

You are an Australian corporation, established for the purpose of acquiring the Project Land with the intention of undertaking a large scale residential development. The development will involve the subdivision of the Project Land into residential lots for sale.

You will treat the sale of new residential premises as taxable supplies

You intend to apply the margin scheme to calculate the GST payable on the sale of the residential lots.

You acquired the right to take transfer of the Project Land at settlement via a Nomination Agreement between you, the Purchasers and the Guarantor. There is one nomination agreement signed by all Purchasers.

You supplied a copy of the Nomination Agreement.

You have been registered for GST since DDMMYYYY, reporting on a non-cash basis.

The Purchasers are each registered for GST.

The Vendors are each individuals who are not registered or required to be registered for GST.

You are not associates of any of the vendors or the purchasers.

Contracts to acquire Project Land

The Purchasers entered into separate Contracts of Sale (Contracts) to acquire each Property comprising the Project Land, as summarised in the table below:

The Purchasers are each registered for GST.

The Vendors are each individuals who are not registered or required to be registered for GST.

There are x purchase contracts signed by the individual Purchasers, all of which permitted the Purchasers to nominate a substitute purchaser to accept transfer of each Property (Nominee).

You entered into the Nomination Agreement with the Purchasers. Pursuant to the Nomination Agreement, the parties agreed that you would be nominated as Nominee and as such, you would acquire the right under the Contracts to take transfer of the Properties at settlement (Nomination Right).

In consideration for the Nomination Right, you agreed to pay the Purchasers the Nomination Amount, being the (collective) Nomination Fee of $xx (plus GST). Clause xx of the Nomination Agreement stipulates that full GST is payable by you to the Purchasers in addition to and at the same time payments are made in respect of any supply made under the Nomination Agreement.

You also agreed to pay the Purchasers the (collective) Reimbursement Amount of $xx, being a reimbursement of the amount paid by the Purchasers for any deposit or instalment under each Contract.

Total consideration for the purchase of the Project Land (including the reimbursement amounts) was $xx.

Tax invoices were provided by the individual Purchasers to you for the amount of the Nomination Fee. You provided a copy of each tax invoice.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 section 11-5

A New Tax System (Goods and Services Tax) Act 1999 section 11-15

A New Tax System (Goods and Services Tax) Act 1999 paragraph 29-10(1)(a)

A New Tax System (Goods and Services Tax) Act 1999 subsection 29-10(3)

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(3)

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

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

Reasons for decision

In this ruling,

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

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

Question 1 - creditable acquisition

Under section 11-5, you make a creditable acquisition if:

•                    you acquire anything solely or partly for a creditable purpose; and

•                    the supply of the thing to you is a taxable supply; and

•                    you provide, or are liable to provide, consideration for the supply; and

•                    you are registered, or required to be registered.

Under section 11-15, you acquire a thing for a creditable purpose to the extent that you acquire it in carrying on your enterprise. An enterprise is defined in section 9-20 to include an activity, or series of activities done in the form of a business.

However, you do not acquire the thing for a creditable purpose to the extent that the acquisition relates to making supplies that would be input taxed, or the acquisition is of a private or domestic nature.

You were established for the purpose of acquiring the Project Land with the intention of undertaking a large scale residential development.

The acquisition of the Nomination Rights relates to your future supply of residential lots which will be taxable supplies. Accordingly, the acquisition was for a creditable purpose.

The supply of the nomination rights to you was a taxable supply - as evidenced by the tax invoices.

You provided consideration for the supply and you are registered for GST.

As your acquisitions of the nomination rights will satisfy all the requirement of section 11-5, they will be creditable acquisitions

Question 2 - attribution

You account on a non-cash basis. Therefore, under paragraph 29-10(1)(a) you attribute the input tax credits to:

•                    the tax period in which you provide any of the consideration for the acquisition, or

•                    if, prior to providing any consideration, you receive an invoice relating to the acquisition - the tax period in which the invoice is received.

However, as per subsection 29-10(3), you must hold a tax invoice for the creditable acquisition when you lodge your BAS for the tax period in which you claim the input tax credit.

Question 3 - margin scheme eligibility

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.

If the land is not ineligible for the margin scheme, the GST on any sale will be calculated as 1/11th of the relevant margin, i.e. 1/11th of the amount by which the consideration for the supply exceeds the valuation of the interest, unit or lease.

Margin scheme eligibility

Subsection 75-5(3) lists the circumstances in which you acquire the entire freehold interest, stratum unit or long term lease through a supply that was ineligible for the margin scheme. None of the circumstances listed applies to your acquisition of the land. Your supply of each of the lots will be a supply of a freehold interest in land. Provided you and the purchaser agree in writing that the margin scheme is to apply, the margin scheme will apply to each of your supplies of new residential premises, pursuant to subsection 75-5(1).

Question 4 - calculation

Section 75-11 sets out the basis for determining the margin for the supply of real property in particular circumstances. None of the circumstances listed applies to your acquisition of the land. Therefore, pursuant to subsection 75-10(1), the GST on a taxable supply of real property under the margin scheme is 1/11th of the margin for the supply. The margin per subsection 75-10(2) is the amount by which consideration for the supply exceeds the consideration paid to acquire the land being supplied.

GSTD 2014/2 "Goods and services tax: where real property is acquired following the exercise of a call option, does the call option fee form part of the consideration for the acquisition for the purposes of subsection 75-10(2) of the A New Tax System (Goods and Services Tax) Act 1999?"outlines the Commissioner's view on the GST treatment of an acquisition of real property following the exercise of a call option.

Specifically, GSTD 2014/2 specifies that where an entity has exercised a call option to compel the transfer of real property, for GST purposes, the call option fee does not form part of the consideration for the property. Paragraphs 21 and 22 state:

21. In the context of a call option over real property, subsection 9-17(1) recognises that the supply of the option is a separate supply to the supply of the underlying property. As a consequence of subsection 9-17(1), the consideration for the call option is the call option fee, and the consideration for the supply or acquisition of the underlying property is limited to any additional consideration provided.[1]

22. The interaction of subsections 9-17(1) and 75-10(2) of the GST Act results in the consideration for the acquisition of the interest, unit or lease being limited to the additional consideration provided on exercise of the call option. Therefore, the entity does not include the call option fee as part of the consideration for the acquisition in calculating the margin under subsection 75-10(2).[2]

Further, GSTD 2014/2 discusses the meaning of 'call option':

12. According to the Macquarie Dictionary and the Oxford Dictionary of English, a call option is:

(a) the right to buy a specified commodity, parcel of shares, foreign exchange, etcetera, at a set price on or before a specified date (Macquarie Dictionary).

(b) an option to buy assets at an agreed price on or before a particular date (Oxford Dictionary of English).

13. Options have been described as irrevocable offers or conditional contracts or sui generis arrangements. For the purposes of this Determination, a call option is an agreement between the grantor and the grantee, the exercise of which allows the grantee to compel the grantor to transfer real property to the grantee within a specified period of time.

You contend that the GST treatment of the Nomination Fee should be akin to the treatment of the exercise of a call option over real property. With particular reference to paragraphs 12 and 13 of GSTD 2014/2, your reasoning is as follows:

•                    the Nomination Fee payable under the Nomination Agreement effectively grants you the right to acquire the Project Land at an agreed price (being the purchase price for each Property under the relevant Contracts) on or before a specified date (as set out in the terms of the Contracts);

•                    the Nomination Fee agreed under the Nomination Agreement can be described as an irrevocable agreement between you and the Purchasers, payment of which allows you to take transfer of real property (being the Project Land) at a specified time (i.e. at settlement).

We agree with your contention.

Consequently, the supply of the Nomination Right by the Purchasers to you in consideration for the Nomination fee is a distinct and separate supply to the supply of the Project Land by the Vendors to you in consideration for the purchase price under each Contract in accordance with subsection 9-17(1) of the GST Act.

As the Nomination Fee is consideration for a separate supply to the supply of the Project Land, it will not form part of the consideration for the acquisition of the Project Land for the purpose of subsection 75-10(2) of the GST Act. The result is that the consideration for the acquisition of the Project Land for the purposes of applying the margin scheme is equal to the total purchase price for the Properties under each Contract, being $xx (including the Reimbursement Amounts).

[1] GSTD 2014/2, para 21.

[2] GSTD 2014/2, para 22.