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Edited version of your written advice
Authorisation Number: 1051378042222
Date of advice: 30 May 2018
Ruling
Subject: GST and the margin scheme
Question 1
Will Entity A be eligible to apply the margin scheme to future sales of residential lots developed on Site X?
Answer
Yes
Question 2
Can Entity A use the XXYYYY GST inclusive market value of Site X as the margin scheme cost base when calculating its GST liability on the sales of the residential lots in accordance with subsection 75-11(7)(d) of the A New Tax System (Goods and Services Tax) Act of 1999 (GST Act)?
Answer
Yes
Relevant facts and circumstances
Entity B was constituted, with effect from XXYYYY.
Entity B was registered for GST from 1 July 2000 and was de-registered with effect from XXYYYY.
At some time prior to 1 July 2000, Entity B acquired a parcel of land (the Original Land).
Entity A was constituted, with effect from XXYYYY.
Entity A was, and remains GST registered with effect from XXYYYY.
Under the terms of a particular Act, with effect from XXYYYY:
(a) the assets, rights and liabilities of Entity B including the Original Land were transferred to Entity A;
(a) the Original Land “vests in the transferee (Entity A) without the need for any conveyance, transfer, assignment or assurance”; and
(b) in respect of the Original Land, acts or omissions of Entity B prior to XXYYYY, are taken to be those of Entity A and are valid, with Entity A to complete anything commenced by Entity B.
Development and sale of residential lots on Site X
Site X formed part of the Original Land that was transferred from Entity B to Entity A on XXYYYY.
Entity A and the Developer entered into a Project Delivery Agreement (PDA) dated XXYYYY, under which Entity A appointed the Developer to develop residential lots (residential Lots) upon Site X.
Under the PDA, the Developer is responsible for marketing and selling the Residential Lots to prospective purchasers, with Entity A entering into the required sale contracts as the owner of Site X.
Further information received
The tax agent confirmed that Entity A and Entity B are associates as defined in section 318 of the Income Tax Assessment Act 1936.
Relevant legislative provisions
A New Tax System (Goods and Services Tax) Act 1999 Division 75
Reasons for decision
Question 1
Will Entity A be eligible to apply the margin scheme to future sales of residential lots developed on Site X?
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.
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 these provisions apply to Entity A.
Consequently, Entity A is eligible to apply the margin scheme to future sales of residential lots developed upon Site X. 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.
Question 2
Can Entity A use the XXYYYY GST inclusive market value of Site X as the margin scheme cost base when calculating its GST liability on the sales of the residential lots in accordance with subsection 75-11(7)(d) of the A New Tax System (Goods and Services Tax) Act of 1999 (GST Act)?
As discussed above, Entity A acquired Site X through a vesting process from Entity B.
Section 75-11 discusses margins for supplies of real property in particular circumstances. This section applies to supplies made on or after 17 March 2005, and applies if real property was acquired from amongst others:
● an associate
An ‘associate’ is defined in section 195-1 as having the meaning given by section 318 of the Income Tax Assessment Act 1936 (ITAA 1936).
You have confirmed that Entity A and Entity B are associates as defined.
Subsections 75-11(6) and 75-11(7) are relevant in your case. However, subsection 75-11(6) only applies to supplies where the relevant land was acquired by an entity from an associate on or after 9 December 2008.
As Site 53 was acquired from Entity B on 1 July 2002, subsection 75-11(6) is not applicable.
Subsection 75-11(7) is however applicable to your circumstances and states:
(7) If:
(a) you acquired the interest, unit or lease in question from an entity who was your associate at the time of the acquisition; and
(b) none of the other subsections of this section apply the margin for the supply you make is the amount by which the consideration for the supply exceeds:
(c) if your acquisition was made before 1 July 2000-an approved valuation of the interest, unit or lease as at 1 July 2000; or
(d) if your acquisition was made on or after 1 July 2000 – the GST inclusive market value of the interest, unit or lease at the time of the acquisition.
As you meet the requirements of paragraphs 75-11(7)(a) and 75-11(7)(b) and your acquisition of the land from Entity B occurred after 1 July 2000, the margin for the supply of the residential lots made by Entity A, is the amount by which the consideration for the supplies exceeds the GST inclusive market value of the land at the time of the acquisition.