Edited version of private advice

Authorisation Number: 1051514683396

Date of advice: 29 May 2019

Ruling

Subject: GST and the margin scheme

Question

Will the sale of the specified property be a taxable supply to which the margin scheme under section 75-5 of the A New Tax System (Goods and Services Tax) Act 1999 does not apply, when the vendor and purchaser complete and execute the proposed Deed of Rectification?

Answer

No

Relevant facts and circumstances

·         Entity A (purchaser) is registered for the goods and services tax (GST).

·         Entity B (vendor) is registered for GST.

·         The vendor and purchaser have previously entered into a Contract of Sale for the sale and purchase of the specified property (Property).

·         The sale of the Property by the vendor was a taxable supply.

·         The supply of the Property was not ineligible for the margin scheme.

·         The Contract of Sale specifies that the price is 'plus GST' and the purchaser must pay to the vendor any GST payable by the vendor in respect of the taxable supply.

·         The purchaser is not required to make payment until provided with a tax invoice, unless the margin scheme applies.

·         The particulars of sale specify that the supply is a 'margin scheme' supply and the parties have agreed that the margin scheme applies to the supply.

·         Settlement occurred on the specified date.

·         The purchaser paid the required price 'plus GST' at settlement and took possession of the Property.

·         The purchaser did not receive a tax invoice for the acquisition, as the vendor did not issue a tax invoice for the sale.

·         In its Activity Statement for the relevant period, the vendor reported the sale of the Property as a taxable supply. The vendor calculated and remitted GST on that taxable supply, in accordance with the application of the margin scheme.

·         In its Activity Statement for the relevant period, the purchaser sought to claim an input tax credit in respect of the GST paid in connection with the acquisition of the Property. The purchaser submits that it was at this time, prior to lodging the Activity Statement, that it was alerted to the use of the margin scheme and the consequent denial of an input tax credit.

·         The purchaser submits that

o   it agreed to the application of the margin scheme in the Contract of Sale in error;

o   it mistakenly accepted the Contract of Sale with the application of the margin scheme without realising the consequences of its application.

·         Upon the purchaser's request, its solicitors have prepared a proposed Deed of Rectification to correct the Contract of Sale in relation to the application of the margin scheme to the supply of the Property.

·         The proposed Deed of Rectification seeks to amend the Contract of Sale with effect from the signed original date, to provide that the margin scheme does not apply to the sale.

·         The parties intend to revoke their agreement to apply the margin scheme by entering into the proposed Deed of Rectification.

·         The vendor does not object to executing the proposed Deed of Rectification.

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 subsection 75-5(1)

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

A New Tax System (Goods and Services Tax) Act 1999 section 195-1

Reasons for decision

You make a taxable supply if you meet the requirements of section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), which states:

You make a taxable supply if:

(a) you make the supply for *consideration; and

(b) the supply is made in the course or furtherance of an enterprise that you carry on; and

(c) the supply is *connected with indirect tax zone; and

(d) You are *registered or *required to be registered.

However, the supply is not a *taxable supply to the extent that it is *GST-free or *input taxed.

(*Denotes a term defined in section 195-1 of the GST Act)

Subsection 75-5(1) of the GST Act provides that the margin scheme applies in working out the amount of GST on a taxable supply of real property that you make, provided that certain requirements are satisfied.

One of the requirements in subsection 75-5(1) of the GST Act is that the supplier and the recipient of the supply have agreed in writing that the margin scheme is to apply.

In accordance with subsection 75-5(1A) of the GST Act, this agreement must be made on or before the making of the supply or within such further period as the Commissioner allows.

It is considered that the time of making the supply of real property for the purposes of Division 75 of the GST Act is at settlement. Accordingly, the written agreement to apply the margin scheme must be made on or before the time of settlement.

In this case, the conditions under the Contract of Sale and the conduct of the parties indicate that the parties have agreed to use the margin scheme:

The Contract of Sale is clear and indicates that where a supply is not under the margin scheme the purchaser is not required to make payment until provided with a tax invoice.

According to the facts, the purchaser paid the required consideration (price 'plus GST') at settlement even though the vendor did not issue a tax invoice to the purchaser. This clearly indicates that the parties understood that the supply was under the margin scheme.

By signing the Contract of Sale, the vendor and purchaser have agreed to the terms of the sale under that contract. The parties have agreed in writing that the margin scheme is to be applied to the sale of the Property.

In this case, the parties had agreed to the application of the margin scheme prior to the making of the supply of the Property at settlement.

The fact that the purchaser entered into the agreement to apply the margin scheme without realising the consequences of its application is irrelevant.

Once the requirement that a timely written agreement is in place between the parties has been met, for the operation of subsection 75-5(1) of the GST Act, there is nothing in the words of the provision that allows its operation to be unwound.

If the provision envisaged that the parties to the supply could alter their choice later, there would have been express provision for it in the legislation. The Commissioner is of the view that the absence of such a provision provides further contextual support for the view that there is no capacity for the supplier and recipient to revoke the written agreement after the making of the supply.

While subsection 75-5(1A) of the GST Act permits a discretion for the Commissioner to allow a further time in which an agreement may be made, after the supply is made, it does not permit a discretion for the Commissioner to allow an entity to revoke an agreement that was in place at the time of settlement.

There is no provision within the GST Act that would allow the margin scheme agreement to be revoked after it has been made and the margin scheme was correctly applied to a supply.

The fact that the parties to the written agreement consent to revoke that agreement subsequent to settlement, is irrelevant.

The Commissioner has issued ATO ID 2010/83 which is about the inability of entities to revoke an agreement to apply the margin scheme after the supply is made and where the parties have agreed in writing to the application of the margin scheme prior to the supply being made.

In this case, as a written agreement to apply the margin scheme was in place at the time of making the supply, the supplier and recipient are not able to revoke the agreement.

The parties cannot elect to revoke their agreement for the application of the margin scheme once it has been properly made.

Based on the principles expressed by the Commissioner in ATO ID 2010/83, the parties are not able to revoke this agreement with the proposed Deed of Rectification.

The Commissioner will not accept the Deed of Rectification that the parties intend to execute to revoke their agreement to use the margin scheme, in order for the vendor to calculate the GST payable on the sale of the Property under the basic rules in the GST Act.

The vendor must calculate the GST payable in accordance with the rules in Division 75 of the GST Act.