Edited version of private advice

Authorisation Number: 1051615744358

Date of advice: 31 January 2020

Ruling

Subject: Application of the margin scheme

Question 1

For the purposes of the formula for calculating the margin in subsection 75-10(2) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) in respect of A's supplies of Developed Lots under the margin scheme, is the consideration for A's acquisition of the those lots equal to an appropriate portion of the GST inclusive market value of the Property as at the time of acquisition?

Answer 1

Yes

Question 2

If the answer to question 1 is yes, is the GST inclusive market value of the Property as at the time of acquisition equal to the professional valuations prepared by the certified valuer on a GST exclusive basis, uplifted by 10% for GST?

Answer 2

Yes

This ruling applies for the following period:

X to Y

Relevant facts and circumstances

B was established as a government-related body corporate under legislation.

In X, the X market was deregulated and B was dissolved.

In accordance with legislation, the property, rights and liabilities of B transferred to A (You), which at the time, was a newly formed company.

In accordance with legislation, as consideration for the transfer of the property, rights and liabilities of B to A, you issued shares to B to the market value of the property, rights and liabilities.

The property you acquired from B included:

Former Lot X on Diagram X (Volume/Folio:X) (Lot X); and

Former Lot Y on Diagram Y (Volume/Folio:Y) (Lot Y);

which were adjoining lots situated at Z-W M Road, P (collectively, the Property).

The Property was acquired by you on X.

You are undertaking a multi-lot built form residential development at the Property.

You will then sell the newly developed residential premises (Developed Lots) to third parties. Those supplies will sales of new residential premises for GST purposes.

You are eligible to apply the margin scheme in accordance with section 75-5 to your supplies of the Developed Lots and intend to do so.

Neither subsection 75-10(3) nor 75-11 apply in respect of your sales of the Development Lots.

Pursuant to subsection 75-1-(2), in circumstances where you sell the Developed Lots under the margin scheme, you will calculate the margin as the amount by which the consideration for the supplies exceeds the relevant portion of the consideration for your acquisition of the Property.

As at X, a certified valuer valued Lot X at $ (exclusive of GST) and Lot Y at $ (exclusive of GST).

The purpose of the above valuations was to assess market value of the properties for margin scheme purposes.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999, section 9-15

A New Tax System (Goods and Services Tax) Act 1999, section 9-17

A New Tax System (Goods and Services Tax) Act 1999, section 9-75

A New Tax System (Goods and Services Tax) Act 1999, section 75-10(2)

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

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

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

Reasons for decision

Calculation of the 'margin'

The GST payable on supplies of the Developed Lots made under the margin scheme is 1/11^th of the 'margin'.

Except where certain circumstances prescribed in subsection 75-10(3) apply, the 'margin' is the amount by which the consideration for the supply exceeds the consideration for your acquisition of the property interest.

Neither the circumstances prescribed in subsection 75-10(3) nor section 75-11 apply with respect to the Developed Lots.

Accordingly, pursuant to subsection 75-10(2), where you sell the Developed Lots under the margin scheme, you will calculate the 'margin' as the amount by which the consideration for the supply (ie the sale price plus/minus settlement adjustments) exceeds the consideration for your acquisition of the relevant property interest (which will be a suitably apportioned amount of the consideration for your acquisition of the Property.

It is therefore necessary to determine the consideration for your acquisition of the Property.

Consideration

Section 195-1 defines 'Consideration' as:

consideration, for a supply or acquisition, means any consideration, within the meaning given by sections 9-15 and 9-17, in connection with any supply or acquisition.

Relevantly, paragraph 9-15(1)(a) states that consideration includes any payment, or any act or forbearance, in connection with a supply of anything.

'Any payment, act or forbearance' is not limited to payments of money. It includes payments in a non-monetary or in-kind form.

In your case, as consideration for your acquisition of the Property, you provided non-monetary consideration in the form of shares that you issued to B to the market value of the Property

Value of consideration

With the consideration ascertained, it is then necessary to determine the value of the consideration to use in the formula to calculate the 'margin' under subsection 75-10(2).

Section 9-70 states that:

The amount of GST on a taxable supply is 10% of the 'value of the taxable supply'.

In accordance with section 9-75, the 'value of a taxable supply' is:

Price x 10/11

where:

price is the sum of:

(a)  so far as the consideration for the supply is expressed as an amount of money - the amount (without any discount for the amount of GST (if any) payable on the supply); and

(b)  so far as the consideration is not consideration expressed as an amount of money - the GST- inclusive market value of that consideration.

With that being the case, 'consideration' is therefore inclusive of GST, and the value of non-monetary consideration is determined with respect to its 'GST inclusive market value'.

Section 195-1 defines 'GST inclusive market value' as:

GST inclusive market value of:

(a)  consideration in connection with a supply; or

(b)  a thing, or a supply or acquisition of a thing;

means the market value of the consideration or thing, without any discount for any amount of GST or luxury car tax payable on the supply.

It is therefore necessary to determine the GST-inclusive market value of the shares provided for the property.

With the value of the shares provided for the Property equal to the market value of the Property, the GST-inclusive market value of the shares will be equal to the GST-inclusive market value of the Property.

The GST Act does not specify a time when the GST-inclusive market value of non-monetary consideration is to be ascertained. The Commissioner is of the view that the time must be reasonable in the circumstances of the transaction. Depending on the circumstances, it may be:

• when the parties enter into a binding agreement;
• when economic risk is transferred; or
• when a recipient assumes effective control.

In these circumstances, it would be appropriate to ascertain the GST inclusive market value of the shares/Property as at X when you acquired the Property and provided the shares.

At paragraph 144 of GSTR 2001/6 (Goods and services tax: non-monetary consideration), the Commissioner lists examples of reasonable methods to determine value of non-monetary consideration. This includes a professional appraisal.

A professional appraisal directed at determining the market value of consideration will be a reasonable method where it is:

• done by a person who is recognised in their particular field in which the appraisal is being given as having the requisite skills and knowledge for the task; and
• uses valuation methodologies that are consistent with professional guidelines.

You engaged a certified valuer to assess the market value of the Property as at X. The purpose of the valuation was specifically to establish the market value for margin scheme purposes.

The valuer valued Lot X at $ (exclusive of GST) and Lot Y at $ (exclusive of GST) as at X. You have provided copies of those valuations.

The valuer prepared the reports having regard to the GST legislation and notes that each valuation was prepared and shown on a GST exclusive basis for consistence and comparison purposes.

Given this, it is appropriate that GST, at the prevailing rate of 10%, be added to the valuations to give their GST inclusive market value.

Accordingly, the GST inclusive market value of the Property, and in turn, the GST inclusive market value of the shares provided as consideration for the Property, can be determined by uplifting the GST exclusive valuations by 10% for GST.

The GST inclusive market value of the Property (and the shares) as at X, would therefore be $ comprising $ for Lot X (ie $ x 1.1) and $ for Lot Y (ie $1 x 1.1).

Therefore, in respect to the Developed Lots you sell under the margin scheme, for the purposes of subsection 75-(10)(2), the 'margin' will be the amount be which the consideration for the supply exceeds the portion of $ (ie the GST inclusive market value of the consideration for your acquisition of the Property) relating to the relevant property interest (apportioned on a fair and reasonable basis).