Edited version of private advice

Authorisation Number: 1051772684195

Date of advice: 27 October 2020

Ruling

Subject: GST and the margin scheme

Question 1

Can Entity A apply the margin scheme under Division 75 of the A New Tax System (Goods and Services Tax) Act 1999 to the sale of the subdivided residential blocks?

Answer

No

Question 2

If so, is the proposed methodology fair and reasonable?

Answer

Not applicable

Relevant facts and circumstances

Entity A purchased two properties from Entity B.

The purchase price of the properties was $X and was a mixed supply as follows:

·         Property 1 containing a residential premise - input taxed supply for $X

·         Property 2 was vacant land - Taxable supply without application of the margin scheme for $X plus GST of $X.

The properties were not amalgamated into one title.

In order to provide access to Property 2, the residential property located at Property 1 was demolished and a road was constructed thereon by Entity A. The road was transferred to the relevant Council.

The land located at Property 2 was subdivided into X vacant residential blocks with an access road (transferred to the Council).

The lots have not been sold yet

Relevant legislative provisions

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)

Reasons for decision

·         all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)

·         all reference materials referred to are available on the Australian Taxation Office (ATO) website www.ato.gov.au

·         all legislative terms of the GST Act marked with an asterisk are defined in section 195-1 of the GST Act

Question 1

Under subsection 75-5(1), if you make a taxable supply of real property by selling a freehold interest in land, you may apply the margin scheme, if you and the recipient have agreed in writing that the margin scheme is to apply.

Subsection 75-5(2) (as amended by the 2005 Amendment Act) 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.

Under subsection 75-5(3), a supply is ineligible for the margin scheme if it is a taxable supply on which the GST was worked out without applying the margin scheme.

You may apply the margin scheme to the supply of real property even though you acquired part of the real property through a supply that was ineligible for the margin scheme. An example of this is where a supplier acquires two adjoining properties and one of the properties was acquired as a taxable supply without using the margin scheme, and the other property was acquired as a taxable supply using the margin scheme or an input taxed, GST-free or non-taxable supply.[1]

GSTR 2006/8 discusses the subdivision of broadacres at paragraphs 150 to 155.

These paragraphs explain that if you acquire adjoining properties, one of which is acquired through a supply that is ineligible for the margin scheme, and you subdivide the properties, the margin scheme can be used for the supply of some of the subdivided lots. However, the margin scheme cannot be applied for the supply of those lots that were derived entirely from land that was acquired through a supply that was ineligible for the margin scheme as subsection 75-5(2) applies.

In your case, you purchased two adjoining properties. The properties were not amalgamated into one title.

Property 1 was a residential property and was transferred to you as an input taxed supply. This was demolished and a road providing access to Property 2 was constructed thereon and transferred to the Council.

Property 2 was vacant land and was transferred to you as a taxable supply without application of the margin scheme. This property has subsequently been subdivided into x residential lots with an access road.

In this case, the margin scheme cannot be applied to the supply of these residential lots as they were derived entirely from land that was acquired through a supply that was ineligible for the margin scheme as subsection 75-5(2) applies.

Question 2

Not applicable

[1] Paragraph 147 of Goods and Services Tax Ruling GSTR 2006/8 Goods and services tax: the margin scheme for supplies of real property acquired on or after 1 July 2000 (GSTR 2006/8)