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Edited version of private advice
Authorisation Number: 1051844832985
Date of advice: 31 May 2021
Ruling
Subject: GST and the margin scheme
Question
Can you apply the margin scheme to the sale of new residential premises pursuant to subsection 75-5(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?
All further legislative references are to the GST Act unless stated otherwise.
Answer
Yes, you can apply the margin scheme to the sale of new residential premises pursuant to subsection 75-5(1) of the GST Act, provided that you and the recipient of the supply agree in writing on or before the making of the supply that the margin scheme is to apply.
You cannot use the margin scheme if any of the scenarios under section 75-3 of the GST Act apply. One of the scenarios is if you purchased the property as a supply made that was fully taxable and the margin scheme was not used. While the property was initially characterised as a fully taxable supply in the Contract of Sale, the Commissioner in October 2018 issued a Notice of Decision that the supply of the property is an input taxed supply. In addition, the settlement you sought in the Deed of Settlement and Release was to recoup the full GST you paid which the vendor charged in error. Therefore, we consider that you do not fall into any of the exclusion scenarios for the margin scheme.
Since the compensation you received for the GST amount has a nexus to an earlier supply, the purchase price for the margin scheme calculation should be the GST exclusive value on the contract.
Relevant facts and circumstances
You have been registered for GST since 2017.
You purchased the property in November 2017.
The contract between you and the vendor states that the price of the property is 'plus GST'.
The solicitor misinformed you that the property was bought as a taxable supply. As such, you lodged your BAS for the relevant quarter and claimed GST credits.
The ATO issued an audit finalisation letter dated October 2018. The letter states that the ATO has disallowed GST credits on the purchase of the property as the residential premise located at the property is not considered a new residential premise and hence is an input taxed supply.
As you were not able to get in contact with the vendor to get a refund of the GST paid, you sued the solicitor for the wrongful advice.
You entered into a Deed of Settlement and Release (Deed) with the solicitor in March 2019.
A Clause in the Deed states that your new solicitors sent a letter of demand to the previous solicitor making a claim for repayment of the GST on the basis that it was paid in error.
Another Clause in the Deed provides that the previous solicitor is to pay a Settlement Sum to you, with the amount of the Settlement Sum being less than the GST paid.
You have demolished the houses on the property and plan to sell the land as it is.
Relevant legislative provisions
A New Tax System (Goods and Services Tax) Act 1999 section 75-5