Edited version of private advice

Authorisation Number: 1051857176447

Date of advice: 25 June 2021

Ruling

Subject: GST and margin scheme

Question 1

Are you eligible to apply the margin scheme in calculating the GST payable on your supply of property situated at a specified location pursuant to section 75-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes

Question 2

If you are eligible to apply the margin scheme, is the margin calculated in accordance with subsection 75-11(7) of the GST Act?

Answer

Yes

Relevant facts and circumstances

ABC Pty Ltd as trustee for the ABC Trust (You) are registered for GST effective from dd/mm/yyyy.

The beneficiaries of the ABC Trust are:

•         DEF Superannuation Fund;

•         GHI Trust; and

•         JKL Trust

Individual A is joint trustee and primary beneficiary of the JKL Trust.

A Contract of Sale (Sale Contract) was entered into for the sale of property situated at a specified location (the Property).

The Sale Contract identifies the vendor as Individual B (Vendor).

The Sale Contract identifies the purchaser as Individual A and/or Nominee.

The Sale Contract provides that the purchaser may nominate a substitute or additional transferee, but the named purchaser remains personally liable for the due performance of all the purchaser's obligations under this contract.

The Property settled on dd/mm/yyyy.

At the date of settlement, the Property was a commercial building subject to lease.

Prior to settlement on dd/mm/yyyy, Individual A nominated you as the transferee.

The purchase price pursuant to the Sale Contract was $x,xxx,xxx.

The Vendor is registered for GST effective from dd/mm/yyyy.

Individual A was neither registered for GST nor required to be registered for GST as at dd/mm/yyyy.

You became the registered proprietor of the Property on dd/mm/yyyy effective from dd/mm/yyyy.

You subsequently subdivided the Property and constructed multiple townhouses.

You are currently in the process of drafting contracts for the sale of the townhouses.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999

Subsection 75-5(1)

Subsection 75-5(2)

Subsection 75-5(3)

Paragraph 75-5(3)(a)

Paragraph 75-5(3)(b)

Section 75-11

Subsection 75-11(1)

Subsection 75-11(5)

Subsection 75-11(6)

Subsection 75-11(7)

Section 195-1

Income Tax Assessment Act 1936

Section 318

Paragraph 318(3)(a)

Paragraph 318(6)(a)

Reasons for decision

In this ruling,

•         unless otherwise stated, all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)

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

•         all reference materials, published by the Australian Taxation Office (ATO), that are referred to are available on the ATO website ato.gov.au

Question 1

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 selling either a freehold interest in land or a unit or granting or selling a long term lease if you and the recipient have agreed in writing that the margin scheme is to apply.

The agreement must be made on or before the making of the supply, or within such further period as the Commissioner allows.

However, subsection 75-5(2) provides that the margin scheme does not apply if you acquired the 'entire' freehold interest, unit or long-term lease through a supply that was 'ineligible for the margin scheme'.

Subsection 75-5(3) lists the circumstances where a supply is ineligible for the margin scheme.

Of relevance in this case are paragraphs 75-5(3)(a) and 75-5(3)(g).

In this case we consider that the Property:

•         was supplied by the Vendor to Individual A (the purchaser stated on the sale contract);

•         a simultaneous supply was made at settlement of the Property from Individual A to you; and

•         you will make supplies of strata titled townhouses to third parties.

Your supply of the townhouses to third parties will be ineligible for the margin scheme under paragraph 75-5(3)(a) if you acquired the Property as a taxable supply on which the GST was worked out without applying the margin scheme.

Individual A has never been registered for GST and there is no evidence that he has been required to register for GST. Therefore, the supply of the Property from Individual A to you was not a taxable supply.

Your supply of the townhouses to third parties will be ineligible for the margin scheme as per paragraph 75-5(3)(g) if, among other things, you acquired the Property from an 'associate' who was registered or required to be registered, at the time of the acquisition.

The term 'associate' is defined in section 195-1 with reference to section 318 of the Income Tax Assessment Act 1936 (ITAA 1936).

Paragraph 318(3)(a) of the ITAA 1936 provides that an entity that benefits under a trust is an associate of that trust.

Paragraph 318(6)(a) of the ITAA 1936 provides that for the purposes of section 318, a reference to an entity benefiting under a trust is a reference to the entity benefiting, or being capable (whether by the exercise of a power of appointment or otherwise) of benefiting, under the trust, either directly or through any interposed companies, partnerships or trusts.

In this case, Individual A is a beneficiary of the JKL Trust with the JKL Trust being a beneficiary of the ABC Trust (you). Therefore, pursuant to section 318 of the ITAA 1936, Individual A is an associate of yours for GST purposes.

As discussed above, Individual A has never been registered for GST and there is no evidence that he has been required to register for GST. Therefore, as you acquired the Property from an 'associate' (Individual A), and Individual A was neither registered nor required to be registered for GST at the time of your acquisition (dd/mm/yyyy), paragraph 75-5(3)(g) does not apply.

In accordance with the above, you are eligible to, and may apply the margin scheme to your supplies of strata titled townhouses to third parties if you and the third party agree in writing that the margin scheme is to apply.

Question 2

If a taxable supply of real property is under the margin scheme, the amount of GST on the supply is 1/11^th of the margin for the supply.

Generally, the margin is the amount the consideration for the supply exceeds the consideration for your acquisition of the property.

However, section 75-11 contains rules for calculating the margin in certain circumstances. Given the facts of this case, subsections 75-11(1) through subsection 75-11(5) are not relevant.

Subsection 75-11(6) applies if, among other things, you acquired the interest, unit or lease in question from an 'associate' who was registered or required to be registered, at the time of the acquisition. As discussed above Individual A was neither registered nor required to be registered at the time you acquired the Property. Therefore subsection 75-11(6) does not apply.

Subsection 75-11(7) applies in situations where you acquired the interest, unit or lease in question from an entity who was your associate at the time of the acquisition and none of the other prior subsections of section 75-11 apply.

In this situation, the margin for the supply you make is the amount by which the consideration for the supply exceeds the GST inclusive market value of the interest, unit or lease at the time of the acquisition where your acquisition was made after 1 July 2000.

In this case:

•         you acquired the Property from an associate (Individual A);

•         subsections 75-11(1) to 75-11(6) do not apply; and

•         you acquired the Property on dd/mm/yyyy.

Therefore, pursuant to subsection 75-11(7), the margin for your supply you make is the amount by which the consideration for your supply exceeds the GST inclusive market value of the Property as at dd/mm/yyyy (the date you acquired the Property).