Edited version of private advice

Authorisation Number: 1051858581966

Date of advice: 22 July 2021

Ruling

Subject: GST and the margin scheme

Questions

1. Will the entity be eligible to apply the margin scheme under Division 75 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) to the sale of the new units?

2. If yes, what is the consideration for the acquisition for the purpose of calculating the margin for the sale of each of the new units pursuant to sections 75-10 and 75-11 of the GST Act?

Answers

1. Yes.

2. The consideration for the acquisition of each of the new units is the GST inclusive market value of each of the respective new units at the time of the acquisition by the entity.

Relevant facts and circumstances

•             The entity is an Owners Corporation for a strata scheme and was constituted under the Strata Schemes Management Act 2015 (NSW) for the specified property (the property).

•             The entity is registered for the goods and services tax (GST).

•             The property currently comprises residential building lots and common property.

•             The entity carries on an enterprise of managing the strata scheme as well as managing and maintaining the building and common property of the strata scheme.

•             The entity is responsible for the proper maintenance and keeping in a state of good and serviceable repair of the common property.

•             NSW strata laws relevant to common property in strata schemes

o   Subsection 28(1) of the Strata Schemes Development Act 2015 (NSW)provides that the owners corporation of a strata scheme holds the common property in the scheme as agent for the owners as tenants in common in shares proportional to the unit entitlement of the owners' lots.

o   Subsection 116(1) of the Strata Schemes Management Act 2015 (NSW)provides that an owners corporation may dispose of or otherwise deal with any lot vested in the owners corporation as a result of a subdivision effected under section 13 of the Strata Schemes Development Act 2015 (NSW).

•             Accordingly, as an owners corporation in NSW, legal title to the common property is vested in the entity as agent for the owners of the existing units in the property (the proprietors) in proportion to their unit entitlements.

•             None of the proprietors are registered for GST.

•             The entity operates entirely at the direction of the proprietors. Any action undertaken by the entity requires the approval of the proprietors (via the approval of resolutions by the proprietors).

•             The proprietors passed a special resolution at a general meeting of the Owners Corporation, authorising the entity to subdivide the common property pursuant to section 9 of the Strata Schemes Development Act 2015 (NSW)to create new residential lots from the subdivision of the existing common property. It was also agreed that the entity would construct new units on the newly created residential lots.

•             The entity agreed to undertake and complete the construction of the units on the common property.

•             The entity undertook the necessary works and will register a new strata plan of subdivision to create the new units as separate lots within the strata plan.

•             The new units are currently common property.

•             Pursuant to the relevant statute, the newly created lots and the new units will vest in the entity on registration of the new strata plan of subdivision.

•             On registration of the new strata plan of subdivision, the proprietors will cease holding title in the common property and title in the new subdivided lots will vest in the entity.

•             The new units constructed on the newly created lots will be sold by the entity for consideration to a third party via an open market process.

•             The entity has entered into standard contracts of sale with the purchasers of the lots. The contracts for the sales of the new units contain written terms for the vendor and purchaser to agree that the margin scheme will apply to the sales of the new units.

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 subsection 40-75(1)

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 subsection 75-5(2)

A New Tax System (Goods and Services Tax) Act 1999 subsection 75-5(3)

A New Tax System (Goods and Services Tax) Act 1999 paragraph 75-5(3)(a)

A New Tax System (Goods and Services Tax) Act 1999 paragraph 75-5(3A)

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

A New Tax System (Goods and Services Tax) Act 1999 subsection 75-10(1)

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

A New Tax System (Goods and Services Tax) Act 1999 subsection 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 subsection 75-11(7)

A New Tax System (Goods and Services Tax) Act 1999 paragraph 75-11(7)(d)

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

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)

•        asterisked terms are defined in section 195-1

•        unless otherwise specified, any reference to a taxable supply assumes that all the requirements of section 9-5 are met

•        a reference to land includes stratum units; and

•        a reference to an interest in land is a reference to the legal and beneficial interest that an owner or co-owner has in the land

Detailed reasoning

1. Will the entity be eligible to apply the margin scheme under Division 75 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) to the sale of the new units?

Subsection 75-5(1) provides that an entity may apply the margin scheme to work out the amount of GST payable on a taxable supply of real property that it makes by selling a freehold interest in land, a stratum unit, or (granting) a long-term lease if that entity and the recipient have agreed in writing that the margin scheme is to apply.

Subsection 75-5(1A) provides that the written agreement must be made on or before making 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 the entity acquired the 'entire' freehold interest, stratum unit or long-term lease through a supply that was 'ineligible for the margin scheme'.

Subsection 75-5(3) lists the circumstances which make a supply ineligible for the margin scheme. Paragraph 75-5(3)(a) provides that 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 cannot use the margin scheme to sell a property if you purchased the entire property through a fully taxable sale and GST was worked out without using the margin scheme.

The entity will be eligible to apply the margin scheme to the sale of the new units where the entity did not acquire the new units through a supply that was ineligible for the margin scheme.

The registration of the strata plan of subdivision results in the legal and beneficial interests in the new lots being vested in the entity. The entity receives title to the land by operation of law.

Before an entity can make a taxable supply, it must first make a supply. The creation and transfer of the new lots to the entity, effected by the registration of a strata plan of subdivision of the common property, would not be a supply to the entity and therefore, would not be a taxable supply to the entity. Consequently, the entity would not have acquired the new units through a taxable supply on which GST was worked out without using the margin scheme.

As none of the other circumstances described in subsection 75-5(3) applies to the entity's acquisition of the new units, the sale of the new units by the entity would not be ineligible for the margin scheme.

Therefore, the entity will be eligible to apply the margin scheme to the sale of the new units.

The supply of the new units by the entity to a third party would be a supply of new residential premises. The sale by the entity of the newly constructed units to a third party would be a taxable supply.

The entity may choose to apply the margin scheme to work out the GST payable on its taxable supplies of the new units where, prior to the making of the supply, the entity and a third-party purchaser have agreed in writing that the margin scheme is to apply.

2. What is the consideration for the acquisition of the new units for the purpose of calculating the margin for the sale of each of the new units pursuant to sections 75-10 and 75-11 of the GST Act?

Subsection 75-10(1) provides that if a taxable supply of real property is under the margin scheme, the amount of GST on the supply is 1/11 of the margin for the supply.

Under subsection 75-10(2), the margin for the supply is the amount by which the consideration for the supply exceeds the consideration for the acquisition of the real property (subject to subsection 75-10(3) and section 75-11).

Subsection 75-10(3) is not applicable.

Section 75-11 provides the methodology for calculations of margins for supplies of real property in specific circumstances. Subsection 75-11(7) deals with the margin scheme on the subsequent supply of an interest, unit or lease over real property acquired from an associate. Subsection 75-11(7) is relevant in this case.

Subsection 75-11(7) applies to work out the consideration for the acquisition of the common property where the proprietors were associates of the entity at the time of acquisition by the entity.

Subsection 75-11(7) states:

(7) If:

(a) you acquired the interest, unit or lease in question from an entity who was your *associate at the time of the acquisition; and

(b) none of the other subsections of this section apply;

the margin for the supply you make is the amount by which the *consideration for the supply exceeds:

(c) if your acquisition was made before 1 July 2000 - an *approved valuation of the interest, unit or lease as at 1 July 2000; or

(d) if your acquisition was made on or after 1 July 2000 - the *GST inclusive market value of the interest, unit or lease at the time of the acquisition.

We consider that, although there may not have been a supply of the interest to the entity from the proprietors prior to the sale of the new units to a purchaser, nevertheless the operation of subsection 75-11(7) may allow the entity to calculate the margin for the sale of the new units, as per paragraph 75-11(7)(d), provided that the proprietors were associates of the entity.

Section 195-1 states that 'associate' has the meaning given by section 318 of the Income Tax Assessment Act 1936 (ITAA 1936). Section 318 of the ITAA 1936 explains who is considered to be an associate.

A company is defined in section 995-1 of the Income Tax Assessment Act 1997 and section 195-1:

company means:

(a)   a body corporate; or

(b)   any other unincorporated association or body of persons;

but does not include a *partnership or a *non-entity joint venture.

We consider that the entity is a company for the purposes of section 318 of the ITAA 1936.

Subsections 318(1) and 318(2) of the ITAA 1936 apply to the Plan. Subsection 318(1) of the ITAA 1936 states:

318(1) [Associates of a natural person]

For the purposes of this Part, the following are associates of an entity (in this subsection called the primary entity) that is a natural person (otherwise than in the capacity of trustee):

...

(e) a company where:

(i) the company is sufficiently influenced by:

(A) the primary entity; or

(B) another entity that is an associate of the primary entity because of another paragraph of this subsection; or

(C) another company that is an associate of the primary entity because of another application of this paragraph; or

(D) 2 or more entities covered by the preceding sub-subparagraphs; or

(ii) a majority voting interest in the company is held by:

(A) the primary entity; or

(B) the entities that are associates of the primary entity because of subparagraph (i) of this paragraph and the preceding paragraphs of this subsection; or

(C) the primary entity and the entities that are associates of the primary entity because of subparagraph (i) of this paragraph and because of the preceding paragraphs of this subsection.

Paragraph 318(2) of ITAA 1936 may apply to consider whether the proprietors are associates of the Plan and states:

318(2) [Associates of a company]

For the purposes of this Part, the following are associates of a company (in this subsection called the primary entity):

...

(d) another entity (in this paragraph called the controlling entity) where:

(i) the primary entity is sufficiently influenced by:

(A) the controlling entity; or

(B) the controlling entity and another entity or entities; or

(ii) a majority voting interest in the primary entity is held by:

(A) the controlling entity; or

(B) the controlling entity and the entities that, if the controlling entity were the primary entity, would be associates of the controlling entity because of subsection (1), because of subparagraph (i) of this paragraph, because of another paragraph of this subsection or because of subsection (3);...

Based on the information provided, the entity is sufficiently influenced by the proprietors and thereby the proprietors are associates of the entity under section 318 of the ITAA 1936.

As the proprietors are associates of the entity at the time of the acquisition by the entity, and none of the other subsections of section 75-11 applies, subsection 75-11(7) applies.

The wording of subsection 75-5(3A), in the context of acquisitions from an associate, suggests that an acquisition of a thing from an associate is possible even if the thing acquired was not by means of a supply by the associate. Therefore, for the purposes of section 75-11, there can be an acquisition of an interest even if there was no supply of the interest by an associate.

Although there may not have been a supply made by the proprietors to the entity, nevertheless the operation of subsection 75-11(7) of the GST Act may create an acquisition value for the new units, which is the market value of the interest as per paragraph 75-11(7)(d).

The new lots are created and vested in the entity upon registration of the new strata plan of subdivision. As the acquisition by the entity would be after 1 July 2000, the entity will be able to use the GST inclusive market value of the interest at the time of acquisition of the interests in the new units to work out the margin for the taxable supply when it sells the newly constructed units to a third party.

The margin for each of unit for margin scheme purposes would be the difference between the GST inclusive market value of the interests acquired by the entity from the individual proprietors to constitute the new unit and the GST-inclusive selling price of the unit.