Edited version of private advice

Authorisation Number: 1051907655306

Date of advice: 8 October 2021

Ruling

Subject: GST and margin scheme

Question 1

Are you eligible to apply the margin scheme under subsection 75-5(3) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) with respect to supplies of new residential apartments constructed on land purchased under a contract of sale dated dd/mm/yyyy, namely:

•         Property 1

•         Property 2

Answer

Yes

Question 2

For the purposes of subsection 75-10(2) of the GST Act, is $x,xxx,xxx the consideration for the acquisition of Property 1 and Property 2?

Answer

Yes

Relevant facts and circumstances

You are a discretionary Investment Trust set up on dd/mm/yyyy.

You registered for GST from dd/mm/yyyy.

ABC Pty Ltd (Vendor) is registered for GST.

You and the Vendor are not related to each other.

The Purchase Contract

On dd/mm/yyyy, you entered into a contract for the sale and purchase of land, (referred to as the Purchase Contract) with the Vendor, to acquire the following properties, (referred to as the Original Properties) for the total consideration of $xx,xxx,xxx:

The Original Residential Properties

•         Property 1

•         Property 2

The Original Commercial Properties

•         Property 3 and

•         Property 4

At the time the contract was entered into, the $xx,xxx,xxx contract price paid for the 4 properties, was not allocated to each individual property.

The Purchase Contract entered into for all Original Properties and supplied to you were treated as a GST-free supply of going concern and no GST charged as part of the purchase price.

In the Purchase Contract, the box indicating 'input taxed' has been marked with an 'X', then crossed out and initialled.

You agreed for the supply of the Original Properties to be a supply of a going concern.

The Purchase Contract settled on dd/mm/yyyy.

Residential Leases

Residential leases for the Original Residential Properties were filed along with the commercial leases as part of the Purchase Contract dated dd/mm/yyyy for completeness purposes.

Neither the Vendor nor you intended to carry on the residential leases up to the date of supply.

In relation to Property 1 you have confirmed by email:

(a)   The tenancy agreement was for a period of x months and ended on dd/mm/yyyy,

(b)   Advice from the vendor's agent confirms the tenant vacated the property on dd/mm/yyyy,

(c)   The property was not subsequently leased or advertised for lease,

(d)   At the time of settlement the residential premises were vacant, and

(e)   After settlement, you did not lease the premises and the property remained vacant until demolition.

In relation to Property 2 you have confirmed by email:

(a)   The tenancy agreement was for a period of xx months and ended on dd/mm/yyyy,

(b)   Advice from the vendor's agent confirms the tenant vacated the property on dd/mm/yyyy,

(c)   The property was not subsequently leased or advertised for lease,

(d)   At the time of settlement the residential premises were vacant, and

(e)   After settlement, you did not lease the premises and the property remained vacant until demolition.

Demolition and sales of New Residential Apartments

You commenced demolition works in relation to the Original Properties on dd/mm/yyyy and constructed multi-level apartment buildings (New Residential Apartments) over the land, for sales to unrelated buyers.

Both you and the individual buyers have agreed in the sales contract that the margin scheme (where applicable) is to apply.

Valuations

You engaged Valuer 1 on dd/mm/yyyy.

Valuer 1 is a professional valuer.

Valuer 1 undertook a valuation inspection on dd/mm/yyyy and provided you a professional valuation as at dd/mm/yyyy for Property 1 and Property 2.

Valuer 1 has valued these properties together at $x,xxx,xxx exclusive of GST as at dd/mm/yyyy.

You engaged Valuer 2 on or around dd/mm/yyyy.

Valuer 2 is a registered real estate value and property consultant.

For the purposes of the margin scheme (MSV 2009/1) Valuer 2 undertook a valuation inspection on dd/mm/yyyy and provided you a professional valuation as at dd/mm/yyyy Property 3 and Property 4.

For the purposes of the margin scheme, Valuer 2 has valued Property 3 at $x,xxx,xxx exclusive of GST as at dd/mm/yyyy and valued Property 4 at $x,xxx,xxx exclusive of GST as at dd/mm/yyyy.

You will adopt other appropriate apportionment methodologies (eg: unit or floor area basis) to further apportion the 'valuation' amount' across each of the new residential apartments.

Historical details in relation to the Original Properties

The Vendor acquired the Original Properties at the dates as set out in the table below. At the time of acquisition, each parcel of land had an existing house/building constructed on the land.

Documents provided

1.    Appendix 1 - Lodged Transfer Form

2.    Appendix 2 - Purchase Contract

3.    Appendix 3 - dd/mm/yyyy Valuation Report for the original residential properties

4.    Appendix 4 - dd/mm/yyyy Valuation report for the commercial properties

Relevant legislative provisions

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

Section 9-5

Section 38-325

Subsection 38-325(1)

Subsection 38-325(2)

Section 40-65

Subsection 75-5(1)

Subsection 75-5(2)

Subsection 75-5(3)

Subsection 75-10(2)

Subsection 75-10(3)

Section 75-11

Section 75-16

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

An entity makes a taxable supply under section 9-5 if:

(a)   it makes the supply for consideration; and

(b)   the supply is made in the course or furtherance of an enterprise that it carries on; and

(c)   the supply is connected with the indirect tax zone; and

(d)   is registered or required to be registered.

However, the supply is not a taxable supply to the extent that it is GST-free or input taxed.

It is common ground that the supply to you of Property 1 and Property 2 were existing residential premises.

For completeness, in accordance with subsection 38-325(1) the supply of a going concern is GST-free if:

(a)   the supply is for consideration; and

(b)   the recipient is registered or required to be registered; and

(c)   the supplier and the recipient have agreed in writing that the supply is of a going concern.

In accordance with subsection 38-325(2) a supply of a going concern is a supply under an arrangement under which:

(a)   the supplier supplies to the recipient all of the things that are necessary for the continued operation of an enterprise; and

(b)   the supplier carries on, or will carry on, the enterprise until the day of the supply (whether or not as a part of a larger enterprise carried on by the supplier).

In your case the acquisition for both the Original Commercial Properties and the Original Residential Properties was for a single amount, being consideration of $xx,xxx,xxx. The supply having satisfied all the elements of subsection 38-325(1). However, at the time of supply, in relation to the original residential properties, the vendor did not supply to you all things necessary for the continued operation of the residential leasing enterprise and did not carry on the enterprise up until the day of supply.

At the time of supply, being dd/mm/yyyy, there was no leasing enterprise carried on by the Vendor in respect of the Original Residential Properties. There were no leases in place, the properties were not advertised for lease and were vacant. Therefore, the supply of the Original Residential Properties from the Vendor to you does not, for GST purposes, meet the definition of a 'going concern' pursuant to subsection 38-325(2) and is not GST-free.

The supply of the Original Residential Properties from the Vendor to you was an input taxed supply of real property pursuant to section 40-65.

In summary, based on the facts of this case, the supply of the four Original Properties was a mixed supply to the extent:

•         the supply of the Original Commercial Properties being GST-free pursuant to section 38-325; and

•         the supply of the Original Residential Properties being input taxed pursuant to section 40-65.

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. Based on the facts you will be making taxable supplies of New Residential Apartments and entering into an agreement with the purchaser to apply the margin scheme.

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.

As the supply of Original Residential Properties to you were input taxed, there are no circumstances listed in this subsection apply to you. Therefore you are not ineligible to apply the margin scheme on the taxable supplies of New Residential Apartments that you make.

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.

In your case you are making taxable supplies of new residential premises constructed on land that was acquired as GST-free going concern (Original Commercial Properties) and input taxed (Original Residential Properties). Together the four properties were acquired for $xx,xxxx,xxx under a single contract. The amount paid as consideration was undissected, that is you are unable to ascertain the consideration provided for the acquisition of each individual property from the Purchase Contract.

As discussed above, you acquired a mixed supply consisting of four properties under a single Purchase Contract. You demolished the existing structures on the properties and amalgamated the properties constructing multi-level apartment buildings on the entire site.

As such, in making subsequent taxable supplies of New Residential Apartments (new residential premises) there may be multiple provisions in section 75-10 and 75-11 that apply in calculating the margin in respect of a subsequent supply. Section 75-16 provides that where real property has been acquired through two or more acquisitions (partial acquisitions) the calculation of the margin under a particular provision is determined only to the extent that the supply is connected to the partial acquisition.

With respect to the Original Commercial Properties the margin for the supply of new residential apartments is calculated as per section 75-11. You obtained a professional valuation at the time of acquisition, to ascertain the cost base for the purposes of the calculating the margin. The valuation for these properties as at 1 July 2000 is $x,xxx,xxx.

With respect to the Original Residential Properties, the margin for the supply of new residential apartments is calculated as per subsection 75-10(2). This is because the circumstances in subsection 75-10(3) and section 75-11 do not apply to you in respect of these properties.

Given the sales contract was a single amount, you engaged a professional valuer in mm/yyyy to obtain a valuation of the Original Residential Properties. The valuation for these properties as at dd/mm/yyyy is $x,xxx,xxx.

Based on the circumstances of the specifics of your case, whilst it may be of assistance for the valuation as at dd/mm/yyyy to include the two commercial properties, we accept that obtaining the valuation (market value) is a fair and reasonable method to ascertain the consideration for the acquisition of original residential properties. We note that the date of settlement is later than the date of valuation by a period of 6 months.

For the purposes of subsection 75-10(2) the valuation methodology used to ascertain the consideration for the acquisition of the original residential properties, being $x,xxx,xxx is fair and reasonable.