Edited version of private advice

Authorisation Number: 1052075721669

Date of advice: 11 January 2023

Ruling

Subject: Eligibility for the margin scheme

Question 1

Is Company Y eligible to apply the margin scheme under Division 75 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) to Sale of Lots created from the Land A?

Answer

Yes, provided Company Y agrees in writing with the purchasers to use the margin scheme, Company Y is eligible to apply the margin scheme under Division 75 of GST Act to Sale of Lots created from the Land A properties.

Question 2

Is Company Y eligible to apply the margin scheme under Division 75 of GST Act to Sale of Lots created from Land B?

Answer

Yes, provided Company Y agrees in writing with the purchasers to use the margin scheme, Company Y is eligible to apply the margin scheme under Division 75 of GST Act to Sale of Lots created from the Land A properties.

Question 3

Is Company Y eligible to apply the margin scheme under Division 75 of GST Act to Sale of Lots created from Pre-July 2000 Land?

Answer

Yes, provided Company Y agrees in writing with the purchasers to use the margin scheme, Company Y is eligible to apply the margin scheme under Division 75 of GST Act to Sale of Lots created from the property located at the Land C.

Question 4

If the answer to question 1 is Yes, is the margin for each Sale Lot created from the Land A calculated by reference to Company Y's consideration for its acquisitions of the interests in question, totalling $XX per subsection 75-10(2)?

Answer

No, the margin for each Sale Lot created from the Land A is calculated by reference to Company Y's consideration for its acquisitions of the interests in question, totalling $XX and any settlement adjustments, per subsection 75-10(2).

Question 5

If the answer to question 2 is Yes, is the margin for each Sale Lot created from Land B calculated by reference to Company Y's consideration for its acquisitions of the interests in question, totalling $XX per subsection 75-10(2)?

Answer

No, the margin for each Sale Lot created from the XXXX Land is calculated by reference to Company Y's consideration for its acquisitions of the interests in question, totalling $XX and any settlement adjustments, per subsection 75-10(2).

Question 6

If the answer to question 3 is Yes, is the margin for each Sale Lot created from the Land C calculated by reference to an approved valuation by a professional valuer of the land as at 1 July 20XX, or its pre-1 July purchase price of $XX per subsection 75-10(3)(b) and Item 1?

Answer

Yes, the margin for each Sale Lot created from the Land C is calculated by reference to an approved valuation by a professional valuer of the land as at 1 July 20XX, per item 1 of subsection 75-10(3)(b).

This ruling applies for the following period:

Financial year commencing 1 July 20XX to financial year ended 30 June 20XX

The scheme commences on:

The date of this private ruling.

Relevant facts and circumstances

Company Y Pty Limited Purchased Land C for $XX on DD MM YY. As the property was acquired before 1 July 20XX, GST was not applied to the sale.

Company Y registered for GST on DD MM YY and reports on a quarterly BAS.

Company Y was a member of a GST Group from DD MM YY to DD MM YY. Company Z was not a member of the GST Group.

Land B was acquired on bare trust for Company Y:

The sellers in these transactions were third party entities and they were not registered or required to be registered for GST. Therefore, GST didn't apply to the transactions.

Company Y acquired Land A on:

Company Y acquired land from associated entity Company Z. The property was purchased GST-free under section 38-325 of the GST Act as a sale of a going concern. After acquisition of the land, Company Z was required to continue its farming business until completion of the sale of Land A.

Company Z acquired the land prior to the commencement of GST, therefore GST was not applied on the land.

Company Z was registered for GST from DD MM YY to DD MM YY.

Bare Trustee A acquired Lot XXX as bare trustee due to:

•         Company Y already owned the adjacent land and the vendor would have sought a higher price if they knew Company Y was the real purchaser

•         Bare Trustee A (as bare trustee) acted at the direction of Company Y in respect of the lots

•         Company Y provided all purchase money (including the deposit)

•         The land is recorded in Company Y books and accounts and

•         Company Y has always paid and recorded all land holding costs for the properties.

Land B was acquired under a bare trust agreement due to the same reason of anonymity as stated above.

Company Y and Bare Trustee A entered into a project development agreement with a third-party developer. The agreement consisted of:

•         The developer will develop the land into circa XX sale lots

•         The developer will, at its own cost and risk, carry out the Project of rezoning and subdividing the Land and development and marketing the sale of the lots

•         Company Y will retain the Lots Sale GST amount in order to fund its GST liability arising on the sale

•         Company Y will also retain the Lot Retention Amount being equivalent to XX% of the Net Sale Proceeds

•         Company Y will pay the balance of the Sale Proceeds to the Developer as the GST exclusive Lot Development Fee and

•         In addition, Company Y will pay an additional amount to the Developer, being the Gross Up GST Amount, on account of the Developer's GST liability on the Development Fee. The Developer's ability to recover the Gross up GST Amount is contained in clause XX of the agreement.

Company Y's future supplies of Sale Lots from the Land A, Land B and Land C will be taxable supplies since Company Y is registered for GST, the supplies are connected with Australia in the course of its enterprise and the supplies will be the supplies of new residential premises, as defined in section 195-1 of the GST Act.

A sale lot will only be created from a single existing property, being entirely from the Land A, Land B or Land C. Each Sale Lot will not be comprised of property that is a mixture of either the Land A, Land B or Land C.

A Sale Lot will be all of the developed lots that are created and sold from the land. The remaining parts of the land will be parks, roads and other undeveloped plots.

Company Y advised that the Private Ruling request does not seek the Commissioner's clarification relating to any other matters such as the bare trust agreements. As such, the Commissioner has not considered the legality or tax implications of the bare trust agreements in this private ruling.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Section 7-1

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(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 Section 75-10

A New Tax System (Goods and Services Tax) Act 1999 Section 75-10(3)

A New Tax System (Goods and Services Tax) Act 1999 Subsection 75-10(3)

A New Tax System (Goods and Services Tax) Act 1999 Paragraph 75-10(3)(b)

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

A New Tax System (Goods and Services Tax) Act 1999 Section 75-14

A New Tax System (Goods and Services Tax) Act 1999 Section 75-15

A New Tax System (Goods and Services Tax) Act 1999 Subsection 75-35(2)

Reasons for decision

Pursuant to section 7-1, GST is payable on all taxable supplies.

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:

a. Selling a freehold interest in land

b. Selling a stratum unit or

c. Granting or selling a long-term lease

if you and the recipient of the supply have agreed in writing that the margin scheme is to apply on or before the making the supply.

However, subsection 75-5(2) 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.

Eligibility

Subsection 75-5(3) lists the circumstances in which you acquire the entire freehold interest, stratum unit or long-term lease through a supply that is ineligible for the margin scheme. A supply is ineligible for the margin scheme if:

a)    it is a *taxable supply on which the GST was worked out without applying the *margin scheme; or

b)    it is a supply of a thing you acquired by *inheriting it from a deceased person, and the deceased person had acquired all of it through a supply that was ineligible for the margin scheme; or

c)    it is a supply in relation to which all of the following apply:

                      i.        you were a * member of a *GST group at the time you acquired the interest, unit or lease in question;

                     ii.        the entity from whom you acquired it was a member of the GST group at that time;

                    iii.        the last supply of the interest, unit or lease by an entity who was not (at the time of that supply) a member of the GST group to an entity who was (at that time) such a member was a supply that was ineligible for the margin scheme; or

d)    it is a supply in relation to which both of the following apply:

                      i.        you acquired the interest, unit or lease from the *joint venture operator of a *GST joint venture at a time when you were a *participant in the joint venture;

                     ii.        the joint venture operator had acquired the interest, unit or lease through a supply that was ineligible for the margin scheme; or

e)    it is a supply in relation to which all of the following apply:

                    i.        you acquired the interest, unit or lease from an entity as, or as part of, a *supply of a going concern to you that was *GST-free under Subdivision 38-J;

                   ii.          the entity was * registered or * required to be registered, at the time of the acquisition;

                  iii.          the entity had acquired the entire interest, unit or lease through a taxable supply on which the GST was worked out without applying the margin scheme; or

f)     it is a supply in relation to which all of the following apply:

                      i.        you acquired the interest, unit or lease from an entity as, or as part of, a supply to you that was GST-free under Subdivision 38-O;

                     ii.        the entity was registered or required to be registered, at the time of the acquisition;

                    iii.        the entity had acquired the entire interest, unit or lease through a taxable supply on which the GST was worked out without applying the margin scheme; or

g)    it is a supply in relation to which all of the following apply:

                      i.        you acquired the interest, unit or lease from an entity who was your *associate, and who was registered or required to be registered, at the time of the acquisition;

                     ii.        the acquisition from your associate was without *consideration;

                    iii.        the supply by your associate was not a *taxable supply;

                   iv.        your associate made the supply in the course or furtherance of an *enterprise that your associate *carried on;

                     v.        your associate had acquired the entire interest, unit or lease through a taxable supply on which the GST was worked out without applying the margin scheme.

Land A

In relation to Land A properties, Company Y is eligible to use the margin scheme as:

•         Company Y acquired Part of Land A by applying the margin scheme

•         The rest of Land A was acquired by Company Y as a sale of going concern under Subdivision 38J. The seller was an associate of Company Y and was registered for GST at the time of sale. The seller acquired the property pre-GST. At that time the seller was not required to be registered and the seller didn't acquired the land through a taxable supply. Therefore, the property was not a taxable supply and the margin scheme was not applied to the sale.

•         Company Y didn't inherit the properties

•         Company Y was not a member of a GST Group at the time they acquired the properties

•         The properties were not acquired from a joint venture operator of a GST joint venture

•         The properties were not acquired GST-free under Subdivision 38-O

•         Part of the land A was acquired by Company Y from an associate of Company Y for consideration of $XX and

•         The rest of land A was acquired by Company Y from an unrelated entity and consideration was paid for the property.

Land B

In relation to the Land B properties, Company Y is eligible to use the margin scheme as:

•         Land B was acquired by Company Y in three transactions. The sellers of the properties were third parties who were not registered or required to be registered for GST. Therefore, the property was not a taxable supply by the third parties.

•         Company Y didn't inherit the properties

•         Company Y was not a member of a GST Group at the time they acquired the properties

•         The properties were not acquired from a joint venture operator of a GST joint venture

•         The properties were not acquired GST-free under Subdivision 38-O or Subdivision 38-J and

•         The sellers were not associates of Company Y.

Land C

In relation to Land C, Company Y is eligible to use the margin scheme as:

•         The land was acquired by Company Y prior to the commencement of GST. Therefore, GST didn't apply to the property

•         Company Y didn't inherit the property

•         Company Y was not a member of a GST Group at the time they acquired the properties

•         The properties were not acquired from a joint venture operator of a GST joint venture

•         The properties were not acquired GST-free under Subdivision 38-O or Subdivision 38-J and

•         The sellers were not associates of Company Y. The sellers were not registered or required to be registered for GST as the property was sold pre-GST.

Calculating the margin

The amount of GST you must normally pay on a property sale is equal to 1/11^th of the GST-inclusive price. Under the margin scheme, however, the GST is instead calculated as 1/11^th of the margin. (Section 75-10)

The margin for the supply is the difference between the consideration for the supply and the consideration for the acquisition of the real property unless subsection 75-10(3) applies.

Subsection 75-10(3) applies if an approved valuation has been made and:

•         the circumstances in section 75-11 do not apply; and

•         you acquired the real property before 1 July 2000.

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), advises that the consideration for the acquisition of the real property is the original purchase price after taking into account settlement adjustments. However, the consideration for the acquisition does not include costs that the supplier had incurred that were associated with their purchases of real property, such as their legal expenses and stamp duty. It also does not include costs incurred in developing the real property, prior to or after its acquisition.

Goods and Services Tax Determination GSTD 2006/3 Goods and services tax: are settlement adjustments taken into account to determine the consideration for the supply or acquisition of real property? (GSTD 2006/3) contains a detailed discussion on the topic of 'settlement adjustment'. That Determination explains that the consideration will not always be the price shown on the contract as, on settlement, adjustments are commonly made for rates, land tax and other outgoings.

There are two methods you can use to work out the margin:

•         the consideration method or

•         the valuation method.

If you are selling property under the margin scheme and you originally purchased it on or after 1 July 2000, you must use the consideration method. That is, you must pay the GST on the difference (margin) between the sale price and the price you paid when you purchased the property

Land A

Land A Properties were acquired for a total of $XX being:

•         Part of Land A was acquired on DD MM YY for $XX and

•         The rest of land A was acquired on DD MM YY for $XX.

As none of the conditions under subsection 75-10(3) apply, the consideration for the property is $XX and any settlement adjustments.

Land B

Land B properties were acquired for $XX being:

•         Part of Land B was acquired on DD MM YY for $XX

•         Part of Land B was acquired on DD MM YY for $XX and

•         The rest of Land B was acquired on DD MM YY for $XX.

As none of the conditions under subsection 75-10(3) apply, the consideration for the property is $XX and any settlement adjustments.

Land C

Land C was acquired on D MM YY for $XX.

Item one in the table under paragraph 75-10(3)(b) states that if you acquired the interest before 1 July 2000 and the items 2,3 and 4 of the table do not apply, the consideration for the property under the margin scheme is an approved valuation for the interest at 1 July 2000.

As none of the criteria in items 2, 3 and 4 of the table at paragraph 75-10(3)(b) apply, the consideration for the margin scheme for the Land C is an approved valuation for the property at 1 July 2000.

Approved Valuation

Subsection 75-35(2) of the GST Act provides that a valuation made in accordance with the requirements of the relevant determination is an approved valuation.

Legislative instrument MSV 2020/1 A New Tax System (Goods and Services Tax) Act 1999 Margin Scheme Valuation Requirements Determination (MSV 2020/1), applies to valuations for taxable supplies of property made on or after 1 March 2010. The three methods available to you are:

Method 1: the market value of the property determined in writing by a professional valuer; or

Method 2: the value of the consideration provided by a purchaser in a contract for the sale and purchase of real property executed or exchanged prior to 1 July 2000 by parties dealing at arm's length; or

Method 3: the most recent value as determined by the State Government or Territory Government Department as the unimproved value, the site value, or the capital value of the land made prior to 1 July 2000.

Goods and Services Tax Ruling GSTR 2006/7 Goods and services tax: how margin scheme applies to a supply of real property made on or after 1 December 2005 that was acquired or held before 1 July 2000 (GSTR 2006/7). Paragraph 79 of GSTR 2006/7, advises the valuation must include a signed certificate which specifies:

a)    A full description of the property being valued

b)    The applicable valuation date

c)    The date the valuer provides the valuation to the supplier

d)    The market value of the property at the valuation date

e)    The valuation approach and the valuation calculation and

f)     Name and the qualifications of the valuer.

A professional valuer is defined in MSV 2020/1 as:

1)    a person registered or licensed to carry out real property valuations under a Commonwealth, a State or a Territory law; or

2)    a person who carries on a business as a valuer in a State or a Territory where that person is not required to be licensed or registered to carry on a business as a valuer; or

3)    a person who is:

a.    a member of the Australian Property Institute and accredited as a Certified Practicing Valuer; or

b.    a member of the Royal Institution of Chartered Surveyors and accredited as a Chartered Valuation Surveyor; or

c.     a member of the Australian Valuers Institute and accredited as a Certified Practicing Valuer.

The valuation must be made by the company's due date for lodgement of their BAS for the tax period to which the GST is payable on the taxable supply of the property. However, if the valuation is not made by the due date for lodgement of their BAS for the tax period to which the GST is payable on the taxable supply of the property, the Commissioner may for good reason allow an additional period within which the valuation may be made. (paragraph 10 of MSV 2020/1)

Proportion of consideration for subdivided property

Where a property has been subdivided, section 75-15 advises that the consideration for the acquisition or supply of a subdivided lot is apportioned by:

•         the consideration for the acquisition or supply referred in that section of interest; or

•         an approved valuation of that interest.

If you use the margin scheme, you will need to apportion your purchase price of the development site between each lot that you supply on a fair and reasonable basis. The margin will be the difference between the price you sell the lot for and its purchase price apportionment value.

Note, that in accordance with section 75-14 of the GST Act, your development costs and any costs associated with the land other than your purchase price or valuation value of the land cannot be included in the apportionment value for the lot.

Your apportionment value for each lot will be a fair and reasonable proportion of the:

•         purchase price for Land A

•         purchase price for Land B and

•         valuation value of Land C.

Paragraph 48 of GSTR 2006/8 states the effect of section 75-15 is that the consideration for the acquisition is the corresponding proportion of the consideration for the real property that you acquired. If land that is part of the original broadacres is used for public purposes including roads, parklands or utilities ('lost land'), the acquisition consideration of the entire broadacres is apportioned to the total number of subdivided lots, so that the sum of the apportioned amounts equal the acquisition consideration for the broadacres (including the 'lost land'). GSTR 2006/8 applies to property acquired on or after 1 July 2000.

GSTR 2006/7, applies to property acquired prior to 1 July 2000 and the sale of property is made on or after 1 December 2005. Paragraph 39 of GSTR 2006/7 states that under subsection 75-10(3), the margin for the supply is the difference between the consideration for the supply and the amount determined by the approved valuation. In the context of subdivision, if the land that is part of the original broadacres is used for public purposes, such as, roads, parklands or utilities, the valuation of the entire broadacres is apportioned to the total number of subdivided lots, so that the sum of the apportioned amounts equals the valuation for the broadacres (including the 'lost land').

The apportionment of the broadacres (including the 'lost land') is spread across the specific land parcel it belongs to. So that the subdivided lots, including any lost land in the XXX Land properties, are apportioned to the total consideration for the XXX Land. The subdivided lots including any lost land in the XXXX Land properties are apportioned to the total consideration for the XXXX Land properties.

The subdivided lots including any lost land in the Land Care apportioned by the valuation value for the Pre-July 20XX Land.

For the purpose of apportioning a valuation under MSV 2000/1, the valuation must be a valuation of the interest in existence at the valuation date; and the value is apportioned on a fair and reasonable basis, to ascertain the part of the valuation that relates to the sale lot being supplied.

Paragraph 59 of GSTR 2006/8 lists examples of some apportionment methods that you may use:

•         area - the consideration for the real property acquired is apportioned on the basis of the proportion of the total saleable area of the development represented by the particular lot;

•         lots or sites - the apportionment is based on the number of lots or sites;

•         anticipated selling price - the consideration for the real property that you acquired is apportioned on the basis of the proportion of the total anticipated selling price of the development represented by the particular lot; and

•         total aggregated selling prices - the consideration for the real property that you acquired is apportioned on the basis of the proportion of the total aggregated selling prices of the development represented by the particular lot. This method is only suitable for a development where all the lots are sold in a time that allows the aggregated selling prices to be calculated by the time the relevant Activity Statements are due to be lodged.

The above methods may be used provided they give a fair and reasonable result. Use of 'lots or sites' as an apportionment method would not give a fair and reasonable result if the size or value of the lots or sites varied significantly. (Paragraph 60 of GSTR 2006/8).