Edited version of private advice

Authorisation Number: 1052126951253

Date of advice: 9 January 2024

Ruling

Subject: GST - property

Question 1

Will the sale of Unit <number> and Unit <number>, property address>(the Properties), be a taxable supply pursuant to section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes.

Question 2

Will you (the owners corporation) be eligible to apply the margin scheme under Division 75 of theGST Act to the sale of the Properties?

Answer

Yes.

Question 3

Will the margin on your (the owners corporation) taxable supplies of the Properties be calculated pursuant to subsection 75-11(7) of the GST Act?

Answer

No, subsection 75-11(7) of the GST Act does not apply based on the facts provided. The owners corporation did not acquire its interest in the Properties from an associate or associates. Each owner is not an associate of the owners corporation solely because they have an entitlement to vote at meetings of the owners corporation.

This ruling applies for the following period

1July <year> to 30 June <year>

The scheme commenced on:

<date>

Relevant facts and circumstances

Note: In this ruling the expressions 'you', 'Strata Plan <number>', 'the Plan' and 'the Owners Corporation' refer to the same entity and are used interchangeably.

You, the Plan, are the owners corporation for a New South Wales (NSW) strata scheme located at <address> (the Property). The Property comprises <number> residential lots, as well as common property. The strata scheme was established and registered in New South Wales on <date>.

You registered for GST from 1 July 2000. You carry on an enterprise of managing the strata scheme as well as managing and maintaining the building and common property of the strata scheme. You are responsible for the proper maintenance of and keeping in a state of good and serviceable repair the common property.

The Plan was originally established under and governed by the Strata Schemes (Freehold Development) Act 1973 (Development Act 1973) and the Strata Schemes Management Act 1996 (Management Act 1996) (collectively, the former strata legislation).

The former strata legislation has been replaced by the Strata Schemes Development Act 2015 (Development Act 2015) and the Strata Schemes Management Act 2015 (Management Act 2015) (collectively, the current strata legislation).

Special resolutions were passed at Extraordinary General Meetings (EGM), authorising the Plan to develop and subdivide the common property over the existing building to create two new residential lots, units <number> and <number>. The sale of the new units will fund rectification works required on the Property.

Two of the relevant EGM minutes have been provided.

In respect of the resolution passed on <date>:

•                     There were a total of <number> unit entitlements present and eligible to vote on the motion.

•                     <number> unit entitlements, approximately <percentage>, voted in favour of the motion.

•                     <number> owners were present.

•                     <number> owners cast their vote by proxy. Of these, <number> nominated <name> (the Chairperson) as their proxy.

For the subsequent resolution, passed on <date>, while the precise numbers vary, the breakdown is similar in terms of the owners present and the proportion that voted by proxy. At that second meeting, a total of <number> unit entitlements voted on the motion with <number> unit entitlements, approximately <percentage>, voting in favour of the motion.

The following provisions from both the Management Act 2015 and the Development Act 2015 are relevant:

• Subsection 8(1) of the Management Act 2015 provides that the owners of the lots from time to time in a strata scheme constitute a body corporate. This is referred to in the Management Act as an 'owners corporation' (refer to the definition of 'owners corporation' under s 4 of the Management Act).
• Subsection 9(1) of the Management Act 2015 provides that the owners corporation has the principal responsibility for the management of the strata scheme.
• Subsection 9(2) of the Management Act 2015 provides that the owners corporation has, for the benefit of the owners of lots in the strata scheme, the management and control of the use of the common property of the strata scheme, and the administration of the strata scheme. Furthermore subsection 9(3) provides the owners corporation has responsibility for, among other things, maintaining and repairing the common property of the strata scheme.
• Subsection 108(1) of the Management Act 2015 provides that an owners corporation may add to the common property, alter the common property, or erect a new structure on common property for the purpose of improving or enhancing the common property. Subsection 108(2) provides that the owners corporation must first pass a special resolution before undertaking these activities.
• Subsection 116(1) of the Management Act 2015 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 Development Act 2015.
• Common property' is defined in subsection 4(1) of the Development Act 2015 to mean any part of a parcel that is not comprised in a lot (including any common infrastructure that is not part of a lot).
• Subsection 13(1) of the Development Act 2015 provides that common property may be subdivided by the registration of a plan as a strata plan of subdivision.
• Subsection 28(1) of the Development Act 2015 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 proprietors' lots.

Accordingly, as an owners corporation in New South Wales, legal title to the common property is held by you as agent for the proprietors of the existing <number> residential units at the Property in proportion to their unit entitlements. Any newly created lots from the common property will vest in you, in your own right, on registration of the new plan of subdivision.

Description of new lots and process

Each new unit is a <number> bedroom, <number> bathroom, unit. The new units were constructed on top of the existing building but within the height limits for the Property.

The works conducted on the Property include:

•         Construction of the new units and underground carparking for these lots.

•         Extending the lift wells to the new units.

•         The addition of a second lift to the building.

•         Replacing the current exterior of the building with a new exterior, including balconies that will enable a greater weight to be placed on the building.

•         Various structuring and integrity measures to improve the building.

•         Improvements to the quality of design and fit out of the foyer area.

•         Landscaping for the building.

Following the registration of the new strata plan of subdivision, title to the new units will vest in you and on settlement of the contracts for sale of the new units, you will transfer the new units to the relevant purchasers.

You engaged builders to construct the new units and to complete the rectification works. Input tax credits have been claimed on the construction costs.

The units have not yet settled (since the new strata plan of subdivision has not yet been registered).

The contracts for the sale of the units have not been exchanged.

The draft contracts for the sale of the new units indicate that the margin scheme is to apply to the sale of the new units.

None of the Proprietors are registered for GST.

Photographs have been provided of the works undertaken by you. The units were constructed on top of the apartment block (i.e. on the roof of the apartment block) and did not replace any existing 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 section 9-40

A New Tax System (Goods and Services Tax) Act 1999 section 11-10

A New Tax System (Goods and Services Tax) Act 1999 section 40-65

A New Tax System (Goods and Services Tax) Act 1999 section 40-75

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

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

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

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

Income Tax Assessment Act 1936 section 6

Income Tax Assessment Act 1936 section 318

Income Tax Assessment Act 1997 section 995

Reasons for decision

These reasons for decision accompany the Notice of private ruling for Strata Plan <number>.

This is to explain how we reached our decision. This is not part of the private ruling.

In this reasoning, please note:

• 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's website ato.gov.au.

Issue 1 - Sale of units - new residential premises

Question

Will the sale of Unit <number> and Unit <number>, <property address> (the Properties), be a taxable supply pursuant to section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Detailed reasoning

Section 9-40 provides that you are liable for GST on any taxable supplies that you make.

Section 9-5 provides that an entity makes a taxable supply if:

(a)  the entity makes the supply for consideration

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

(c)   the supply is connected with Australia, and

(d)  the entity 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.

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

Subsection 13(1) of the Development Act 2015 provides that common property may be subdivided by the registration of a strata plan of subdivision.

'Common property' is defined in subsection 4(1) of the Development Act 2015 to mean any part of a parcel that is not comprised in a lot (including any common infrastructure that is not part of a lot).

The registration of the strata plan of subdivision containing a lot made up in whole or in part from the common property changes the nature of that property.

Since common property is the land in a parcel that is not comprised in a lot, lots and common property are mutually exclusive (Houghton v. Immer (No 155) Pty Ltd (1997) 44 NSWLR 46 at 51 per Handley JA).

Therefore, on registration of the strata plan of subdivision, the subdivided property will cease to be common property and will become two new lots. The legal and beneficial interests in the new lot will vest in you.

Under subsection 116(1) of the Strata Schemes Management Act 2015 (NSW) an owners corporation may dispose of or otherwise deal with any lot vested in it as a result of a subdivision of common property effected by section 13 of the Development Act 2015.

Consequently, you will make a supply when you sell the new units to third parties.

This supply will be a taxable supply if the requirements in section 9-5 of the GST Act are met.

In this case, you will receive consideration from the third party to which you make the supply of the newly created lot.

You carry on an enterprise of managing and maintaining the buildings and common property. The subdivision of the common property and the construction of new residences on the new lots are part of the activities you carry on in managing the common property and the strata scheme. Accordingly, your supply of the new units will be made in the course or furtherance of an enterprise that you carry on.

The supply is connected with Australia and you are registered for GST.

The new units have not previously been sold as residential premises (see paragraph 40-75(1)(a) of the GST Act). As stated above, the registration of the strata plan of subdivision results in the legal and beneficial interests in the new lot being vested in you. As the interests in the new lot are created and vest in you by the operation of the law, the new units were not sold as residential premises to you. Accordingly, your supply of the new units to third parties will be supplies of new residential premises and therefore will not be input taxed supplies of residential premises under section 40-65.

As all of the requirements for a taxable supply under section 9-5 will be satisfied, your supply of the new units to third parties will be taxable supplies.

Issue 2 - Sale of units - eligibility for the margin scheme

Question

Will you (the owners corporation) be eligible to apply the margin scheme under Division 75 of the GST Act to the sale of the Properties?

Detailed reasoning

Subsection 75-5(1) provides that you may apply the margin scheme to work out the amount of GST payable on a taxable supply of real property that you make by, among other things, selling a freehold interest in land 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 through a supply that was 'ineligible for the margin scheme'.

Subsection 75-5(3) lists the circumstances in which a supply is 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.

Application to this case

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

As discussed in Issue 1, the registration of the strata plan of subdivision results in the legal and beneficial interests in the new lots being vested in you. You receive title to the property by the operation of law. You did not acquire your interest in the new residential 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 your acquisition of the two new residential units, the sale of the new residentials units by you would not be ineligible for the margin scheme.

Therefore, you will be eligible to apply the margin scheme to the sale of the new residential units provided you and each of the purchasers have agreed in writing that the margin scheme is to apply. In this case, you state that in each contract for the sale of the new residential units, it has been agreed that the margin scheme is to apply to the sale.

Issue 3 - Sale of units - calculation of the margin

Question

Will the margin on your (the owners corporation) taxable supplies of the Properties be calculated pursuant to subsection 75-11(7) of the GST Act?

Detailed reasoning

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

Subject to subsection 75-10(3) and section 75-11, the margin for the supply is the amount by which the consideration for the supply exceeds the consideration for the acquisition of the interest, unit or lease in question.

Subsection 75-10(3) does not apply as none of the circumstances specified in an item in the second column of the table in the subsection apply to the supply (which all relate to interests held since before 1 July 2000).

Subsection 75-11(7) applies to determine the margin for a supply of real property that was acquired from an associate.

Under subsection 75-11(7) if 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 subsections of section 75-11 apply, then 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 (for acquisitions made on or after 1 July 2000).

It is therefore necessary to determine whether you will make an acquisition from an associate or associates when the new lots vest in you on subdivision of the common property.

We consider that, although there may not have been a supply of the interest in the new lots from each owner, nevertheless it is possible for you to make an acquisition of your interest in the new lots from each owner. It is clear from the wording of subsections 75-5(3A) and 75-11(6A) that you can have an acquisition from an entity even though the acquisition was not by means of a supply by that entity.

However, we consider that subsection 75-11(7) does not apply in this case as you have not acquired your interest in the new lots from an associate or associates.

Section 195-1 of the GST Act provides that 'associates' for the purposes of the GST Act has the meaning given by section 318 of the Income Tax Assessment Act 1936 (ITAA 1936).

The owners corporation is a body corporate established under NSW strata legislation which relevantly provides:

Constitution of owners corporation

(1) The owners of the lots from time to time in a strata scheme constitute a body corporate under the name "The Owners-Strata Plan No X" (X being the registered number of the strata plan to which that strata scheme relates).

(2) An owners corporation is declared to be an excluded matter for the purposes of section 5F of the Corporations Act 2001 of the Commonwealth in relation to the whole of the Corporations legislation.

Note: This subsection ensures that neither the Corporations Act 2001 nor Part 3 of the Australian Securities and Investments Commission Act 2001 of the Commonwealth will apply in relation to an owners corporation. Section 5F of the Corporations Act 2001 of the Commonwealth provides that if a State law declares a matter to be an excluded matter in relation to those Acts, then the provisions of those Acts will not apply in relation to that matter in the State concerned.

The term 'company' is defined in subsection 6(1) of the ITAA 1936 to have the meaning given by subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997), which provides that 'company' means a body corporate or any other unincorporated association or body of persons but does not include a partnership or non-entity joint venture.

The owners corporation is a body corporate and is therefore a 'company' for the purposes of applying the definition of associate in section 318 of the ITAA 1936.

Subparagraph 318(2)(d) of the ITAA 1936 provides that another entity (the 'controlling entity') is an associate of a company where:

(i) the company 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 company 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).

'Sufficiently influenced' is defined for the purposes of section 318 of the ITAA 1936 in paragraph 318(6)(b) as follows:

a company is sufficiently influenced by an entity or entities if the company, or its directors, are accustomed or under an obligation (whether formal or informal), or might reasonably be expected, to act in accordance with the directions, instructions or wishes of the entity or entities (whether those directions, instructions or wishes are, or might reasonably be expected to be, communicated directly or through interposed companies, partnerships or trusts).

To determine whether a company is sufficiently influenced by a controlling entity, or a controlling entity and another entity or entities, what is required is a factual inquiry as to how the owners corporation is accustomed to (past acts), must (present acts), or might reasonably be expected to (future acts by reference to some other fact or matter presently existing) act.

The mere entitlement to vote at meetings of the owners corporation does not, of itself, establish that the owners corporation is sufficiently influenced by the voting entity.

Where unrelated owners exercise independent judgement to cast their votes, the mere fact that an owner has a voting entitlement and has exercised that voting entitlement, does not make the owner an associate of the owners corporation, even if that owner voted with the majority.

The definition of sufficiently influenced in paragraph 318(6)(b) refers to 'the directions, instructions or wishes of the entity or entities'. It is implicit in this wording that there is some form of unity of these directions, instructions or wishes.

The Explanatory Memorandum introducing section 318 noted that an entity will be sufficiently influenced by another entity where that entity has 'influence, because of obligation or custom, over a company or its directors to direct the actions of the company either directly or through interposed entities'.

Further, the Explanatory Memorandum summarised the relevant provisions as follows:

•         another entity that, acting alone or with another entity or entities, sufficiently influences the company (subparagraph (2)(d)(i));

•         an entity that, either alone or together with associates, holds a majority voting interest in the company (subparagraph (2)(d)(ii))

[Emphasis added]

Where'sufficient influence' is sought to be established by aggregating the influence of multiple entities, something more than just combined voting power is required. The entity must act 'with' the other entities. Entities each individually casting their vote do not act 'with' each other even if they happen to vote consistently with each other after each exercising independent judgement.

If an alternative view was adopted, a minority shareholder of a company would be an associate of that company because, combined with all the other shareholders of the company with voting rights, the shareholder and these other entities could together sufficiently influence the company through their combined voting power.

In the present case, each owner has an entitlement to vote at meetings of the owners corporation. The value of each vote in respect of a lot is generally equal to the unit entitlement of the lot.

In respect of the resolution passed on <date>:

•                     There were a total of <number> unit entitlements present and eligible to vote on the motion.

•                     <number> unit entitlements, approximately <percentage>, voted in favour of the motion.

•                     <number> owners were present.

•                     <number> owners cast their vote by proxy. Of these, <number> nominated <individual> (the Chairperson) as their proxy.

For the subsequent resolution, passed on <date>, while the precise numbers vary, the breakdown is similar in terms of the owners present and the proportion that voted by proxy. At that second meeting, a total of <number> unit entitlements voted on the motion with <number> unit entitlements, approximately <percentage>, voting in favour of the motion.

We have not been provided with any evidence that the owners acted together in casting their votes. In fact, a number of owners voted against the development and subdivision occurring.

In summary, what is required is a factual inquiry specific to the owners corporation to determine whether the owners corporation is sufficiently influenced by any particular owner, or a specific subset of the owners acting together. An individual owners entitlement to vote at meetings of the owners corporation is not, of itself, enough to establish sufficient influence regardless of how they voted.

Conclusion

For the purposes of applying the margin scheme, the consideration for the acquisition is nil. Subsection 75-11(7) does not apply based on the facts provided. While the owners corporation acquired its interest in the units from the owners, the mere fact that each owner has an entitlement to vote at meetings of the owners corporation is not sufficient to establish that each owner is an associate of the owners corporation.

As subsection 75-10(3) and section 75-11 do not apply, the margin for the supply will be the amount by which the consideration for the supply exceeds the consideration for the acquisition of the interest by the owners corporation (nil).