Edited version of private advice

Authorisation Number: 1052206400904

Date of advice: 20 December 2023

Ruling

Subject: GST - and the margin scheme

Question

Can you use the margin scheme to calculate GST on your sale of new residential premises to be located at (address)?

Answer

Yes.

This ruling applies for the following period:

20/12/20YY to 19/12/20YY

The scheme commenced on:

20 December 20YY

Relevant facts and circumstances

You are intending to register for GST. Once you are registered for GST, you will buy a residential block of land (the development site), located at (address), from an individual (X) for (price) on (date).

The development site is in the suburbs and is not farmland. The site has no structures on it and it has an area of (Y) metres squared.

X is not registered for GST and not required to be registered for GST. X did not use the development site in any enterprise and is not carrying on a property trading business or adventure or concern in the nature of trade in relation to the development site. X purchased the property with the intention of building a home for themselves to live in, but X changed their mind.

After settlement of sale of the development site to you, you will build a house on it. You will sell the completed house and the land for (price). You will sell the new residential premises less than 5 years after completion of construction of the house. The development of the new residential premises and sale of the new residential premises is your sole reason for holding the property. You want to use the margin scheme for your sale of the new residential premises. You and your buyer will agree in writing before the time of settlement of sale of the property by you to that buyer that the margin scheme will be used on that sale.

X is not an associate of your company.

You will not become part of a GST group or a GST joint venture.

You will not purchase the development site through the supply of a going concern. Additionally, your intended sale of the completed house will not be sold as part of a going concern.

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 40-65

A New Tax System (Goods and Services Tax) Act 1999 Division 75

Reasons for decision

Question

Can you use the margin scheme to calculate GST on your sale of new residential premises to be located at (address).

Summary

You may use the margin scheme to calculate GST on your sale of the new residential premises because:

•         you will make a sale of real property by selling a freehold interest in land; and

•         this supply will be a taxable supply; and

•         you and your buyer will agree in writing that the margin scheme will be used and you will enter this agreement before settlement of sale; and

•         you did not acquire your interest in the development site through a supply that was ineligible for the margin scheme as defined in subsection 75-5(3) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

Detailed reasoning

The margin scheme is a special way of working out GST on a taxable sale of real property.

Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) states:

You make a taxable supply if

(a)   you make the supply for *consideration; and

(b)   you make the supply in the course or furtherance of an enterprise that you carry on; and

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

(d)   you are registered or required to be registered (for GST).

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

(*Denotes a term defined in section 195-1 of the GST Act)

Relevantly, a sale of new residential premises is generally not GST-free.

A sale of residential premises other than new residential premises is input taxed under section 40-65 of the GST Act.

A sale of new residential premises used for residential accommodation before 2 December 1998 is input taxed.

In accordance with subsection 75-5(1) of the GST Act, the margin scheme applies in working out the amount of GST on a taxable supply of real property you make by:

(a)   selling a freehold interest in land; or

(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.

Subsection 75-5(1A) of the GST Act states:

The agreement must be made:

(a)    on or before the making of the supply; or

(b)    within such further time as the Commissioner allows.

However, in accordance with subsection 75-5(2) of the GST Act, the margin scheme does not apply if you acquire the entire freehold interest etc through a supply that was ineligible for the margin scheme'.

Subsection 75-5(3) of the GST Act specifies when an acquisition of freehold interest in land etc is through a supply that is ineligible for the margin scheme, for the purposes of subsection 75-5(2) of the GST Act.

Subsection 75-5(3) of the GST Act states:

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 to 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 GST joint venture at a time when you were a *participant in that 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.) (e)   it is a supply in relation to which all of the following apply:

(i)    you acquired the interest, unit or lease as part of, or as part of, a *supply of a going concern that was *GST-free under Subdivision 38-J;

(ii)    the entity was *registered or *required to be registered at the time of acquisition;

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

(f.)   It is a supply in relation to which all of the following apply:

(i)    you acquired the interest, unit or lease 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

(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 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

(v)    that your associate *carried on;

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

Subsection 75-5(4) of the GST Act states:

A reference in paragraph (3)(b), (c) or (d) to a supply that was ineligible for the margin scheme is a reference to a supply:

(a)  that was ineligible for the margin scheme because of one or more previous applications of subsection (3); or

(b)  that would have been ineligible for the margin scheme for that reason if subsection (3) has been in force at all relevant times.

In summary, the margin scheme 'cannot be used' by a seller in either of the following two situations:

•         where the seller is not making a taxable supply, for GST purposes; or

•         where the property was acquired by the seller through a supply that was 'ineligible for the margin scheme', pursuant to subsection 75-5(3) of the GST Act.

An interest in a property is acquired by a given entity (entity X) through a supply that is ineligible for margin scheme if:

•         the supply of the property to entity X was a taxable supply on which GST was worked out without using the margin scheme; or

•         in some limited situations where a sale prior to that sale was a taxable supply on which GST was worked out without applying the margin scheme.

For an interest in a property to be classed as being acquired through a supply that was ineligible for the margin scheme for the purposes of the GST Act, the requirements of any of paragraphs (a) to (g) of subsection 75-5(3) of the GST Act must be met.

The fact that an entity could not use the margin scheme on their sale of the property because their sale was not a taxable supply does not necessarily in itself mean that their buyer acquires their interest in the property through a supply that was 'ineligible for the margin scheme'.

However, the fact that an entity acquired their interest in land through a supply that was not a taxable supply can in combination with other factors (if present) mean that the entity acquired their interest through a supply that was ineligible for the margin scheme.

Application of the law to your circumstances

We shall firstly determine whether you will make a taxable supply of real property by selling a freehold interest in land.

You are going to supply real property by selling a freehold interest in land when you sell the new residential premises.

Your sale of the new residential premises will meet the positive limbs of section 9-5 of the GST Act because:

•         you will sell the new residential premises for consideration and in the course or furtherance of your enterprise consisting of your property development activities (paragraphs 9-5(a) and 9-5(b))

•         the sale will be connected with Australia, as the property is located in Australia (paragraph 9-5(c))

•         you will be registered for GST at the time of your sale of the new residential premises (paragraph 9-5(d))

Your sale of the new residential premises will not be GST-free.

You will sell new residential premises other than new residential premises used for residential accommodation before 2 December 19YY. Therefore, your sale of the new residential premises will not be input taxed under section 40-65 of the GST Act. There are no other provisions of the GST Act under which your sale of the new residential premises will be input taxed.

As all of the requirements of section 9-5 of the GST Act are met, you will make a taxable supply of the new residential premises.

Written agreement to use margin scheme

You and your buyer will agree in writing that the margin scheme will be used and the two of you will enter into this agreement before settlement of sale of the new residential premises.

Determining whether or not you acquired your interest in the property through a supply that was ineligible for margin scheme

The sale of the development site to you was not a taxable supply because the seller did not sell the property to you in the course or furtherance of an enterprise that he carried on.

This sale to you was not a taxable supply on which the margin scheme was not used. Therefore, the circumstances at paragraph 75-5(3)(a) of the GST Act are not present in your case.

Paragraph 75-5(3)(b) of the GST Act is not applicable to your situation as you did not acquire the development site by inheriting it.

Paragraph 75-5(3)(c) of the GST Act is not applicable to your situation as you are not a member of a GST group who is acquiring the interest from another member of the GST group.

Paragraph 75-5(3)(d) of the GST Act is not applicable to your situation as there is no joint venture involved.

The sale of the development site to you is not the supply of a going concern. Therefore, paragraph 75-5(3)(e) is not applicable to your situation.

The sale of the development site to you is not a GST-free supply of farmland under Subdivision 38-O of the GST Act. Therefore, paragraph 75-5(3)(f) is not applicable to your situation.

You are not acquiring your interest in the development site from an associate. Therefore, paragraph 75-5(3)(g) is not applicable to your situation.

In summary, you did not acquire an interest in the development site through a supply that was ineligible for the margin scheme. This is despite the fact that X could not have legally used the margin scheme due to the fact that his sale was not a taxable supply (the margin scheme was not relevant to X's sale)

In conclusion, you may use the margin scheme to calculate GST on your sale of the new residential premises because:

•         you will make a sale of real property by selling a freehold interest in land; and

•         this supply will be a taxable supply; and

•         you and your buyer will agree in writing that the margin scheme will be used and you will enter this agreement before settlement of sale; and

•         you did not acquire your interest in the development site through a supply that was ineligible for the margin scheme as defined in subsection 75-5(3) of the GST Act.

The fact that X's sale of the development site to you was not a taxable supply does not prevent you from legally using the margin scheme on your sale of the new residential premises. Although it is a relevant factor, it is not sufficient in itself to result in the supply to you being ineligible for the margin scheme.