Edited version of private advice

Authorisation Number: 1052315027375

Date of advice: 11 October 2024

Ruling

Subject: GST - margin scheme

Question 1

Is the sale by you of real property to another entity a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes. The sale is a taxable supply as it meets all the requirements of section 9-5 of the GST Act.

Question 2

If the answer to Question 1 is yes, can you apply the margin scheme under section 75-5 of the GST Act to calculate GST on the sale of the properties?

Answer

Yes. The margin scheme can be applied to calculate GST on the sale of the properties.

Question 3

If the answer to Question 2 is yes, how will the margin be calculated for the sale of the properties?

Answer

The margin and GST payable under the margin scheme have been calculated.

This ruling applies for the following periods:

1 July 20YY to 30 June 20YY

The scheme commenced on:

7 December 20YY

Relevant facts and circumstances

You purchased three residential properties from another entity (hereafter collectively referred to as 'the properties').

The contract provided confirms that there was no GST applied to the purchase of the properties.

At the time of purchase, the properties had improvements on it including a garage and residential dwellings.

You subsequently registered for GST and carry on an enterprise of developing real estate.

You received development approval for the demolition of the residences and the construction of a mixed-use building.

In 20YY, a valuation was undertaken on the properties.

In 20YY, a Development Agreement was entered into between you and another entity (the developer). Under the agreement:

1.            You transferred ownership of the land to the developer.

2.            You and the developer agreed that the developer would deliver the project and you would be entitled to a number of serviced apartments subject to the terms of the agreement.

The valuation obtained in 20YY remained relevant as at the time of sale.

The Development Agreement contained clauses stating that consideration is GST exclusive.

When the property was sold, you also entered into the following agreements with the developer:

1.            A contract for the sale of the properties.

2.            A Call Option Deed to acquire units, carparks and storage spaces.

The contract for the sale of the properties advises that the supply is a taxable supply, the margin scheme will be used in making the taxable supply and that unless otherwise stated any amount specified in the contract as consideration payable for any taxable supply does not include any GST payable in respect of that supply.

The sale of the properties was settled in 20YY.

The properties were sold for a monetary amount under a contract for the sale of the properties and a non-monetary amount which related to an additional contract for the purchase of options. The total consideration was based on the property valuation undertaken in 20YY. A tax invoice was issued for the purchase. The tax invoice was issued as a taxable supply not made under the margin scheme.

You and the developer were registered for GST at all relevant times and the properties were acquired and sold in the course of the enterprise in which each entity carries on.

You reported the sale of the properties at label 1A with full GST. The GST was 10% of the valuation of the property undertaken in 20YY.

After you reported and paid the GST on your activity statement with GST on the full amount of the supply, you became aware that the initial contract was entered into under the margin scheme and that the GST amount was calculated and paid without applying the margin scheme.

There are no other contracts or agreements entered into that would alter the choice made by you and the developer to use the margin scheme. There is no dispute between you and the developer that the margin scheme was applied to the sale of the properties.

You and the developer are unrelated parties, and this was an arm's length transaction.

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 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)

Does Division 165 apply to this private ruling?

Division 165 of the A New Tax System (Goods and Services Tax) Act 1999 is a general 'anti-avoidance' rule that can apply in certain circumstances if you or another entity obtains a GST benefit from a scheme that you entered into or carried out for the main purpose of obtaining a GST benefit or allowing another to obtain one.

It may also apply in some cases where the GST benefit arises as a principal effect of a particular scheme. An entity can get a 'GST benefit' under the GST, Luxury Car Tax or Wine Equalisation Tax laws.

If Division 165 applies, the benefit can be cancelled. For example, we might increase the net amount for a particular tax period.

Unless your private ruling specifically discusses Division 165, we have not considered the application of the anti-avoidance provisions to your case.

If you want us to rule on whether Division 165 applies in your circumstances, contact your contact officer to find out what details we will need to make the private ruling.

Reasons for decision

Question 1

Summary

Yes. The sale is a taxable supply as it meets all the requirements of section 9-5 of the GST Act.

Detailed reasoning

Under section 7-1 of the GST Act, GST is payable on all taxable supplies.

Section 9-5 of the GST Act provides that you make a taxable supply if:

a)            you make the supply for consideration; and

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

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

d)            you are 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.

Your supply of the properties was in Australia for consideration, in the course of your property development enterprise and you are registered for GST. Therefore, your supply of the properties satisfies the requirements of paragraphs 9-5(a), (b), (c) and (d) of the GST Act.

The circumstances in which a supply is GST-free or input taxed are found in Divisions 38 and 40 of the GST Act respectively.

In this case, the sale of the properties are not GST-free or input taxed. Therefore, your supply of properties to the developer is a taxable supply.

Question 2

Summary

Yes. The margin scheme can be applied to calculate GST on the sale of the properties.

Detailed reasoning

Subsection 75-5(1) of the GST Act 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; 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.

However, subsection 75-5(2) of the GST Act 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

To apply the margin scheme to a supply of real property, the vendor and the purchaser must agree in writing for it to apply. Subsection 75-5(1A) of the GST Act provides that the agreement must be made on or before the making of the supply or within such further period as the Commissioner allows.

For the purposes of subsection 75-5(1A) of the GST Act, the time of making a supply of real property is settlement.

The contracts entered into between you and the developer for the sale of the properties provides that the sales were made under the margin scheme.

The written agreement requirement under section 75-5 of the GST Act is therefore satisfied.

Subsection 75-5(2) of the GST Act provides that you are not eligible to apply the margin scheme if you 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) of the GST Act outlines the circumstances where a supply would be 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

...

You did not acquire the property through a supply that was ineligible for the margin scheme, as set out in section 75-5(3) of the GST Act and therefore are eligible to use the margin scheme.

Question 3

Summary

The margin and GST payable under the margin scheme have been calculated.

Detailed reasoning

The margin scheme is a method of calculating the GST payable on the following supplies of real property:

a)            Selling a freehold interest in land;

b)            Selling a stratum unit; or

c)            Granting or selling a long-term lease.

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) explains how the margin scheme applies to a supply of real property made after 1 July 2000.

Under the margin scheme, the GST payable on the supply of real property is 1/11th of the margin for the supply (section 75-10 of the GST Act).

Subsection 75-10(2) of the GST Act states that subject to subsection 75-10(3) of the GST Act and section 75-11 of the GST Act, the margin for the supply is the difference between the consideration for the supply and the consideration for the acquisition of the real property. Subsection 75-10(3) and section 75-11 of the GST Act does not apply in these circumstances.

Where a property was acquired after 1 July 2000 the margin is generally the amount by which the consideration for the supply exceeds the consideration for the acquisition of the real property.

Consideration is defined in section 195-1 of the GST Act as follows;

"consideration" for a supply or acquisition, means any consideration, within the meaning given by sections 9-15 and 9-17, in connection with the supply or acquisition.

GSTR 2001/6 Goods and services tax: non-monetary consideration (GSTR 2001/6) paragraph 14, provides that if you receive any non-monetary consideration for a supply, the price includes the market value of that consideration.

You obtained a valuation for the properties in 20YY which was used to determine the sale price of the properties. The sale price of the properties included a non-monetary amount related to the purchase of options. The valuation of the non-monetary amount will be included in determining the price of the properties and will be used in calculation of the margin.

You purchased properties for consideration from an entity that was not an associate.

You sold the properties for monetary and non-monetary consideration for an amount that was exclusive of GST. Generally, the margin is calculated as the sale price less the purchase price divided by 11, however in this case, the valuation amount does not include GST.

As per paragraph 145 of GSTR 2006/8, where only the GST exclusive price is known, the GST inclusive price is calculated as follows:

GST inclusive price = ((E − C) ÷ 10) + E

Where:

E is the GST exclusive price; and

C is the supplier's consideration for the acquisition

The margin of the supply is the amount by which the consideration for the supply exceeds the consideration for the acquisition of the real property.

The margin has been calculated.

GST is 1/11th of the margin and has been calculated.

Note: the consideration for the acquisition should take into account adjustments on settlement.