Edited version of private advice

Authorisation Number: 1052336787365

Date of advice: 28 November 2024

Ruling

Subject: Use of the margin scheme on disposal of real property

Question 1

Is XXXX entitled to apply the margin scheme in working out the amount of GST on any taxable supply of the Lots under section 75-5 of the A New Tax System (Goods and Services Tax Act) 1999 ('GST Act')?

Answer

Yes.

Question 2

Is XXXX entitled to calculate the margin on any taxable supply of the Lots under subsection 75-11(6) of the GST Act?

Answer

Yes.

This ruling applies for the following period:

Up to the year ended in which the sale of the lots in question is undertaken by XXXX.

Relevant facts and circumstances

XXXX is an Australian statutory corporation and XXX Government agency constituted under the XXXX Act.

XXXX is registered for GST.

Under the XXXX Act, XXXX has a statutory mandate to oversee the development of the XXXX Precinct in which it owns land ('the Lots'). XXXX intends to sell the Lots in the future for the purposes of residential development.

The Lots are within the XXXX Precinct and, specifically, the existing XXXX site located at the corner of XXXX Road and XXXX Street.

The Lot on which the XXXX Site is located is currently subject to a commercial lease from which XXXX derives income.

XXXX is carrying on an enterprise of leasing commercial property.

The commercial lease, running XX years from XXXX to XXXX, will still be in operation at the date of the transfer of the Lots.

XXXX was recorded as the registered proprietor of each Lot pursuant to a Transfer Form XXXX ('Transfer Dealing'), which was registered on XXXX.

The Transfer Dealing was entered into under section X of the XXXX Act that allows XXXX to acquire land via agreement with other government agencies.

The previous owner of the Lots was YYYY. YYYY is a statutory body constituted under the YYYY Act.

YYYY is registered for GST.

The Deed of Transfer between XXXX and YYYY states that the consideration for the transfer of the land will be $0. Any fair value of the land will be recognised by way of equity transfer.

The Deed of Transfer stated that the parties agreed that the supply of land constituted the supply of a GST-free going concern.

The Transfer Dealing lists $1.00 payable as consideration.

The $1.00 recorded in the Transfer Dealing was included for administrative purposes only, as an amount of at least $1.00 must be recorded on such a dealing for it to be in registrable form with the XXXX Registry Services.

XXXX did not pay any amount to YYYY for the transfer of the Lots.

Upon completion of the acquisition from YYYY, XXXX acquired each of the assets and liabilities held by YYYY as owner of the Lots, including the commercial lease.

The owners of the lots at 1 July 2000 were i) The Crown; being Her Most Gracious Majesty Queen Elizabeth II in the right of the State of XXXX and the Government of XXXX) and ii) the Former ZZZZ a statutory body constituted under former Part Z of the ZZZZ Act ('the Original Owners').

On or around XXXX, the lots vested in the YYYY pursuant to the YYYY Order ('the Vesting Order'). The Vesting Order was made under section Y of the YYYY Act 2006.

The Original Owners were compelled to dispose of the Lots pursuant to the Vesting Order and the YYYY was recorded as the registered proprietor of the lots.

No consideration was payable from the YYYY to the Original Owners for the transfer of The Lots.

Under the YYYY Act 2012, the YYYY Act was amended to change the name of the YYYY to YYYY. Accordingly, on or around YYYY, the name of the registered proprietor of each Lot was changed to YYYY.

After passing the YYYY Act, YYYY changed names to YYYY, who was then listed as the registered proprietor of the Lots.

Relevant legislative provisions

A New Tax System (Australian Business Number) Act 1999section 41

A New Tax System (Goods and Services Tax) Act 1999 section 9-5

A New Tax System (Goods and Services Tax) Act 1999 section 9-10

A New Tax System (Goods and Services Tax) Act 1999 section 9-15

A New Tax System (Goods and Services Tax) Act 1999 section 9-20

A New Tax System (Goods and Services Tax) Act 1999 section 72-100

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

Income Tax Assessment Act 1936 section 318.

Reasons for decision

Question 1

Is XXXX entitled to apply the margin scheme in working out the amount of GST on any taxable supply of the Lots under section 75-5 of the GST Act?

Detailed reasoning

Under section 9-5 of the GST Act, an entity makes a taxable supply where the supply:

•         is made for consideration; and

•         is made in the course or furtherance of an enterprise being carried on; an

•         is connected with the indirect tax zone; and

•         is made by a supplier who is registered or required to be registered, for GST.

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

The proposed sale of the Lots by XXXX meets of all the criteria of section 9-5 as the sales will be for consideration, it will be made in the furtherance of the enterprise XXXX carries on, it will be connected with the indirect tax zone with the land being located within Australia and XXXX will be registered for GST. There is no other provision in the GST Act that will make the supply of land input taxed or GST-free.

Division 75 of the GST Act allows the use of a margin scheme to bring within the GST system any taxable supplies of freehold interests in land, of stratum units and of long-term leases. Subsection 75-5(1) of the GST Act states that the margin scheme applies in working out the amount of GST on a taxable supply of real property made by selling a freehold interest in land. As the land being sold by XXXX is a freehold interest, this definition is met.

However, subsection 75-5(2) of the GST Act creates an exclusion for the ability to apply the margin scheme. Subsection 75-5(2) states:

(2) However, 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.

The wording of subsection 75-5(2) demonstrates that if XXXX acquired the land through a supply that was ineligible for the margin scheme, then the margin scheme cannot be applied. Thus, it is a question of whether the acquisition from YYYY was a supply as defined within section 9-10 of the GST Act and if so, whether that was an ineligible supply.

Subsection 9-10(1) of the GST Act defines a supply as:

A supply is any form of supply whatsoever.

Further clarification is given in subsection 9-10(2). Relevantly, paragraph 9-10(2)(d) states in relation to real property:

Without limiting subsection (1), supply includes any of these:

...

(d) a grant, assignment or surrender of real property.

Goods and Services Tax Ruling GSTR 2006/9: Supplies, provides further detail on where there may be a supply, as defined within section 9-10 of the GST Act. When considering situations where land is acquired through operation of legislation or compulsory acquisition, it states at paragraph 76:

76. While an entity may make a supply by observing an obligation, even if that involves no more than refraining from doing something or tolerating some act or situation, there will be no supply where something occurs by operation of law without an entity providing something or without any obligation being placed on the entity to provide something.

Regarding the acquisition by XXXX from YYYY, although they are both statutory bodies of the same State government and the acquisition was part of XXXX's statutory mandate under the XXXX Act, the acquisition will be a supply under section 9-10 as the transfer was not merely enacted through operation of law but through agreement between both parties. This is evidenced by the Deed of Transfer and the transaction being executed under section X of the XXXX Act that allows the acquisition of land via agreement with other government agencies. This contrasts with a vesting order or compulsory acquisition where the parties to the transaction do not offer positive consent to a supply being made.

Once it is established that the transfer from YYYY to XXXX is a supply as defined within section 9-10 of the GST Act, in order to apply the margin scheme, it is also a requirement that the supply was not an ineligible supply. Paragraphs 75-5(3)(a) to (g) of the GST Act list the supplies that will be ineligible supplies. In relation to the supply from YYYY to XXXX, each of these paragraphs will be tested.

•         Paragraph 75-5(3)(a); this will not apply as the supply from YYYY to XXXX was not a taxable supply as defined within section 9-5 of the GST Act because there was no consideration as required by paragraph 9-5(a). Consideration is defined within section 9-15 of the GST Act to include any payment or act of forbearance with the supply of anything. The Transfer Dealing lists $1.00 as consideration but this was only for it to be in registrable form with the XXXX Services. The Deed of Transfer does not include any consideration and YYYY has no legal right to enforce any payment or act of forbearance from XXXX.

•         Paragraph 75-5(3)(b); this will not apply as the supply from YYYY to XXXX was not an inheritance from a deceased person.

•         Paragraph 75-5(3)(c); this will not apply as YYYY and XXXX were not members of the same GST group as defined under the GST Act.

•         Paragraph 75-5(3)(d); this will not apply as XXXX did not acquire the interest from a joint venture operator as defined under the GST Act.

•         Paragraph 75-5(3)(e); this will not apply as the transfer was not a GST-free supply of a going concern under section 38-325 of the GST Act as the requirement for there to be consideration, within paragraph 38-325(1)(a), has not been met.

•         Paragraph 75-5(3)(f); this will not apply as the transfer was not a GST-free supply under Subdivision 38-O of the GST Act.

•         Paragraph 75-5(3)(g); this will not apply as while it is a transfer without consideration, the requirement of subparagraph 75-5(3)(g)(v) is not met. YYYY did not acquire the interest in the land through a taxable supply, a requirement of subparagraph 75-5(3)(g)(v) of the GST Act, as there was no consideration in the transfer from the Original Owners.

Therefore, as none of paragraphs 75-5(3)(a) to (g) apply for the supply from YYYY to XXXX to be an ineligible supply, then XXXX may use the margin scheme under section 75-5 of the GST Act to bring within the GST system the taxable supplies of the sale of the Lots.

Question 2

Is XXXX entitled to calculate the margin on any taxable supply of the Lots under subsection 75-11(6) of the GST Act?

Detailed reasoning

Section 75-10 of the GST Act provides that, 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. If a particular circumstance outlined in section 75-11 applies, then the margin is to be calculated under section 75-11 without a need to refer to subsection 75-10(3).

The subsections within section 75-11 are to be tested sequentially. The test of each subsection applied to the fact circumstance of the transfer from YYYY to XXXX is found below.

•         Subsections 75-11(1) and 75-11(2); these will not apply as YYYY and XXXX were not members of the same GST group as defined under the GST Act.

•         Subsection 75-11(2A) and 75-11(2B); these will not apply as XXXX did not acquire the interest as a participant in a GST joint venture as defined under the GST Act.

•         Subsections 75-11(3) and 75-11(4); these will not apply as XXXX did not acquire the Lots by way of inheritance.

•         Subsection 75-11(5); this will not apply as XXXX did not acquire the lots as part of a sale of a going concern under section 38-325 of the GST Act as there was no consideration, a requirement of paragraph 38-325(1)(a).

Subsection 75-11(6); this will apply. Paragraphs 75-11(6)(a) to (e) are extracted below with the application to the circumstances of the acquisition of the Lots by XXXX.

If:

(a) you acquired the interest, unit or lease in question from an entity who was your associate, and who was registered or required to be registered, at the time of the acquisition;

Both XXXX and YYYY are statutory bodies and not companies, so the definition of associates within subsection 318(2) of the Income Tax Assessment Act 1936 cannot be relied upon. However, subsection 75-11(8) of the GST Act broadens the definition of associates within the specific context of subsection 75-11(6);

(8)

Subsection (6) or (7) applies to an acquisition through a supply made by:

...

(c) a government entity of a kind referred to in section 72-95 or 72-100;

as if Subdivision 72-D affected the operation of that subsection in the same way that it affects the operation of Division 72.

Subsection 72-100(1), within Subdivision 72-D, deems government entities that are an organisation by a State or Territory, of a kind referred to in paragraph (e) of the definition of government entity in section 41 of the A New Tax System (Australian Business Number) Act 1999 ('ABN Act') to be associates of every other Department of State of that State or Territory or organisation, established by that State or Territory.

Paragraph 41(e) of the ABN Act relevantly defines government entity as an organisation that:

(i) is not an entity (i.e., a company, trust, partnership etc); and

(ii) is either established by the Commonwealth, a State or a Territory (whether under law or not) to carry on an enterprise or established for a public purpose by an Australian law; and

(iii) can be separately identified by reference to the nature of the activities carried on through the organisation or the location of the organisation, whether or not the organisation is part of a Department.

Both YYYY and XXXX are not entities and established by the State as statutory bodies constituted under State legislation while also being separately identifiable with their own mandate and departmental and Ministerial reporting. Thus, the definition of government entity within section 41 of the ABN Act has been met and YYYY and XXXX will be associates under the definition of subsection 75-11(8) of the GST Act.

As YYYY was registered for GST at the time of the transfer of the Lots, paragraph 75-11(6)(a) is met.

(b) the acquisition from your associate was without consideration;

There was no legal right to consideration payable from XXXX to YYYY. Thus paragraph 75-11(6)(b) is met.

(c) the supply by your associate was not a taxable supply;

The transfer of the Lots from YYYY to XXXX was a supply as defined within section 9-10 of the GST Act. However, the supply was not a taxable supply as the requirement for consideration, within paragraph 9-5(a) of the GST Act, was not met. Thus paragraph 75-11(6)(c) has been met.

(d) your associate made the supply in the course or furtherance of an enterprise that your associate carried on;

The supply of the Lots by YYYY was undertaken in the course of an enterprise, as defined within section 9-20 of the GST Act, by YYYY, evidenced by the statutory mandate and commercial lease in operation in land within the Lots. Thus paragraph 75-11(60(d) has been met.

(e) none of subsections (1) to (5) applies;

None of subsections 75-11(1)-(5) apply. Thus paragraph 75-11(6)(e) has been met.

Therefore, as paragraphs 75-11(6)(a) to (e) have been met, XXXX is entitled to calculate the margin on any taxable supply of the Lots under subsection 75-11(6) of the GST Act.

Once paragraphs 75-11(6)(a) to (e) have been met, the remainder of subsection 75-11(6) gives instruction on how the acquisition cost is to be calculated. Where the associate of XXXX acquired the interest after 1 July 2000 and was registered for GST at the time, the appropriate provision is paragraph 75-11(6)(g) of the GST Act:

(g) if your associate had acquired the interest, unit or lease on or after 1 July 2000 and had been registered or required to be registered at the time of the acquisition:

(i) if your associate's acquisition was for consideration and you choose to apply an approved valuation to work out the margin for the supply - an approved valuation of the interest, unit or lease as at the day on which your associate had acquired it; or

(ii) if your associate's acquisition was for consideration and subparagraph (i) does not apply - that consideration; or

(iii) if your associate's acquisition was without consideration - the GST inclusive market value of the interest, unit or lease at the time of the acquisition;

YYYY did not acquire the Lots for consideration as defined within section 9-15 of the GST Act. The transfer from the Original Owners was undertaken through a vesting order, with no legal right to consideration payable. Furthermore, YYYY did not need to undertake any act of forbearance as a means of payment. Thus, the appropriate provision that applies in calculating the acquisition cost for XXXX is subparagraph 75-11(6)(g)(iii).