ATO ID 2013/18: GST and the application of the margin scheme to taxable supplies to associates for no consideration
Date of decision: 8 April 2013
Business line: Indirect Tax

Issue
Can an entity use the margin scheme to work out the GST payable on a taxable supply of real property that was held prior to 8 December 2008, and made after 24 March 2010 to an associate for no consideration where the associate will not use the real property for a fully creditable purpose?

Decision
Yes. The entity can use the margin scheme to work out the GST payable on a taxable supply of real property that was held prior to 8 December 2008 and made after 24 March 2010 to an associate for no consideration where the associate will not use the real property for a fully creditable purpose, subject to the provisions of subsection 75-5(3) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

Facts
The entity is registered for GST and is carrying on an enterprise in the building and construction industry. The entity has an associate who is carrying on an enterprise of supplying residential premises by way of lease. On 1 November 2008 the entity acquired the freehold interest in real property from an arm's length supplier who was not registered, nor required to be registered for GST. The entity developed residential premises on the real property. On 1 July 2010 the entity made a supply of the freehold interest in the real property as new residential premises to the associate. The entity and the associate agreed in writing that the margin scheme would be used to work out the GST payable on the supply.

Reasons for decision
Summary: The entity has made a supply of a freehold interest of real property consisting of new residential premises to an associate for no consideration. The associate will not use the real property for a fully creditable purpose. Therefore the supply is a taxable supply by virtue of section 72-5 of the GST Act. The supply of the freehold interest in the real property on 1 July 2010 is taken for the purposes of the GST law to be a sale in accordance with the provisions of section 72-20 of the GST Act. Section 72-20 Act applies to supplies made on or after 24 March 2010. The entity has made a taxable supply of a freehold interest of real property to an associate, which is taken for the purposes of the GST law to be a sale. The entity and the associate have agreed in writing that the margin scheme is to apply. Therefore the relevant requirements of section 75-5(1) of the GST Act are met and the entity can apply the margin scheme to work out the GST payable on the taxable supply. The supply is not ineligible for the margin scheme, as that term is defined in subsection 75-5(3) of the GST Act, as the entity acquired the freehold interest in the real property from an arm's length supplier who was not registered, nor required to be registered for GST. It should be noted that, if the entity had acquired the real property on or after 8 December 2008, then a subsequent supply for no consideration made to an associate would be treated as a sale according to the application of the provisions of section 75-5 (1B) of the GST Act.

Legislative references: A New Tax System (Goods and Services Tax) Act 1999 section 72-5 section 72-20 section 75-5(1) section 75-5(1B) subsection 75-5(3)
Subject references: Goods and services tax real property GST margin scheme GST associates