ATO ID 2010/83: GST: revoking agreement to apply the margin scheme
Date of decision: 26 March 2010
Business line: Indirect Tax

Issue
Can a supplier and recipient of real property that make an agreement to apply the margin scheme under subsection 75-5(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) revoke that agreement after settlement of the supply of the real property?

Decision
No, the entities are not able to revoke an agreement to apply the margin scheme under subsection 75-5(1) of the GST Act, after settlement of the supply of the real property.

Facts
An entity entered into an agreement to sell real property in the form of a freehold interest in land to another entity. The supply of the real property is a taxable supply for the purposes of the GST Act. The supplier acquired the real property before 1 July 2000. The supplier's supply of the real property to the recipient was: Before making the supply of the real property, the supplier and the recipient made an agreement to apply the margin scheme in Division 75 of the GST Act to the supply. All of the other requirements for the margin scheme to apply were satisfied. The supplier calculated the GST payable on the taxable supply in accordance with the margin scheme. After settlement of the supply of the real property, the supplier and the recipient are now seeking to revoke their agreement to apply the margin scheme. The supplier and the recipient intend to do this by entering into a deed of variation to the contract of sale for the real property.

Reasons for decision
Summary: The margin scheme in Division 75 of the GST Act can be used to work out the amount of GST payable on a taxable supply of real property provided that certain requirements are satisfied. One of the requirements in subsection 75-5(1) of the GST Act is that the supplier and the recipient of the supply have agreed in writing that the margin scheme is to apply. In accordance with subsection 75-5(1A) of the GST Act, this agreement must be made on or before the making of the supply or within such further period as the Commissioner allows. It is considered that the time of making the supply of real property for the purposes of Division 75 of the GST Act is at settlement (see paragraphs 42 to 45 of Goods and Services Tax Ruling GSTR 2006/7 'Goods and services tax: how the margin scheme applies to a supply of real property made on or after 1 December 2005 that was acquired or held before 1 July 2000'). Accordingly, the written agreement to apply the margin scheme must be made on or before the time of settlement (if the agreement is made at a later time, it is subject to the exercise of a discretionary power by the Commissioner under subsection 75-5(1A) of the GST Act). As the supplier and recipient have entered into a written agreement to apply the margin scheme on or before that time, and the other requirements of section 75-5 of the GST Act are met, GST payable on the taxable supply of the real property has been worked out in accordance with Division 75 of the GST Act. Once the requirements for the operation of subsection 75-5(1) of the GST Act have been met, including the key requirement that a timely written agreement be in place between the parties, there is nothing in the words of the provision that allows its operation to be unwound. The fact that the parties to the written agreement subsequent to settlement consent to revoke that agreement is irrelevant. This view is further supported by the context in which the provision operates. Under the provision, the supplier and recipient have alternative courses of action available to them; that is, they can choose to apply the margin scheme or not in working out the GST payable on the taxable supply. In making that choice, the parties would necessarily have regard to likely future events and circumstances that may affect them at the time of making the supply. If the choice, once made, is capable of being altered after that time, it would enable the parties to the supply to enjoy the benefit of hindsight. This is contrary to the purpose and intent of the provision which is there to provide certainty to the parties at the time of supply (see paragraph 6.38 of the Revised Explanatory Memorandum to the Tax Laws Amendment (2005 Measures No. 2) Bill 2005). If the provision envisaged that the parties to the supply could alter their choice at a later time, there would have been express provision for it in the legislation. The absence of such a provision provides further contextual support for the view that there is no capacity for the supplier and recipient to revoke the written agreement after the making of the supply. Also, while subsection 75-5(1A) of the GST Act permits a discretion for the Commissioner to allow a further time in which an agreement may be made, it does not permit a discretion for the Commissioner to allow an entity to revoke an agreement that was in place at the time of settlement. In this case, as a written agreement to apply the margin scheme was in place at the time of making the supply, the supplier and the recipient are not able to revoke the agreement and calculate the GST payable on the taxable supply in accordance with the basic rules in the GST Act. The GST payable is to be calculated in accordance with the rules in Division 75 of the GST Act.

Legislative references: A New Tax System (Goods and Services Tax) Act 1999 Division 75 section 75-5 subsection 75-5(1) subsection 75-5(1A)
Related public rulings and determinations: Goods and Services Tax Ruling GSTR 2006/7
Other references: Revised Explanatory Memorandum to the Tax Laws Amendment (2005 Measures No. 2) Bill 2005
Subject references: GST margin scheme GST property & construction GST sale of real property Taxable supply