Private ruling: Proposed sale of residential premises
Published: December 2013

Ruling: Q1: Can you apply the margin scheme to the proposed sale of residential apartments? | A1: See below.

Relevant facts and circumstances: · You are the trustee for a trust. · You are carrying on an enterprise of property development. · You are registered for the goods and services tax (GST). · You purchased two commercial premises and residential premises. · The residential premises were built over a hundred years ago. · The properties were under leases at the time of the acquisition. · The vendor of the properties is a company and is registered for the GST. · The vendor satisfied the requirements of section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) at the time of the sale and therefore supplied the properties as a GST-free going concern. · The properties were sold to you under a single contract of sale. · You continue to lease the two premises and the residential premises after the acquisition. · At a future date you intend to demolish the existing buildings and construct residential apartments on the land. · You intend to sell the residential apartments once they are built.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 section 40-65. | A New Tax System (Goods and Services Tax) Act 1999 section 75-5 | A New Tax System (Goods and Services Tax) Act 1999 section 135-5

Reasons for decision: Summary: Division 75 of the GST Act allows you to use the margin scheme to bring within the GST system your 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 may only apply in working out the amount of GST on a taxable supply of real property if the supplier and recipient of the supply have agreed in writing that the margin scheme is to apply to the supply. The agreement must be made on or before the making of the supply, or within such further period as the Commissioner allows. However, subsection 75-5(3) of the GST Act lists the situations where a supply is ineligible for the margin scheme. Of particular relevance in this case is paragraph 75-5(3)(e) of the GST Act. It states that a supply is ineligible for the margin scheme if: It is a supply in relation to which all of the following apply: (i) you acquired the interest, unit or lease from an entity as, or as part of, a *supply of a going concern to you that was *GST-free under Subdivision 38-J; (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. (Terms marked with asterisks are defined at section 195-1 of the GST Act) In this case you acquired the properties as a GST-free supply of a going concern. The property consists of commercial premises and residential premises. | Detailed Reasoning - Commercial Properties: If the entity that sold the property to you had acquired the commercial premises as a taxable supply without applying the margin scheme, then, you cannot apply the margin scheme when you sell that land (and any improvements thereon) at a later date. However, if the entity had acquired the commercial premises under the margin scheme or, if the entity owned the property before the advent of GST (1 July 2000), then you would be able to apply the margin scheme to the sale provided you satisfy section 75-5 of the GST Act at the time of the sale. In other words, you would be able to apply the margin scheme to the sales you intend to make in the future if the entity that sold the properties to you were eligible to apply the margin scheme when it sold the properties to you as a GST-free going concern. If the entity you purchased the property from was eligible to use the margin scheme and as you purchased the property as a GST-free going concern, then you must include the value you and the previous seller added to the property when you calculate the margin. Please refer to the publication "GST and the margin scheme" enclosed for further details on the calculation of the margin in this situation. | Detailed Reasoning - Residential Properties: The residential property that was sold to you under a single contract of sale was built before 1 July 2000 and you state that the residential premises are over one hundred years old. Under Division 40 of the GST Act, the sale of residential premises (other than new residential premises) is input taxed. If the residential premises were built before 2 December 1998, they would not fall within the definition of new residential premises (subsection 40-65 (2) of the GST Act). In this case the residential premises were built over a hundred years ago and therefore their supply would be an input taxed supply and you would be able to apply the margin scheme when you sell the land that constitutes that property. The margin in this situation would be your selling price minus the price at which you acquired the property. As all the properties were purchased under a single contract of sale, you will have to apportion the price you paid for the residential property from the contract price. | Detailed Reasoning - Division 135 of the GST Act: Under Division 135 of the GST Act, the recipient of a supply of a going concern has an increasing adjustment to take into account the proportion (if any) of supplies that will be made in running the concern and that will not be taxable supplies or GST-free supplies. Subsection 135-5(1) of the GST Act states that you have an increasing adjustment if: (a) you are the *recipient of a *supply of a going concern….; and (b) you intend that some or all of the supplies made through the *enterprise to which the supply relates will be supplies that are neither *taxable supplies nor *GST-free supplies. In this case, you are the recipient of a supply of a going concern and you are making input taxed supplies. That is, you are currently leasing the residential premises which constitute part of the going concern you acquired. Therefore, under section 135-5 of the GST Act you have an increasing adjustment. Subsection 135-5(2) details the method of calculating the increasing adjustment. Also, the Goods and Services Tax determination (GSTD 2012/1) provides the Commissioner's opinion on the GST consequences following the sale of residential premises that are subject to a lease. | Detailed Reasoning - Interim Decision Impact Statement: Please note, however, the Full Federal Court (FFC) has made a decision regarding Division 135. The ATO has issued an "Interim Decision Impact Statement (Interim DIS)" regarding the decision of the FFC. According to the Interim DIS, the current published view in GSTD 2012/1 about the sale of leased residential premises still apply pending the outcome of the ATO's application for special leave to appeal to the High Court and any resulting appeal. However, taxpayers who purchased leased residential premises as a GST-free going concern are not obliged to follow the ATO view on Division 135. Consistent with the FFC decision, these taxpayers may choose to self assess on the basis that they do not have a Division 135 increasing adjustment. If a taxpayer follows the FFC decision to not make a Division 135 increasing adjustment and the FFC decision is then overturned by the High Court, any outstanding primary tax will need to be paid to the ATO. However, no shortfall penalties will apply and any GIC attributable to the shortfall will be remitted to nil. Taxpayers who have followed the ATO view and made a Division 135 adjustment may be entitled to a refund of any overpaid GST if the ATO is unsuccessful in the High Court proceedings. To protect their entitlement to interest on overpayment of GST, these taxpayers can object against their assessment simply by writing to the ATO advising of the potential amount of overpaid GST for the relevant tax period.