Private ruling: Sale of real property and margin scheme.
Date of advice: 19 June 2018
Published: August 2018

Ruling: Q1: Can Entity B apply the margin scheme under Division 75 of the A New Tax System (Goods and Services Tax) Act 1999 ( GST Act) for the sale of the new residential premises? If so, how should the GST amount on the supply be calculated? | A1: Yes, Entity B can apply the margin scheme and the amount of GST on the supply is 1/11 of the amount by which the consideration for the supply exceeds the total consideration for the acquisition of the Property.

Relevant facts and circumstances: Entity A (the Vendor) acquired a property prior to 1 July 2000 in a non-taxable supply. Entity A is a registered charity and is registered for GST. Entity A subdivided the property into smaller lots and sold one lot (the Property) as vacant land to Entity B as the Purchaser. Entity B acquired the Property as vacant land under a Contract of Sale entered into by it as Purchaser in XX/ 201X. At the time of the purchase of the Property, the sale was not a taxable supply because the parties to the transaction were both members of the same GST Religious Group for purposes of section 49-10 of the GST Act, and thus the supply was not treated as a taxable supply between the parties pursuant to section 49-30 of the GST Act. Entity A and B are not associates of each other. Entity B purchased the vacant land for the sole purpose of developing the land by the construction of a dwelling to be sold by it, with the proceeds of the sale to be used as a fund raising activity. The newly developed property constitutes ‘new residential premises’ with the meaning of section 40-75 of the GST Act

Relevant legislative provisions: Section 9-5 of the GST Act | Section 40-75 of the GST Act | Section 49-10 of the GST Act | Section 49-30 of the GST Act | Section 75-5 of th4 GST Act

Reasons for decision: Summary: Under subsection 75-5(1) of the GST Act, you can apply the margin scheme 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 longer lease; if you and the recipient of the supply have agreed in writing that the margin scheme is to apply. Notwithstanding the above, subsection 75-5(2) of the GST Act states 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. In the current case, that means if the supply from which Entity B has acquired the vacant land was ineligible for the margin scheme, the margin scheme cannot be applied to Entity B’s supply of the new residential premises. Subsection 75-5(3) provides that a supply is ineligible for the margin scheme if it is a taxable supply on which the GST was worked out without applying the margin scheme. Subsection 75-5(3) also provides a list of supplies that are ineligible for the margin scheme if certain criteria are met in relation to these supplies. These supplies are those where the real property has been purchased or acquired either from: ● inheriting the property ● an associate ● a fellow GST group member ● a fellow participant in a GST joint venture ● an associate without payment ● a GST-free sale (either as part of a going concern or farmland) where the seller was not eligible to use the margin scheme. In the current case, the supply of the vacant land from the Vendor is one that does not fall within any of the above; therefore, it is not a supply that is ineligible for the margin scheme. As such, Entity B is eligible to apply the margin scheme when selling the new residential property as a taxable supply. Under section 75-10 of the GST Act, if a taxable supply of real property is under the margin scheme, the amount of GST on the supply is 1/11 of the margin for the supply unless the other rules contained in subsection 75-10(3) and section 75-11 apply. On the facts provided, subsection 75-10(3) and section 75-11 do not apply to Entity B’s supply of the new residential premises. The margin is the amount by which the consideration for the taxable supply exceeds the total consideration for the acquisition of the Property (in this case, the consideration paid by Entity B for the vacant land plus the legal costs of acquisition).