Private ruling: Application of the margin scheme
Date of advice: 10 November 2016
Published: March 2017

Ruling: Q1: Will Taxpayer be able to use the margin scheme in Division 75 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) to work out the amount of GST payable by the Taxpayer in respect of a taxable supply of real property made by the Taxpayer (being the sale of a unit) if the Taxpayer and the Purchaser have agreed in writing that the margin scheme is to apply? | A1: Yes.

Relevant facts and circumstances: In 20XX the Vendors and the Purchaser entered into a Contract for the Sale of Land in respect of the advised address. The Contract for the Sale of Land indicates that the sale was not a taxable supply, that the margin scheme did not apply and that the sale was GST-free because the sale was the supply of a going concern. In 20XX the Vendor and the Purchaser entered into a Contract for the Sale of Land in respect of the advised address. The Contract for the Sale of Land states that the sale is not a taxable supply because the sale is a supply of a going concern under section 38-325. The Purchaser then sold both properties to the Taxpayer pursuant to a single Contract for the Sale of Land dated 20YY. The Contract for Sale of Land states that the sale of the Property is not a taxable supply, that the margin scheme is not being used and that the sale of the Property is GST-free because the sale is the supply of a going concern. In the ruling request it was stated that the Taxpayer intends to demolish the existing premises on the advised addresses and erect apartments in accordance with a Development Approval. It was estimated that this will take less than five years and that the Taxpayer will sell the apartments as new residential premises during the 20AA-BB financial year. The Taxpayer considers that the supply of each apartment will be a taxable supply of 'new residential premises' within the meaning of section 40-75 of the GST Act and intends to apply the margin scheme to the supply of each apartment. The Taxpayer intends to enter into a written agreement with each Purchaser that the margin scheme is to apply on or before the day of supply of each apartment.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 Division 75.

Reasons for decision: Summary: Although the Taxpayer acquired the Property from the Purchaser as a supply of a going concern that was GST-free and the Purchaser was registered for GST at the time of that acquisition, paragraph 75-5(3)(e) will not make the supply of a unit by the Taxpayer to a Purchaser ineligible for the margin scheme because subparagraph (iii) of paragraph 75-5(3)(e) is not satisfied. | Detailed Reasoning - Detailed reasoning: Margin scheme: Subsection 75-5(1) of the GST Act provides that the margin scheme applies in working out the amount of GST on a taxable supply of real property that an entity makes by selling either a freehold interest in land or a unit or granting or selling a long term lease if that entity and the recipient have agreed in writing that the margin scheme is to apply. However subsection 75-5(2) of the GST Act provides that the margin scheme does not apply if the entity acquired the 'entire' freehold interest, unit or long term lease through a supply that was 'ineligible for the margin scheme'. Ineligible for the margin scheme - does paragraph 75-5(3)(e) apply? Section 195-1 of the GST Act states that 'ineligible for the margin scheme' has the meaning given by subsections 75-5(3) and (4). Paragraph 75-5(3)(e) provides 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; Paragraph 75-5(3)(e) was inserted by the Tax Laws Amendment (2008 Measures No.5) Act 2008. Section 3 and item 13 in Schedule 1 (Item 13) of the Tax Laws Amendment (2008 Measures No. 5) Act 2008 states that paragraph 75-5(3)(e) applies in relation to supplies that are supplies of things that the supplier acquired through a 'new supply' to the supplier and defines 'new supply' as a supply that: (a) is made on or after 9 December 2008; and (b) is not made: (i) under a written agreement entered into before 9 December 2008; or (ii) pursuant to a right or option granted before 9 December 2008; that specifies in writing the consideration, or a way of working out the consideration, for the supply. The ruling request included a copy of the 'Work out if the 2008 amendments apply' decision tree on the ATO's website (Eligibility to use the margin scheme when selling property) which was annotated to indicate that the Taxpayer acquired the Property through a 'new supply', i.e. the supply of the Property by the Purchaser to the Taxpayer was made on or after 9 December 2008 and not made under a written agreement entered into before 9 December 2008. This is supported by the relevant Contract of Sale which shows a Contract Date in 20YY. We are therefore satisfied that the Taxpayer acquired the entire freehold interest through a single acquisition from the Purchaser which was a 'new supply' for the purposes of Item 13 of the Tax Laws Amendment (2008 Measures No. 5) Act 2008 and that paragraph 75-5(3)(e) therefore may apply to the supply of a unit by the Taxpayer to a Purchaser. Are the requirements of paragraph 75-5(3)(e) satisfied? Subparagraph (i) of paragraph 75-5(3)(e) requires that the Taxpayer acquired the freehold interest, unit or long term lease from an entity as, or as part of, a supply of a going concern to the Taxpayer that was GST-free. This requirement is satisfied as the Contract of Sale between the Vendor and the Taxpayer (as Purchaser) states that the supply is not a taxable supply, the margin scheme will not be used and the supply is GST-free because the sale is the supply of a going concern. Subparagraph (ii) of paragraph 75-5(3)(e) requires that the entity which supplied the freehold interest etc. to the Taxpayer was registered for GST or required to be so registered at the time the Taxpayer acquired the freehold interest etc. The Taxpayer acquired the freehold interest from the Purchaser on the Completion Date stated in the Contract for the Sale of Land, i.e. in 20YY. We have confirmed that the Purchaser was registered for GST with effect from 20XX and is currently so registered. Subparagraph (iii) of paragraph 75-5(3)(e) requires that the Purchaser …had acquired the entire interest, unit or lease through a taxable supply on which the GST was worked out without applying the margin scheme. Prima facie the requirement in subparagraph 75-5(3)(e)(iii) that the Purchaser acquired the entire Property 'through a taxable supply' is not met because the entire freehold interest was acquired by the Purchaser through two supplies each of which was treated as a GST-free supply of a going concern rather than a taxable supply. Section 195-1 of the GST Act provides that 'taxable supply' has the meaning given by sections 9-5, 78-50, 84-5 and 105-5 of the GST Act. Section 9-5 of the GST Act states that an entity makes a taxable supply if that entity makes the supply for consideration etc. and then states: However, the supply is not a taxable supply to the extent that it is GST-free or input taxed. Paragraph 9-30(1)(a) of the GST Act provides that a supply is GST-free if it is GST-free under Division 38 of the GST Act and Division 38 includes Subdivision 38-J which provides that a supply of a going concern is GST-free. We therefore consider that The Purchaser did not acquire the entire freehold interest 'through a taxable supply' for the purposes of subparagraph (iii) of paragraph 75-5(3)(e). This conclusion is supported by Para 1.32 and Example 1.1 in the Explanatory Memorandum to the Tax Laws Amendment (2008 Measures No. 5) Act 2008 (Explanatory Memorandum) which refers to eligibility to use the margin scheme being reinstated where the relevant sale (i.e. the sale of a unit by the Taxpayer to a Purchaser) is preceded by two GST-free supplies of going concerns (i.e. the supplies made to the Purchaser and the supply made by the Purchaser to the Taxpayer). Para 1.32 of the Explanatory Memorandum states: It is recognised that limiting the look through test to determine eligibility to the preceding acquisition may enable eligibility for the margin scheme to be reinstated in instances where a sale of property made under the basic rules is followed by two or more interposed GST-free sales of a going concern or farmland or two or more interposed sales from an associate for no consideration. However, limiting the requirement to look through one transaction seeks to achieve a balance between the risks to revenue and the complexity and compliance costs that would be involved in tracing back through a number of transactions between unrelated parties. Example 1.1 at Para 1.34 of the Explanatory Memorandum states: A is registered for GST, and held vacant land before 1 July 2000. A sells the property to B, a property developer who is also registered for GST. This sale is made under the basic rules. A and B do not use the margin scheme because B wishes to be eligible to claim an input tax credit on the purchase. B begins construction of a unit complex on the vacant land. Before completing construction, B sells the partly constructed unit development to C, along with the necessary arrangements for C to carry on its construction. B and C have agreed that this is a supply of a going concern. Therefore B does not remit GST, nor is C entitled to an input tax credit. C finishes the development, and sells a unit to D, who is a private individual not registered for GTS. This is a taxable supply of new residential premises. C cannot make the sale to D under the margin scheme because B acquired the property under the basic rules and would therefore also have been ineligible to apply the margin scheme. The present case differs from Example 1.1 in the Explanatory Memorandum. If the 'requirement to look through one transaction' is applied in relation to a sale of an apartment by the Taxpayer to a Purchaser, then you 'look through' the sale of the advised address as a going concern by the Purchaser to the Taxpayer. That would take you to the sales of both the properties by the Purchaser and the Vendors et al respectively. Each of those sales differs from Example 1.1 because they were supplies of going concerns rather than supplies to which the 'basic rules' (the vendors paying GST and the Purchaser claiming ITCs) were applied. As the requirement in subparagraph (iii) of paragraph 75-5(3)(e) is not satisfied, paragraph 75-5(3)(e) will not apply to make the sale of a unit by the Taxpayer to a Purchaser a supply that is 'ineligible for the margin scheme'. The Taxpayer will be entitled to apply the margin scheme to such a sale if the Taxpayer and the Purchaser have agreed in writing that the margin scheme is to apply. We note that section 75-11 of the GST Act contains special rules for calculating the margin for a supply of real property acquired on or after 9 December 2008 as a GST-free going concern, i.e. the margin is calculated as the difference between the price for which the Taxpayer sells the property and either the price for which the Purchaser acquired the freehold interest or an approved valuation of the freehold interest as at the day on which the Purchaser acquired it.