Private ruling: Goods and services tax and the margin scheme
Published: February 2015

Ruling: Q1: (a) Is Partnership A eligible to use the margin scheme to calculate the GST liability on its sale of renovated residential properties as set out in Example A of the facts? (b) Will the margin scheme be applicable to similar sales in the future? | A1: (a) Yes. Partnership A is eligible to use the margin scheme to calculate the GST liability on its sales of renovated residential properties. (b) Yes. The margin scheme will be applicable to similar sales in the future provided the facts applicable to these sales are the same as set out below. | Q2: Would the net GST payable at the end of the project of $XXX be the correct amount of GST payable to the ATO under the circumstances provided in Example A of the facts? | A2: Yes. The net GST payable will amount to $XXX.

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. Partnership A (You) will be registered for Goods and Services Tax (GST) on the commencement of a new business of property development. In undertaking this property development business, you intend to purchase existing residential properties in your local area that are for sale with the intention of developing and renovating these properties for resale. Your development activities will amount to conducting an enterprise for GST purposes and any income taxable profits earned by you will be taxable in the normal course of your business. You will only purchase residential properties that will require substantial renovations and/or additions prior to your resale. Your aim is to renovate the existing residential properties prior to resale by both adding size and/or improvement of the condition of the residential properties. The renovations will be conducted by a company that is owned by your partners and which is licensed to carry out such building works. The owners of all of the residential properties that you acquire will not be registered for GST as these owners will either have lived in these properties, be deceased estates or be landlord owners of the properties where such properties are investment residential properties. You will not be claiming any input tax credits on your acquisition of these residential properties as their sale to you is not subject to GST. You would not have acquired these residential properties through an inheritance. You would not have acquired these residential properties as a GST-free supply of a going concern. You would not have acquired these residential properties as a GST-free supply of a farmland. You would not have acquired these residential properties from an associate for no consideration. You are not a member of a GST-group and you are not a participant to a joint venture. At the time of your purchase, these residential properties will not be "new residential premises" as they will be existing residential properties that are older than five years. The renovations undertaken by you on these residential properties will amount to "substantial renovations" as described in paragraphs 54 to 59 of Goods and Services Tax Ruling GSTR 2003/3 Goods and services tax: when is a sale of real property a sale of new residential premises? (GSTR 2003/3). At the time of your resale of these renovated residential properties, they will be "new residential premises" as defined in section 40-75 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act). The sale of these renovated residential properties will constitute taxable supplies in accordance with section 9-5 of the GST Act. The renovated residential properties will not be subject to lease prior to their sale. At the time of the sale of the renovated residential properties, you will be entering into an agreement in writing with the purchasers of the renovated residential properties that the margin scheme is to apply to the sale. You expect your turnover will exceed the $75,000 threshold under the GST Act. You have provided an example of a property transaction you may undertake as follows: Example A Consideration for the sale of renovated residential premises (Considered to be new residential premises due to substantial renovations done to the building) $? Cost of original purchase $? Margin on sale $? GST payable on margin $? Other costs of renovations which include GST paid $? GST Claimable on costs of renovations $? Net GST payable $?

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999: Section 9-5 | Section 11-5 | Section 40-75 | Division 75 | Subsection 75-5(1) | Subsection 75-5(1A) | Section 195-1

Reasons for decision: Detailed Reasoning - Question 1(a): Section 9-5 of the GST Act refers to taxable supplies and states: You make a taxable supply if: (a) you make the supply for *consideration; and (b) the supply is made in the course of furtherance of an *enterprise that you *carry on; and (c) the supply is *connected with Australia; and (d) you are *registered, or required to be registered. However, the supply is not a *taxable supply to the extent that it is *GST-free or *input taxed. (* denotes a term defined in section 195-1 of the GST Act) Your supply of the renovated residential premises will be made for consideration, in the course of furtherance of the property development enterprise you will be conducting, will be connected with Australia as the renovated residential properties will be located in Australia and you will be registered for GST. You have told us that your supply of the renovated residential premises will constitute new residential premises as defined in section 40-75 of the GST Act. Therefore the sale of the renovated properties will not be input taxed and there is no provision in the GST Act for the sale of the renovated residential properties to be GST-free. Therefore your sales of the renovated residential properties which constitute new residential premises in accordance with section 40-75 of the GST Act will be taxable supplies in accordance with section 9-5 of the GST Act and therefore will be subject to GST. Division 75 of the GST Act allows you to use the margin scheme to calculate the GST payable on taxable supplies of real property if certain requirements are satisfied. In particular subsection 75-5(1) of the GST Act provides that if you make a taxable supply of real property by: • selling a freehold interest in land; or • selling a stratum unit; or • granting or selling a long-term lease; you may apply the margin scheme in working out the amount of GST on the supply, if you and the recipient of the supply have agreed in writing that the margin scheme is to apply. Further, subsection 75-5(1A) of the GST Act provides that the agreement in writing must be made on or before making the supply or within such further period that the Commissioner allows. You have told us that at the time of your sales of the renovated residential properties, you will be entering into an agreement in writing with the purchasers that the margin scheme is to apply to the sales. Therefore the requirement of subsection 75-5(1A) will be met. Notwithstanding the existence of an agreement, subsection 75-5(2) of the GST Act provides 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. Subsection 75-5(3) of the GST Act provide the circumstances under which a supply is ineligible for the margin scheme. Relevantly, paragraph 32 of Goods and Services Tax Ruling GSTR 2006/8 Goods and service tax: the margin scheme for the supplies of real property acquired on or after 1 July 2000 (GSTR 2006/8) discusses the ineligibility criteria and state: 32. Subsection 75-5(2) (as amended by the 2005 Amendment Act) provides 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. Under subsection 75-5(3) 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; • it is a supply of real property you inherited and the deceased person acquired all of the real property through a supply that was ineligible for the margin scheme; • it is a supply of real property and all of the following apply: • you acquired the real property from a fellow group member when you were a member of a GST group; • the fellow group member had acquired it from an entity that was not a member of the GST group; and • this earlier supply was not eligible for the margin scheme because of the operation of subsection 75-5(2); or • it is a supply of real property and both of the following apply: • you acquired the real property from the joint venture operator of a GST joint venture at the time when you were a participant of a joint venture; and • the joint venture operator had acquired the real property through a supply that was ineligible for the margin scheme. You have told us that your initial acquisitions of the residential properties (not renovated) will not meet the ineligibility criteria as set out above. Therefore, you will be eligible to apply the margin scheme to calculate your GST liability on your sales of the renovated residential properties. Subsection 75-10(1) of the GST Act provides that if a taxable supply of real property is made under the margin scheme, the amount of the GST payable on the supply is 1/11 of the margin for the supply. Subsection 75-10(2) of the GST Act provides that the margin for the supply is the amount by which the consideration for the supply exceeds the consideration for the acquisition of the real property. Paragraph 47 of GSTR 2006/8 states as follows re consideration: | Detailed Reasoning - Consideration for the supply and settlement adjustments: 47. The consideration for the supply and the consideration for the acquisition may be either monetary or non-monetary or both. The consideration for the supply or acquisition should take into account adjustments on settlement that are commonly made for rates, land tax and other outgoings. Goods and Services Tax Determination GSTD 2006/3 contains a detailed discussion on this topic. Whilst the consideration for the acquisition of the real property is the original purchase price after taking into account settlement adjustments, it does not include costs such as legal expenses and stamp duty. Paragraph 49 of GSTR 2006/8 states: 49. The consideration for the acquisition does not include costs that the supplier had incurred that were associated with their purchase of the real property, such as their legal expenses and stamp duty. It also does not include costs incurred in developing the real property, prior to or after its acquisition Further, section 75-14 of the GST Act excludes costs of improvements etcetera from the consideration for acquisition of the real property. Relevantly paragraphs 54 and 55 of GSTR 2006/8 states: | Detailed Reasoning - The effect of section 75-14 on supplies made on or after 17 March 2005: 54. The treatment of excluding costs incurred in developing real property from the calculation of the margin for the supply is confirmed by section 75-14. Section 75-14 is effective from 17 March 2005. 55. Section 75-14 makes it clear that in working out the consideration for the acquisition the following are disregarded: (a) the cost or value of any other acquisitions that have been made by you, or any work that has been performed in relation to the real property; and (b) the cost or value of any other acquisitions that are intended to be made by you, or any work that is intended to be performed after you have acquired the real property, including acquisitions or work connected with bringing the real property into existence. In Example A, you have provided an example of how you intend to calculate the margin on a proposed sale. The margin on sale is calculated as the difference between the consideration for the sale of the renovated residential property being $? and the cost of the original purchase being $?. This result in a margin of $? and therefore the GST liability on the sale would be $? which equals to $?. This ruling is made on the basis that that the cost of the original purchase of $? is the purchase price adjusted for allowable settlement adjustments as set out in GSTR 2006/8 and GSTD 2006/3(Goods and Services Tax Determination GSTD 2006/3 Goods and services tax: are settlement adjustments taken into account to determine the consideration for the supply or acquisition of real property?). Similarly, this ruling is made on the basis that the consideration for the sale of the renovated residential premises of $? is the sale price adjusted for allowable settlement adjustments as set out in GSTR 2006/8 and GSTD 2006/3. Based on the above and the facts as set out in this ruling, the amount of $? will correctly reflect your GST payable on the margin in this instance and will need to be included at item 1A of your Business Activity Statement. | Detailed Reasoning - Question 1(b): The eligibility to use the margin scheme is discussed in Question 1(a) above. Provided your future acquisitions and sales are made in the same circumstances as set out in the facts above and the analysis as considered in Question 1(a) applies to these future acquisitions and sales, you will be eligible to apply the margin scheme to calculate your GST liability. | Detailed Reasoning - Question 2: Example A calculates the margin on the sale to be $? on which GST of $? is payable. Example A furthers considers the scenario where costs of renovations amounting to $? (GST inclusive) are incurred. Accordingly, input tax credits of $? are claimed resulting in a net GST payable amount of $?. We have concluded that in the circumstances discussed in Question 1(a), the $? GST payable on the margin will be correct. Therefore we need to consider if the input tax credits claimed of $? are for creditable acquisitions. Division 11 of the GST Act considers creditable acquisitions. You are entitled to input tax credits for your creditable acquisitions. Section 11-5 of the GST Act sates: You make a creditable acquisition if: (a) You acquire anything solely or partly for a *creditable purpose; and (b) The supply of the thing to you is a *taxable supply; and (c) You provide, or are liable to provide, *consideration for the supply; and (d) You are *registered, or *required to be registered. Section 11-15 further provides that you acquire a thing for a creditable purpose to the extent that you acquire it in carrying on your enterprise and the acquisition does not relate to making supplies that would be input taxed or private or domestic in nature. You are conducting an enterprise of property development. In Example A, you have incurred costs of renovations amounting to $? in the course of conducting your property development enterprise. The sale of the renovated residential property is not input taxed as it is the sale of new residential premises (paragraph 40-70(2)(b) of the GST Act) and has not been leased prior to sale. This sale will not be private or domestic in nature and will constitute a taxable supply in accordance with section 9-5 of the GST Act. Given the acquisitions of $? are subject to GST, their supply to you will be taxable supplies, are made for consideration and you will be registered when conducting your property development enterprise. Accordingly all the requirements of section 11-5 of the GST Act will be met and you will be entitled to the input tax credits amounting to $? Whilst the net GST payable of $? as calculated in Example A (that is $? - $?) will correctly reflect your net GST liability in relation to that sale, you will need to include an amount of $? at item 1B of your Business Activity Statement.