Private ruling: Margin Scheme
Date of advice: 12 August 2015
Published: August 2015

Ruling: Q1: What is the valuation method to be used in determining the value of non-monetary consideration (being the supply of development services) for the acquisition of the Lots, for the purpose of calculating the margin under the margin scheme for sales of the lots to end purchasers in accordance with section 75-10(2) of the GST Act? | A1: The GST-inclusive market value of non-monetary consideration should be determined by a reasonable valuation method as agreed by the parties to the development agreement See reasoning below | Q2: Where GST has been overpaid in respect of the supply of residential houses, does section 105-65 of Schedule 1 to the Taxation Administration Act 1953 apply to restrict a refund entitlement on those supplies? | A2: No

Relevant facts and circumstances: You are registered for GST You are the representative member of a GST group You account for GST on an accruals basis The Developer is registered for GST and is a member of the GST group The Developer has undertaken the project The project requires development of residential lots and the development of base infrastructure including roads, sewerage and other utilities as well as recreational and community facilities Development commenced in XXXX and was completed in XXXX The land is Crown Land The Development Agreement and associated schedules and annexures executed between the parties contain the obligations entered into: • Development Agreement • Special Conditions • Crown Lease Historically, the Developer applied the margin scheme to the sales of lots to the end purchasers and only used the monetary consideration provided by the Developer as its 'cost base' for determining the margin on sales to purchasers. The Developer also developed affordable housing which was sold at a GST inclusive purchase price and GST was remitted to the ATO. You have notified the Commissioner of an entitlement to refund within the four year time limit in section 105-55 of Schedule 1 to the Taxation Administration Act 1953 for the monthly tax periods 1 August 2010 to 30 June 2012. Further facts

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 Division 9, | A New Tax System (Goods and Services Tax) Act 1999 40-75, | A New Tax System (Goods and Services Tax) Act 1999 Division 75 | A New Tax System (Goods and Services Tax) Act 1999 Section 195-1 and | Taxation Administration Act 1953 section 105-65 of Schedule 1

Reasons for decision: Detailed Reasoning - Detailed reasoning: Division 75 allows you to use the margin scheme to calculate the GST payable on a taxable supply of real property you make by selling a freehold interest in land; selling a stratum unit; or granting or selling a long term lease, if certain requirements are met. Pursuant to sub-section 75-10(2), 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. The Developer has entered into the Development Agreement whereby it has been granted a Crown Lease over land to allow the Developer to enter the land and carry out development works as required under the Development Agreement. Goods and Services Tax Ruling GSTR 2015/2 GST: development lease arrangements with government agencies (GSTR 2015/2), explains the GST treatment of transactions in the context of development lease arrangements. It is accepted that the Agreement is a development lease arrangement as described in GSTR 2015/2. In completing the development works on the land, in accordance with the terms of the development lease arrangement, the Developer makes a supply of development services. The supply of the land to the Developer is consideration for the Developer's supply of development services if there is a sufficient nexus between the supply of the development services and the transfer of the Titled Lots. In this case, as the transfer of Certificates of Title to the Developer is conditional on the Developer achieving practical completion of the specified works required under the Development Agreement, there is sufficient nexus between the supply of the development services and the transfer of the land. Therefore, the supply of the land to the Developer is consideration for the supply of the development services and the supply of the development services is, in turn, consideration for the supply of the land. In addition to the provision of non-monetary consideration (being the development services) the Developer must make a monetary payment Valuation of non-monetary consideration Where the consideration for supplies is non-monetary, the GST inclusive market value of the consideration is used to work out the price and value of that supply. As the parties are dealing with each other at arm's length, the Commissioner considers that the things exchanged between them are of equal GST inclusive market value They may use a reasonable valuation method as agreed between them to determine the GST-inclusive market value of any non-monetary consideration for supplies arising in the context of the development lease arrangement. In this instance, as the land is supplied in exchange for a monetary payment and non-monetary consideration (being the development services), the price of the supply of the development services is determined by reducing the agreed GST inclusive market value of the land supplied by the payment. Attribution Non-monetary consideration, comprising the supply of the development services by the Developer, is not provided (either in full or in part) until the conditions specified in the development agreement are met and the Developer is entitled to the supply of the land. Under the terms of the Development Agreement and the Crown Lease the Developer is not entitled to be granted an estate in fee simple in each developed lot until the developer works have been completed in accordance with the provisions of the agreement. At this point the Developer may apply for a certificate of practical completion. It can be said therefore that the Developer is only entitled to the transfer of land when practical completion is achieved. The lots are supplied to the Developer immediately prior to the sale of the lots by the Developer to the end Purchaser. It is therefore reasonable to conclude that the GST inclusive market value of the supplied the Developer is equivalent to the GST inclusive market value of the Lots supplied by the Developer to an end Purchaser of a Lot, assuming that the market value of the land on creation of the Title is the same as the market price for sales to end Purchasers. Accordingly, when applying the provisions of sub-section 75-10(2) to determine the margin for a supply under the margin scheme, the consideration for the supply under the margin scheme will be equivalent to the consideration for the acquisition of the real property. | Summary: Where GST has been overpaid in respect of the supply of residential houses on the lots, does section 105-65 of Schedule 1 to the Taxation Administration Act 1953 apply to restrict any refund entitlement on those supplies? | Detailed Reasoning - Detailed reasoning: Houses were sold by the Developer to end purchasers at a GST inclusive price. You contend that these supplies should have been treated as input taxed supplies of residential premises as they were sold either prior to the amendment to section 40-75(2B) or under an arrangement entered into prior to the date of effect of the new provisions (i.e. 27 January 2011). The Developer is therefore entitled to a refund of the GST remitted on the basis that it incorrectly treated the supplies as taxable supplies. In line with the views expressed in ATO Interpretative Decision ATO ID 2014/19 GST and the supply of newly constructed premises under an arrangement entered into prior to 27 January 2011 the supplies of affordable housing by the Developer under the Agreement dated XXXX have been incorrectly treated as taxable supplies. Under the general rules, the Commissioner is required to give a refund or apply that amount in accordance with the running balance account provisions in Divisions 3 and 3A of Part IIB of the Taxation Administration Act 1953 (TAA). However, the requirement to give a refund of overpaid GST is subject to section 105-65 of Schedule 1 to the TAA which modifies the general rules so that the Commissioner need not give a refund or apply that amount if an entity overpaid its net amount or an amount of GST where the requirements of the section are satisfied. Subsection 105-65(1) of Schedule 1 to the TAA states: (1) The Commissioner need not give you a refund of an amount to which this section applies, or apply (under Division 3 or 3A of Part IIB) an amount to which this section applies, if: (a) you overpaid the amount, or the amount was not refunded to you, because a *supply was treated as a *taxable supply, or an *arrangement was treated as giving rise to a taxable supply to any extent; and (b) the supply is not a taxable supply, or the arrangement does not give rise to a taxable supply, to that extent (for example, because it is *GST free); and (c) one of the following applies: (i) the Commissioner is not satisfied that you have reimbursed a corresponding amount to the recipient of the supply or (in the case of an arrangement treated as giving rise to a taxable supply) to an entity treated as the recipient; (ii) the recipient of the supply, or (in the case of an arrangement treated as giving rise to a taxable supply) the entity treated as the recipient, is *registered or *required to be registered. The words 'need not' contained in section 105-65 of schedule 1 to the TAA indicate the Commissioner may choose to pay a refund in appropriate circumstances even though the conditions in paragraphs 105-65(1)(a), (b) and (c) are satisfied. To this limited extent the Commissioner has a discretion. Further, paragraphs 116 and 117 of Miscellaneous Taxation Ruling MT 2010/1 Miscellaneous tax: restrictions on GST refunds under section 105-65 of Schedule 1 to the Taxation Administration Act 1953 (MT 2010/1) state: 116.The operation of section 105-65 to deny the requirement to pay refunds that would otherwise be payable is not discretionary.…The words of the provision say that where the section applies the Commissioner need not give you a refund of the amount or apply the amount under the relevant RBA provisions…. 117. The commissioner considers that the words 'need not', in the context of section 105-65, do not prohibit the giving of a refund and accordingly the Commissioner has a discretion to pay a refund in appropriate circumstances…. This view is supported by the decision in Luxottica Retail Australia Pty Ltd v FC of T 2010 ATC 10-119 at 57 when the AAT referred to "residual discretion". The question then becomes whether, in these circumstances, the discretion to pay the refund to the applicant should be exercised. | Detailed Reasoning - When the Commissioner's Discretion can be exercised: Paragraph 128 of MT 2010/1 provides some guiding principles to consider when exercising the discretion. It states: 128. Section 105-65 does not specify what factors are relevant to the exercise of this discretion. In exercising the discretion, the Commissioner will have regard to the following guiding principles: 48 (a) The Commissioner must consider each case based on all the relevant facts and circumstances. (b) The Commissioner needs to follow administrative law principles such as not fettering the discretion or taking into account irrelevant considerations. (c) The Commissioner must have regard to the subject matter, scope and purpose of section 105-65. As explained in paragraph 127 of this Ruling, it clear from the scope and purpose that section 105-65 is designed to prevent windfall gains to suppliers and to maintain the inherent symmetry in the GST system and is based on the underlying design feature and presumption of the GST system that the cost of the GST is ultimately borne by the non-registered end consumer. (d) The discretion should be exercised where it is fair and reasonable to do so and must not be exercised arbitrarily. The circumstances in which the Commissioner considers it may be fair and reasonable to exercise the discretion include, but are not limited to, the following: (i) The overpayment of GST arises as a direct result of the actions of the Commissioner and the taxpayer has not had the opportunity to factor in the cost of the GST or otherwise pass on the GST, for instance through a gross up clause. For instance, an entity had treated its supply as GST-free, the Commissioner subsequently treats the supply as taxable, the entity pays an amount for GST on the supply, but the Commissioner later reverses that decision. In such circumstances it would not be necessary for the supplier to refund the recipient of the supply whether the recipient is registered or unregistered. (ii) The taxpayer can demonstrate that, for other reasons, they did not otherwise pass on the GST. As mentioned in Avon , 'it is for the taxpayer to establish a circumstance out of the ordinary, namely that the amount of the overpayment ... has not been passed on'. (iii) The supplier is able to satisfy the Commissioner that an amount corresponding to the refund will be, or has been, passed on to the party that ultimately bore the cost of the overpaid GST… (e) The discretion would generally not be exercised where it produces an unreasonable result, for example an asymmetrical revenue outcome. This could occur where, for example, a supplier reimburses a registered recipient for the overpaid GST but the Commissioner is unable to reclaim the over claimed input tax credit from the recipient. 49 Taking into account all the facts and circumstances of this particular case, as required by MT 2010/1, the Commissioner is satisfied that, subject to you falling within the transition provision in item 12 of the Amending Act, you have overpaid GST in respect of the supply of residential houses on the lots because a supply was treated as a taxable supply when the supply was not a taxable supply. Consequently, it is reasonable for the Commissioner to exercise his discretion to allow a refund of the overpaid GST amount. | Detailed Reasoning - Other relevant comments: In accordance with the view expressed in GSTR 2015/2 GST is payable on development services provided by the Developer as they are taxable supplies. To the extent GST has not yet been paid on these taxable supplies business activity statements should be amended to reflect the correct position.

Reasons for decision: In this reasoning, unless otherwise stated, | • all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) | • all reference materials referred to are available on the Australian Taxation Office (ATO) website www.ato.gov.au | • all legislative terms of the GST Act marked with an asterisk are defined in section 195-1 of the GST Act