Private ruling: GST and sale of developed properties under the margin scheme
Published: August 2014
Ruling period: Not applicable
Date scheme commenced: Not applicable.

Ruling: Q1: Is the sale of subdivided properties located at X, eligible for the application of the margin scheme by the partnership of A, B, C, D, E and F? | A1: No.

Relevant facts and circumstances: • The property is owned by a partnership • The partnership is registered for goods and services tax. • The property which included a residential house was sold by a vendor to a company as an input taxed supply. • The property was acquired by the company with the intention of carrying on property development activities by demolishing the residential house and subdividing the bare land. • The director of the company applied for the subdivision of the property and approval was received in December 20XX. • The property was sold by the company to the partnership. • The contract of sale dated Y does not indicate that the property was sold as a bare land or with the house. One of the partners advised that the residential house on the property was demolished after the sale to the partnership. • The partnership was requested to provide the statement of settlement for the sale of the property and the copy of tax invoices from the supplier who demolished the residential house. The requested documents were not provided. • The partnership provided us with a Statutory Declaration signed by the partnership. This statutory declaration does not specify the date of demolition of the house. • The property was transferred to the partnership and the partnership acquired the property with an intention of carrying on a property development.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 - section 9-5 | A New Tax System (Goods and Services Tax) Act 1999 - section 9-10 | A New Tax System (Goods and Services Tax) Act 1999 - subsection 75-5(1),(2)and (3)

Reasons for decision: Summary: Subsection 75-5(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) states that the margin scheme applies in working out the amount of GST on a taxable supply of real property that you make by selling a freehold interest in land where you and the recipient of the supply have agreed in writing that the margin scheme is to apply. However, under subsection 75-5(2) of the GST Act the margin scheme cannot be used if the property was acquired through a supply that was ineligible for the margin scheme. Subsection 75-5(3) of the GST Act defines what is an ineligible supply. For example, a property acquired as a taxable supply without applying the margin scheme would be an ineligible supply. It is necessary to determine whether the property acquired by the partnership on which the new residential properties have been constructed was not acquired through a supply that was ineligible for the margin scheme under subsection 75-5(2) of the GST Act. In this case, the property was sold by the vendor to a company as an input taxed supply. Later the property was sold by the company to the partnership. However, the sale of the property by the company to the partnership was a taxable supply as the contract does not state whether the property was sold with the existing house. The partnership was unable to substantiate the specific date of demolition of the house to determine whether the sale by the company to the partnership was not a taxable supply of bare land and therefore the sale was an input taxed supply. The partnership provided us with a statutory declaration signed by the partners confirming that the property was sold by the company to them. However, this statutory declaration does not confirm whether the house was demolished after the settlement of this property between the company and the partnership. The partnership was requested to provide the statement of settlement of this property to enable us to determine whether the house was included in the settlement of the property. The partnership was also requested to provide us with the copy of tax invoices issued by the supplier who carried on the demolition work to confirm when the demolition of this house was completed. The partnership was unable to provide any of the information requested and the information provided in the statutory declaration is not satisfactory to determine when the house was exactly demolished. Based on the information provided, the Commissioner is not satisfied that the house was demolished after the settlement of the property between the company and the partnership. Therefore, the sale of this property is not considered as an input taxed supply to the partnership by the company. Section 9-10 of the GST Act refers to the meaning of supply and states that a supply is any form of supply whatsoever. It further states that a supply includes, amongst other things, a grant, assignment or surrender of real property. Therefore, the sale of vacant land satisfies the criteria for a supply under the GST Act. It is necessary to ascertain whether the sale of the vacant land constitutes a taxable supply. Under section 9-5 of the GST Act, you make a taxable supply if you make a supply for consideration; and the supply is made in the course or furtherance of an enterprise that you carry on; and the supply is connected with Australia; and 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. The sale of vacant land although it was used for residential purposes is not a GST-free or input taxed supply. The company sold the vacant land to the partnership for consideration and they were carrying on an enterprise of property development. The property is connected with Australia and the company was registered for GST at the time of the sale of this vacant land to the partnership. Therefore, the sale of the property by the company to the partnership was a taxable supply and they are required to pay GST on the sale of this property to the ATO. The partnership acquired the property which was ineligible for the application of the margin scheme under subsection 75-5(3) of the GST Act and they are not entitled to apply the margin scheme to the sale of any new developed properties. The sale of new developed properties will be taxable supplies and the partnership is required to remit GST on the sale of these new developed properties. Please note that the above view has been taken based on the information provided by the partnership and other information available in relation to this case. However, if the partnership has sufficient evidence to provide to the Commissioner that the property was settled between the company and the partnership as an input taxed supply, the partnership may apply to the Commissioner to exercise his discretion to apply the margin scheme on the newly developed properties. | Detailed Reasoning - Additional information: Please also note that the supply of an uninhabitable house is not considered as an input taxed supply when sold. Section 195-1 of the GST Act defines residential premises to mean land or a building that is occupied as a residence or that is intended to be occupied and is capable of being occupied as a residence. If a property is vacant for some time and is currently uninhabitable, the supply of this property may not satisfy the definition of residential premises. Paragraphs 25 to 27 of the Goods and Services Tax Ruling GSTR 2000/20 provide guidance on residential premises for GST purposes. The supply of residential premises that is not being occupied as a residence nor capable of being occupied as a residence cannot be considered as an input taxed supply of residential property.