Private ruling: GST and the acquisition of residential premises and the application of the margin scheme
Published: February 2013

Ruling: Q1: Is the supply of the Property, referred to in the facts, to you an input taxed supply of residential premises? | A1: On the facts provided, the supply and corresponding acquisition by you of the Property is a 'mixed supply' comprising separately identifiable taxable and non-taxable (input taxed) parts. That is: · part of the Property comes within the definition of residential premises that is input taxed. That part will not be a taxable supply to you and therefore not a creditable acquisition pursuant to section 11-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)GST Act, and · part of the Property does not come within the definition of residential premises. That part is a taxable supply to you (and therefore a creditable acquisition) where the Vendor satisfies the requirements of section 9-5 of the GST Act. This is the case unless the acquisition of that taxable part of the Property by you is precluded from being a creditable acquisition because of the operation of section 75-20 of the GST Act which deals with an acquisition where the supply is a taxable supply under the margin scheme. | Q2: Are you eligible to apply the margin scheme to the sale of the Property as developed lots? | A2: Yes, on the facts provided you are eligible to apply the margin scheme to work out the amount of GST on subsequent taxable supplies of developed lots. This is the case as: · all the requirements under section 75-5 of the GST Act will be satisfied. This includes you and the recipient of each of the developed lots agreeing in writing (on or before the making of the supply) that the margin scheme is to apply, and · your subsequent supplies of developed lots are derived entirely from land that was acquired through a supply that was eligible for the margin scheme. In particular, the GST on the taxable part of the Property supplied by the Vendor is worked out by applying the margin scheme and the requirements under section 75-5 of the GST Act are otherwise satisfied.

Relevant facts and circumstances: You are registered for goods and services tax (GST). You carry on an enterprise which involves the acquisition, development, subdivision and sale of land. The Vendor and you as purchaser executed a conditional contract for the sale and purchase of land located in Australia (the Property). A copy of the Contract was provided. The purchase price is identified in the Contract. The Property will be created from a larger lot and will have a separate and new title as indicated in the Management Plan. You will obtain Development Approval of the Management Plan from the local government prior to completion of the Contract. A house was built on part of the Property prior to 1998 and has been used for residential accommodation since before 2 December 1998. The house is currently rented to an employee (Tenant) of a company related to the Vendor. The Tenant occupies the house as his/her residence under a salary package arrangement between the Vendor and the Tenant. The Tenant occupies the premises and has full and free access to enjoy and use the whole of the Property. The house has the physical characteristics to provide the occupant with shelter and basic living facilities such as a kitchen, toilet, shower and bedrooms. The house is fit for human habitation and is not in a dilapidated condition which would prevent it from being occupied for residential accommodation. There is an area surrounding the house that may be called a 'dedicated garden' with an area of lawn surrounded by a fence and trees. The Property has separate road access from the fields in the larger lot and is separated from that larger Lot by a thick row of trees which act as a barrier. A structure that was constructed on part of the Property was demolished more than 12 months ago. That structure had been used by the Vendor in conjunction with its enterprise. Other than the physical characteristics described above, there are no other structures or facilities that show the land is to be enjoyed with the house (i.e. no tennis court, pond etc). The Vendor is registered for GST and warrants that the supply of the Property is made in the course or furtherance of the Vendor's enterprise and is not to be supplied GST-free under Division 38 of the GST Act. The balance of the larger lot is used for agriculture and is not being sold to you and is not the subject of the Contract. The Property is adjacent to land that has already been subdivided into smaller residential lots. The Contract provides that it is subject to and conditional upon you obtaining: · Development Approval and a written notice of an infrastructure chare in respect of the proposed development of the land. The Contract provides that you and the Vendor agree that the consideration for the supply of the Property does not include GST. The Vendor discloses at the Contract Date that there is a used residential home on the land and that the land is only used for purposes incidental to the use of a residential home. Under a clause of the Contract, if the supply is liable to GST, the Vendor warrants that it will be entitled to choose to apply the margin scheme provided for in Division 75 of the GST Act in calculating its GST liability in respect of the sale of the Property. You are acquiring the Property in the course of your enterprise which will involve subdividing the Property and selling the subdivided lots (developed lots) to buyers. Each supply of a developed lot by you will satisfy the requirements of a taxable supply under section 9-5 of the GST Act. The Tenant will not continue to occupy the residential house after completion of the Contract and you will take vacant possession. You intend to work out the amount of GST payable on the sale of those taxable supplies of developed lots by applying the margin scheme. On or before making the supplies of developed lots, you and the recipients will agree in writing that the margin scheme is to apply. Each of those agreements will be made on or before the making of the supply of each subdivided lot. You have advised that none of the supplies of the developed lots will be ineligible for the margin scheme under Division 75 of the GST Act. In particular, if only part of the Property answers the definition of residential premises that are input taxed and part is a taxable supply to you, the Vendor and you have agreed to apply the margin scheme.

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 11-5 | A New Tax System (Goods and Services Tax) Act 1999 section 40-65 | A New Tax System (Goods and Services Tax) Act 1999 section 40-75 | A New Tax System (Goods and Services Tax) Act 1999 subsection 75-5(1) | A New Tax System (Goods and Services Tax) Act 1999 subsection 75-5(1A) | A New Tax System (Goods and Services Tax) Act 1999 subsection 75-5(2) | A New Tax System (Goods and Services Tax) Act 1999 subsection 75-22(1) | A New Tax System (Goods and Services Tax) Act 1999 section 195-1

Reasons for decision: Detailed Reasoning - Legislative background: Section 7-1 of the GST Act provides that GST is payable on taxable supplies and entitlements to input tax credits arise on creditable acquisitions. As you are the recipient of the supply of the Property, consideration is given to whether and to what extent your acquisition of the Property is a creditable acquisition. An acquisition is a creditable acquisition under section 11-5 of the GST Act if, among other criteria not presently relevant, 'the supply of the thing to you is a taxable supply'. The meaning of 'supply' is given in section 9-10 of the GST Act. In addition to the general words 'any form of supply what so ever' in subsection 9-10(1) of the GST Act, subsection 9-10(2) of the GST Act includes 'a grant, assignment or surrender of real property'. The meaning of acquisition in section 11-10 of the GST Act is the corollary to the meaning of supply in section 9-10 of the GST Act and includes amongst other things, 'the acceptance of a grant, assignment or surrender of real property'. You contend that the supply by the Vendor and the corresponding acquisition by you of the Property with its improvement (house) is not a taxable supply to you on the basis that the supply of the whole of the Property is of residential premises that is input taxed. A supply is a taxable supply if under section 9-5 of the GST Act: · an entity makes the supply for consideration · the supply is made in the course or furtherance of an enterprise that an entity carries on · the supply is connected with Australia, and · the entity is registered, or required to be registered for GST. Section 9-5 of the GST Act expressly excludes from the definition of a taxable supply a supply to the extent that it is GST-free or input taxed. There is no issue that the sale of the Property by the Vendor comes within the definition of a supply by the Vendor and an acquisition by you. The supply by the Vendor and the acquisition by you is for consideration, both you and the Vendor are registered for GST and the supply is connected with Australia. On the facts provided, the Vendor's supply of the Property is made in the course of an enterprise that it carries on and is not a supply that is GST-free. You are acquiring the Property in the course of a development enterprise that you carry on. As you are acquiring a Property on which a residential house has been built, the question that arises under section 11-5 of the GST Act is whether and to what extent the supply by the Vendor is a taxable supply to you. To the extent that the sale of the Property is input taxed it is not a taxable supply and therefore, not a creditable acquisition. | Detailed Reasoning - Input taxed supply: Division 40 of the GST Act identifies those supplies which are input taxed and therefore not taxable supplies. Subsection 40-65(1) of the GST Act relevantly provides that a sale of real property is input taxed to the extent that the property is residential premises to be used predominantly for residential accommodation (regardless of the term of occupation). However, the sale of the real property is not input taxed to the extent the residential premises are: · commercial residential premises, or · new residential premises other than those used for residential accommodation (regardless of the term of occupation) before 2 December 1998. Section 195-1 of the GST Act defines residential premises as land or a building that: · is occupied as a residence or for residential accommodation, or · is intended to be occupied, and is capable of being occupied, as a residence or for residential accommodation (regardless of the term of occupation or intended occupation) and includes a floating home. The sale of new residential premises are excluded from being input taxed under paragraph 40-65(2)(b) of the GST Act. New residential premises are relevantly defined in section 40-75 of the GST Act. In particular, paragraph 40-75(1)(a) of the GST Act provides that residential premises are new residential premises if they have not previously been sold as residential premises (other than commercial residential premises) and have not previously been the subject of a long term lease. Section 195-1 of the GST Act defines commercial residential premises as: · a hotel, motel, inn, hostel or boarding house · …, and · anything similar to residential premises described in paragraphs (a) to (e) of the definition of commercial residential premises. On the facts, the Property does not come within the definition of commercial residential premises nor does it constitute new residential premises, as the house has been used for residential accommodation since before 2 December 1998. | Detailed Reasoning - Question 1 Residential premises: The Tax Office provides guidance on the meaning of residential premises in Goods and Services Tax Ruling GSTR 2012/5. GSTR 2012/5 explains at paragraph 7, 15 and 20 that: 7 Premises, comprising land or a building, are also residential premises under paragraph (b) of the definition of residential premises if the premises are intended to be occupied, and are capable of being occupied, as a residence or for residential accommodation, regardless of the term of the intended occupation. This limb of the definition refers to premises that are designed, built or modified so as to be suitable to be occupied, and capable of being occupied, as a residence or for residential accommodation. This is demonstrated through the physical characteristics of the premises. … 15 To satisfy the definition of residential premises, premises must provide shelter and basic living facilities. Premises that do not have the physical characteristics to provide these are not residential premises to be used predominantly for residential accommodation. 20 Premises must be fit for human habitation in order to be suitable for, and capable of, being occupied as a residence or for residential accommodation. The house satisfies the definition of residential premises as it provides shelter and basic living facilities. The house is fit for human habitation and provides the occupant with sleeping accommodation and some basic facilities for day to day living such as a kitchen, bathroom and laundry facilities. The physical characteristics of the house indicate that it possesses those necessary features to provide residential accommodation and is able to be occupied as residential premises. However, the house is situated on land which more than 12 months ago included a shed that was used in the Vendor's enterprise until it was demolished. The Property was subdivided from a larger parcel of land used by the Vendor in its enterprise. The words 'to the extent' in section 40-65 of the GST Act indicates that the GST Act contemplates circumstances where the supply of a single interest in real property may not be wholly input taxed. This raises the issue of to what extent the land supplied with the residential premises comes within the definition of residential premises to be used predominantly for residential accommodation. Section 40-65 of the GST Act places a focus on the physical characteristics of property as evidence of its suitability for its intended use. In paragraph 46 of GSTR 2012/5, the Commissioner expresses the view that there is no specific restriction, in the definition of residential premises, on the area of land that can be included with a building. The extent to which land would form part of the residential premises to be used predominantly for residential accommodation is a question of fact and degree in each case. A relevant factor in determining to what extent land forms part of the residential premises is the extent to which the physical characteristics of the land and building as a whole indicate that the land is to be enjoyed in conjunction with the residential building. The use of the land is not a determining factor in deciding whether the land forms part of the residential premises. For land to be regarded as residential premises, it must be evident that the land possesses physical characteristics which demonstrate its suitability for a residential purpose. | Detailed Reasoning - Mixed supply: From the aerial photograph and the descriptions provided, part of the Property demonstrates that some of the land has the physical characteristics which indicate it was to be enjoyed with the house such as: · infrastructure related to a residential dwelling such as an outdoor area, fences related to the house and a driveway to the house, and · an amount of cultivation that indicate the land has been maintained for a residential purpose such as a lawn and dedicated garden with trees. The same cannot be said about the balance of the Property (that is, the land other than that comprising the house, its surrounding cultivation and driveway), which does not exhibit any particular physical characteristics which when considered as a whole with the house would indicate that the land is to be enjoyed in conjunction with the residential dwelling. This is the case notwithstanding that the agreement between the Vendor and the Tenant may allow the Tenant access to the whole of the Property. In the present case that part of the Property on which a structure had been erected, at least at the time the structure was there, related to the Vendor's enterprise and could not be said to exhibit physical characteristics which when considered as a whole with the house indicated that it was to be enjoyed in conjunction with the residential building. Demolishing the structure and subsequently allowing the Tenant access to that part of the Property without more would not of itself imbue that land with physical characteristics which when considered as a whole with the house indicate it is to be enjoyed with the residential premises. The mere fact that the balance of the land may not have any particular physical characteristics since the structure was demolished should not imply that such land is to be bundled with the accompanying residential dwelling. That part of the Property comprising the house with its lawn and dedicated garden surrounded by a fence and driveway answers the description of residential premises and to that extent is input taxed. Accordingly, the physical characteristics of the Property indicate that the supply by the Vendor of the Property (and the corresponding acquisition by you) has separately identifiable taxable (balance of the Property) and non-taxable (input taxed residential premises) parts. The balance of the Property is a taxable supply to you where the Vendor satisfies the requirements under section 9-5 of the GST Act. Goods and Services Tax Ruling GSTR 2001/8 explains and describes the characteristics of a supply that contains taxable and non-taxable parts referring to such a supply as a 'mixed supply'. A mixed supply is a supply that has to be separated or unbundled as it contains separately identifiable taxable and non taxable parts that need to be individually recognised (paragraph 16 of GTR 2001/8). Guidance in relation to the interpretation of 'separately identifiable parts' is provided in paragraphs 45 to 54 of that Ruling. In particular, the Ruling states: A supply has separately identifiable parts where the parts require individual recognition and retention as separate parts, due to their relative significance in the supply' A supply will not be considered as having separately identifiable parts where the parts are integral, ancillary or incidental to a principal supply. Such a supply is a composite supply, and is treated as the supply of a single thing. It is a matter of fact and degree whether the parts of a supply are separately identifiable. | Detailed Reasoning - Reasonable methods of apportionment: There are no legislative provisions specifying a basis for apportionment in the case of supplies covered by section 9-80 of the GST Act. You may use any reasonable method to apportion consideration to the separately identifiable taxable part of a mixed supply. However, the apportionment must be supported by the facts in the particular circumstances and be undertaken as a matter of practical commonsense. What is a reasonable method of apportioning the consideration for a mixed supply depends on the circumstances of each case and records must be kept to explain the method used. GSTR 2001/8 provides methods and examples that may help in working out how to apportion consideration for a supply that contains separately identifiable taxable and non-taxable parts. | Detailed Reasoning - Conclusion: Part of the supply of the Property to you constitutes input taxed residential premises and to that extent is not a taxable supply to you and therefore not a creditable acquisition. Part of the supply of the Property to you constitutes a taxable supply by the Vendor (where the supplier satisfies the requirements of section 9-5 of the GST Act), and therefore a creditable acquisition. This is the case unless, as you have indicated, the Vendor applies the margin scheme to the supply of the Property to you which will then not give rise to a creditable acquisition (section 75-20 of the GST Act). | Detailed Reasoning - Question 2 Margin scheme: If you make a taxable supply of real property, the GST payable under the basic rule in section 9-70 of the GST Act is 1/11 th of the price. However, under subsection 75-5(1) of the GST Act, if you make a taxable supply of real property by selling a freehold interest in land, a stratum unit or granting or selling a long term lease, you may apply the margin scheme, if you and the recipient have agreed in writing that the margin scheme is to apply. Subsection 75-5(1A) of the GST Act provides that the agreement must be made on or before making the supply, or such further period as the Commissioner allows. Under subsection 75-5(2) of the GST Act, the margin scheme does not apply if you acquired the entire freehold interest through a supply that was ineligible for the margin scheme. A supply is ineligible for the margin scheme under subsection 75-5(3) of the GST Act if, amongst other things: · it is a supply on which the GST was worked out without applying the margin scheme (paragraph 75-5(3)(a) of the GST Act) · … The ATO has considered how the margin scheme under Division 75 of the GST Act applies to a supply of real property acquired on or after 1 July 2000 in Goods and Services Tax Ruling GSTR 2006/8. Paragraph 133 of GSTR 2006/8 contemplates the application of the margin scheme to the taxable component of a mixed supply. On the facts provided, you intend to develop and subdivide the Property you acquire under the Contract and subsequently sell the developed lots. You confirm that your supplies of the developed lots will satisfy the requirements of taxable supplies under section 9-5 of the GST Act and that the recipients of these taxable supplies will agree in writing on or before the making of each supply that the margin scheme is to apply. You further advised that none of the other circumstances set out in paragraphs 75-5(3)(a) to (g) of the GST Act apply. You have indicated that you will be eligible to apply the margin scheme in relation to the subsequent supply of developed lots as you will acquire the taxable part of the Property from the Vendor through a supply on which the Vendor will apply the margin scheme and the requirements for applying the margin scheme under section 75-5 will have been satisfied (including you and the Vendor agreeing in writing that the margin scheme applies). In such circumstances, the subsequent supplies of developed lots will be derived entirely from land that was acquired through a supply that was eligible for the margin scheme and as such, you will be eligible to apply the margin scheme on the taxable supplies of developed lots (paragraphs 147 to 155 of GSTR 2006/8). The determination cited as the A New Tax system (Goods and services Tax) Margin Scheme Valuation Requirements Determination MSV 2009/1 (MSV 2009/1) specifies the requirements for making valuations for the purposes of applying the margin scheme in Division 75 of the GST Act. The requirements apply to valuations for taxable supplies of real property made on or after 1 March 2010. Paragraph 10 of MSV 2009/1 refers to 'mixed supplies'. | Detailed Reasoning - Conclusion: On the facts provided, you will be eligible to apply the margin scheme to work out the amount of GST on subsequent taxable supplies of developed lots, as: · all the requirements under section 75-5 of the GST Act will be satisfied including you and the recipient of each of the developed lots agreeing in writing (on or before the making of the supply) that the margin scheme is to apply, and · your subsequent supplies of the developed lots will be derived entirely from land that was acquired through a supply that was eligible for the margin scheme. In particular, the GST on the taxable part of the Property supplied by the Vendor is worked out by applying the margin scheme.

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