Private ruling: GST and application of the margin scheme
Date of advice: 26 May 2016
Published: July 2016

Ruling: Q1: Are you eligible to choose to use the margin scheme to calculate the GST payable when you sell proposed titled lots? | A1: Yes, provided you and the prospective purchasers of the units agree in writing that the margin scheme is to apply.

Relevant facts and circumstances: You are registered for GST and carry on an enterprise of property development with operations in commercial, residential and retail developments. You acquired property at a specified location (Lot 1) from ABC Pty Ltd (ABC). You also acquired the adjoining property (Lot 2) from Z. You intend to construct a new building containing multiple residential units across multiple levels on the property. You intend selling the proposed residential units within X years of the development of the residential units. Your sales of the residential units will be taxable supplies of 'new residential premises' for GST purposes. The Special Conditions to the sale contracts for your acquisition of Lots 1 and 2 provide the following: • settlement date is between a specified period (including a maximum two day extension); • The Buyer and Seller acknowledge that ABC has either entered into or is currently entering into Pre-Sale Contracts as at the Contract Date; • The respective contracts are subject to and conditional upon Z and ABC entering into multiple Pre-Sale Contracts no later than a specified date; • On and from the Settlement Date, ABC assigns to you each binding Pre-Sale Contract entered into as at the Settlement Date and the rights of ABC under each Pre-Sale Contract and you assume the obligations of ABC under each Pre-Sale Contract; • 'Pre-Sale Contract' is defined as a contract of sale and disclosure statement between ABC (as the Seller) and a third party buyer where ABC agrees to sell to the buyer a proposed lot to be registered with a community management statement to create the Scheme over Lots 1 and 2. Both Lot 1 and Lot 2 settled on a specified date. At settlement date Lot 1 consisted of a X bedroom house on approximately a X m 2 block. At settlement date Lot 2 consisted of a residential house on a similar size block. Neither property were commercial residential premises or new residential premises as defined by the GST Act. The existing dwellings on lot 1 and Lot 2 were demolished post settlement. You have provided a sample of the Pre-Sale Contract referred to above. The sample Pre-Sale Contract states: The Seller may adopt the Margin Scheme in calculating the GST payable. If the Seller does so, the Buyer agrees the Seller may adopt the Margin Scheme for calculation of GST. The Buyer must not object to the Seller electing to use the Margin Scheme. To date, no Pre-Sale Contracts have settled. You do not expect any Pre-Sale Contracts to settle until early 20ZZ. You did not acquire Lot 1 and Lot 2 as a member of a GST group, from another member of the GST group. You did not acquire Lot 1 and Lot 2 as a participant in a GST joint venture, from the joint venture operator. You did not acquire Lot 1 and Lot 2 as a GST-free going concern or as GST-free farmland.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 Subsection 75-5(1) | Subsection 75-5(1A) | Subsection 75-5(2) | Subsection 75-5(3)

Reasons for decision: Summary: Note: In this reasoning, unless otherwise stated, • all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) • reference material(s) referred to are available on the Australian Taxation Office (ATO) website www.ato.gov.au Subsection 75-5(1) provides that you may choose the margin scheme in working out the amount of GST on a taxable supply of real property you make by: • selling a freehold interest in land • selling a unit, or • granting or selling a long-term lease. if you and the recipient of the supply have agreed in writing that the margin scheme is to apply. Subsection 75-5(1A) provides that the agreement must be made: • on or before the making of the supply, or • within such further period as the Commissioner allows. However subsection 75-5(2) provides that the margin scheme will not apply to your supply if the supply is ineligible for the margin scheme. Subsection 75-5(3) details circumstances a supply is ineligible for the margin scheme. None of the ineligibility criteria of subsection 75-5(3) will apply. In this case you will be assigned the rights and obligations as vendor under Pre-Sale Contracts for the sales of residential units. Your sales of the residential units will be taxable supplies of 'new residential premises'. | Detailed Reasoning - Written agreement: As mentioned above, one of the criteria to apply the margin scheme is that you (as vendor) and the purchaser must have agreed in writing that the margin scheme is to apply. Generally the agreement must be made on or before the making of the supply. The issue of when a supply is made is discussed in Goods and Services Tax Ruling GSTR 2006/8 Goods and services tax: the margin scheme for supplies of real property acquired on or after 1 July 2000 (GSTR 2006/8). Paragraphs 36 to 39 of GSTR 2006/8 explain that the sale (and corresponding acquisition) of real property is made at settlement. In this case, settlement date of the Pre-Sale contracts is expected to be March or April 2017 at the earliest. On this issue, the relevant clause contained in the Pre-Sale Contracts states: The Seller may adopt the Margin Scheme in calculating the GST payable. If the Seller does so, the Buyer agrees the Seller may adopt the Margin Scheme for calculation of GST. The Buyer must not object to the Seller electing to use the Margin Scheme. Whilst there is no set format for the written agreement, there must be a written statement which makes it clear that you and the purchaser have agreed to use the margin scheme on the sale, and clearly identifies the property being sold. This statement may form part of the sale contract, or it may be a separate document. Where a clause in a contract provides absolute discretion to the vendor to choose to apply the margin scheme, it is the ATO view that such a clause would not constitute an agreement between the parties that the margin scheme is to apply to work out the GST payable on a taxable supply of real property. We consider that the clause included in the Pre-Sale Contracts does not constitute an agreement between the parties that the margin scheme is to apply. As such, given the current facts in this case, you would not be able to choose to apply the margin scheme to work out the GST payable on sales of units under the Pre-Sale Contracts. However, where prior to settlement of the Pre-Sale Contracts you and the prospective purchasers of the units agree in writing that the margin scheme is to apply, you will satisfy the criteria regarding the requirement of a written agreement and apply the margin scheme to calculate the GST payable on the sale of the units.