Private ruling: GST and the margin scheme
Published: September 2011

Ruling: Q1: Can the Commissioner of Taxation (Commissioner) confirm that the following apportionment methods used by Entity X to calculate the consideration for the acquisition for properties which are sold using the margin scheme are fair and reasonable: · Gross realisation method; · Lot number method; and · Area basis method? | A1: The Commissioner confirms that the Gross realisation method and the Area basis method outlined in the facts are considered fair and reasonable. However the Lot number method is not considered fair and reasonable.



Reasons for decision: Summary: In general terms, section 75-5(1) of the GST Act allows the margin scheme to be applied in working out the amount of GST on a taxable supply of real property where the vendor is selling a freehold interest in land; and the vendor and the recipient of the supply have agreed in writing that the margin scheme applies. Where the margin scheme is applied to the sale of real property, subsection 75-10(1) of the GST Act provides that the amount of GST payable for the supply of real property is 1/11 of the margin. Subsection 75-10(2) of the GST Act provides that the margin is the amount by which the consideration for the supply exceeds the consideration for the acquisition in question. 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), explains the Commissioner's position when determining the consideration for the acquisition. In particular paragraph 48 states: Consideration for the acquisition 48. The consideration for the acquisition of the real property is the original purchase price after taking into account settlement adjustments. In the case of subdivided land or a stratum unit, the effect of section 75-15 is that the consideration for the acquisition is the corresponding proportion of the consideration for the real property that you acquired. If land that is part of the original broadacres is used for public purposes including roads, parklands or utilities ('lost land'), the acquisition consideration of the entire broadacres is apportioned to the total number of subdivided lots, so that the sum of the apportioned amounts equals the acquisition consideration for the broadacres (including the 'lost land'). In the case where an entity is required to apportion the consideration for an acquisition paragraph 58 and 59 of GSTR 2006/8 state: Apportionment methods 58. To ascertain the proportion of the purchase price that relates to the subdivided allotment or stratum unit, you may use any fair and reasonable method of apportionment. The method of apportionment used must result in the sum of the proportionate amount of the purchase price that relates to each subdivided allotment or stratum unit equalling in total, the actual consideration for the acquisition. You cannot change the method of apportionment after sales of allotments or stratum units have been made unless the changed method is applied to calculate the margin for all the sales. 59. Examples of some methods that you may use are as follows: · area - the consideration for the real property acquired is apportioned on the basis of the proportion of the total saleable area of the development represented by the particular lot; · lots or sites - the apportionment is based on the number of lots or sites; · anticipated selling price - the consideration for the real property that you acquired is apportioned on the basis of the proportion of the total anticipated selling price of the development represented by the particular lot; and · total aggregated selling prices - the consideration for the real property that you acquired is apportioned on the basis of the proportion of the total aggregated selling prices of the development represented by the particular lot. This method is only suitable for a development where all the lots are sold in a time that allows the aggregated selling prices to be calculated by the time the relevant Activity Statements are due to be lodged. In this case, Entity X seek confirmation from the Commissioner that their use of the Gross realisation method, Lot number method and Area basis method in the manner described in the facts is fair and reasonable according to the principles established in GSTR 2006/8. It is submitted by Entity X that all methods outlined in their ruling request accurately reflect the very high residential proportion of the development. The Commissioner discusses the principle of 'fair and reasonable' in Goods and Services Tax Ruling GSTR 2006/4 entitled 'determining the extent of creditable purpose for claiming input tax credits and for making adjustments for changes in extent of creditable purpose'. At paragraphs 33 to 35 the ruling states: 33. The 'fair and reasonable' principle was used by the High Court in Ronpibon Tin v. FC of T , in the context of the apportionment of expenditure serving more than one object 'indifferently'. The High Court did not, in that case, apply this principle in relation to the allocation of specific acquisitions wholly to specific ends, or to apportioning items of expenditure 'distinct and severable parts of which' can be identified as being devoted to such specific ends. The Commissioner's view is that the 'fair and reasonable' principle applies equally to the choice of method for allocating or apportioning acquisitions in all circumstances. 34. Following the principles set out by the High Court, the apportionment method you choose needs to: · be fair and reasonable; · reflect the planned use of that acquisition (or in the case of an adjustment, the actual use); and · be appropriately documented in your individual circumstances (see paragraphs 98 to 100 of this Ruling). 35. Apportionment methods explained in the Ruling can be broadly categorised as direct or indirect methods. Where a direct method is available to you, the Commissioner's view is that such a method would best reflect the intended or actual use of your acquisitions. However, you are not required to use direct and indirect methods in the manner set out in this Ruling, provided that whatever alternative method you use is fair and reasonable having regard to the principles in paragraph 34 of this Ruling (see paragraphs 101 to 107 of this Ruling). The ruling concludes at paragraph 99: 99. The High Court therefore emphasised the necessity of considering the facts of individual cases. Where items of expenditure ('acquisitions' or 'importations' in the context of GST) are not referable to a particular object, then apportionment is required using a method which results in a fair and reasonable reflection of the relation of the expenditure to assessable income. We have accordingly considered if each of the methods which have been submitted by Entity X is fair and reasonable below. Method 1: Gross realisation method In this case Entity X will use a realisation value for each lot in the development, which is just prior to the completion of the project. Example 6 of GSTR 2006/8 provides an example of using the 'anticipated sales price' which states: 65. Adam is a builder who is registered for GST purposes. He acquires land for $400,000. He subdivides the land and builds a house on each allotment. As the quality of the land varies between allotments, the anticipated sales method will provide a fair and reasonable apportionment method to ascertain the consideration for the acquisition for each of the house and land packages . 66. The anticipated sales price for each of the house and land packages and the consideration for the acquisition of each of them is shown below . Lot no . Anticipated sales price Consideration for the acquisition (anticipated sales price / total anticipated sales prices) x $400,000 1 $200,000 $40,000 2 $200,000 $40,000 3 $300,000 $60,000 4 $300,000 $60,000 5 $500,000 $100,000 6 $500,000 $100,000 Total $2,000,000 $400,000 67. Adam subsequently sells Lot 1 for $190,000. The margin for the supply of Lot 1 is $150,000 ($190,000 - $40,000). The GST payable on the supply is $13,636.36 (1/11 of $150,000 ). We consider that the Gross realisation method outlined in the facts is similar to using the 'anticipated sales price' methodology described in paragraph 59 and Example 6 of GSTR 2006/8. As such we consider that using the 'Gross realisation method' as a basis to working out the consideration for the acquisition of the individual lots will result in a fair and reasonable outcome according to GSTR 2006/8. Subsequently, for each property that is (or has been) sold by Entity X, where the margin scheme is used to calculate the GST payable, the margin for the supply will be calculated in the same manner to what is described in paragraph 67 of GSTR 2006/8. | Detailed Reasoning - Method 2: Lot number method: Paragraph 60 of GSTR 2006/8 explains that use of 'lots or sites' as an apportionment method would not give a fair and reasonable result if the size or value of the lots or sites varied significantly. Further, the example in paragraph 64 of GSTR 2006/8 states: Example 5: lots area 64. Neville acquires a house and land for $500,000. Neville intends to demolish the house and construct four duplexes on the land. As each of the duplexes is of similar value Neville can use the lots method to establish the consideration for the acquisition for each of the duplexes. Using this method, the consideration for the acquisition of each duplex is $125,000 (1/4 x $ 500,000 ). Based on the facts, the Commissioner does not consider that the Lot number method proposed by Entity X results in a fair and reasonable outcome to calculate the consideration for the acquisition of each lot. | Detailed Reasoning - Method 3: Area basis method: The area methodology outlined in GSTR 2006/8 requires that the consideration for the real property acquired is apportioned on the basis of the proportion of the total saleable area of the development represented by the particular lot. In this case, there are both residential and non-residential components which sit on top of the same parts of the land. As such Entity X has calculated its 'saleable area' with reference to the total m 2 of the constructed development. We consider that using the Area basis method as described in the facts to determine the consideration for the acquisition of the individual lots can result in a fair and reasonable outcome according to GSTR 2006/8. This is based on the condition that the method used by Entity X to determine the area for each individual lot sold is fair and reasonable.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet. | Relevant facts: · Entity X has undertaken a property development project. | · In forming the development site, Entity X acquired a number of existing residential properties and these property titles were amalgamated to create the development site. No GST was payable on any of these acquisitions. | · Each square meter of area of the amalgamated site (or bare land) purchased is uniform in value. | · All the relevant taxable supplies of real property within the project are eligible for the margin scheme. | · The project is an integrated residential and commercial development. | · Just prior to completion of the development the estimated gross realisation of the commercial, retail and residential lots have been determined. | · The fully developed site has been used to calculate the total saleable area attributable to the residential use. This area is comprised of: | o An amount directly apportioned to the residential apartments which are for residential use; and | o An amount indirectly apportioned to residential use for common areas such as basements, lift wells, corridors, reception area, etc. This figure takes into account the residential component of the development calculated as a percentage of total lots. | · Applying the same method to attribute the saleable retail/commercial components of the development, results in an area allocated which is comprised of: | a. An amount directly apportioned to retail/commercial use; and | b. An amount indirectly apportioned to retail/commercial use for common areas such as basements, lift wells, corridors, reception area, etc. This figure takes into account the retail/commercial component of the development calculated as a percentage of total lots. | · The range for size and value of the residential units varies significantly. | · A photograph of the completed development along with a 'top down' view of the development has been provided and shows the scale and layout of the completed development. | · It is proposed that Entity X will apply one of the following methodologies to calculate the proportion of the combined consideration for the acquisition of the properties purchased relating to a lot sold: | b. Gross realisation method; | c. Lot number method; and | · The sales contracts for the residential apartments include an agreement that the margin scheme is to apply. | · It is expected that the retail and commercial components of the development will be sold either as part of a GST-free going concern or as fully taxable commercial premises. However, if an agreement is reached between the supplier and the recipient, these supplies may also be made under the margin scheme. | · All the residential apartments will be sold using the margin scheme. | · The sale of premises by Entity X are new residential premises and/or commercial premises and will satisfy the requirements of a taxable supply and is property eligible for the margin scheme under the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).