Private ruling: Supply of property
Published: August 2012

Ruling: Q1: Is the sale of the Property a taxable supply to which the margin scheme does not apply? | A1: Yes, the sale of the Property is a taxable supply to which the margin scheme does not apply.

Relevant facts and circumstances: Vendor is carrying on an enterprise in property development and is registered for the goods and services tax (GST). Purchaser is a public benevolent institution and a deductable gift recipient endorsed by the Australian Taxation Office (ATO). Purchaser is carrying on an enterprise of providing accommodation at 75% less than the GST inclusive market value of the supply. In 2010 the Purchaser entered into a contract of sale (Contract of Sale) with the Vendor for the sale of a property (Property). The sale comprised residential apartments sold off the plan. Under a clause in the Contract of Sale, the sale was to be under the margin scheme. The Property was settled in 2011, at which time the Purchaser took possession of the completed apartments. Vendor lodged the activity statement and treated the supply as being made under the margin scheme and remitted GST accordingly. At the time the Purchaser entered into the Contract of Sale, the Purchaser had not made a conscious decision to agree to treat the sale as being made under the margin scheme. The Purchaser's business model for the acquisition of the Property was made on the basis the Purchaser being able to claim X of the sale price as input tax credit. Hence, the specific margin scheme clause in the Contract of Sale was an error. Purchaser did not realise this at the time the Purchaser entered into the Contract of Sale and did so without considering the implications. Treatment of the sale as being under the margin scheme would have adverse financial consequences for the Purchaser. Both the Vendor and the Purchaser have now instructed their respective solicitors to prepare a Deed of Rectification to change the original Contract of Sale to be one where the sale is not under the margin scheme. The Deed of Rectification confirms the original Contract of Sale incorrectly provided for the application of the margin scheme to the supply of the Property. The Deed also provides for the Contract of Sale to be amended with effect from the original date it was signed to state that the margin scheme does not apply to the sale. Vendor has written to the Purchaser that it supports the application of this private ruling. Subject to ATO allowing the sale to be treated as a taxable supply without the application of the margin scheme, the Vendor will execute the Deed of Rectification.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 (GST Act) Section 75-5

Reasons for decision: Summary: Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) states that: You make a taxable supply if: · you make the 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 terms marked with the an asterisk are defined at section 195-5 of the GST Act) In this case, the supply the Vendor is making is for consideration, it is made in the course of an enterprise the Vendor is carrying on, the supply is connected with Australia and the Vendor is registered for the GST. Further, the supply is neither GST-free nor input taxed because none of the provisions in Divisions 38 and 40 of the GST Act apply to this supply. Hence, the supply of the Property by the Vendor to the Purchaser is a taxable supply. Under section 9-70 of the GST Act, the amount of GST on a taxable supply is 10% of the value of the taxable supply. Section 9-75 of the GST Act states the value of a taxable supply as 10/11 th of the price. Therefore the GST amount payable by the Vendor on the supply of the Property is X of the price paid by the Purchaser. However, under section 75-5 of the GST Act, the margin scheme may be applied on a taxable supply of property where all of the conditions under that section are satisfied. Subsection 75-5 (1) of the GST Act states: 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; or · selling a *stratum 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. In the original contract of sale, both the Vendor and the Purchaser agreed, under the terms of the contract, that the supply of the Property was to be under the margin scheme. The facts of this case state that the Purchaser subsequently realised that the contractual agreement to apply the margin scheme was made by mistake and that the Purchaser's intention was to claim input tax credit on this acquisition. Accordingly, the Purchaser and the Vendor are entering into a Deed of Revocation to amend the original Contract of Sale to state that the margin scheme would not apply to the sale. Once the Deed of Revocation is entered into, the supply of the Property will be a taxable supply under section 9-5 of the GST Act without the application of the margin scheme. Since the amended Contract of Sale (as will be provided by the Deed of Revocation) specifies that the sale is not made under the margin scheme, the margin scheme provisions under section 75-5 of the GST Act will not apply in this case. Consequently, the GST on the supply of the Property will be X of the price paid by the Purchaser.

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