Private ruling: Application of margin scheme
Date of advice: 7 June 2017
Published: October 2017

Ruling: Q1: Will the supply of the Property by X Ltd to either a company or the trustee of a unit trust established for the purpose of acquiring the Property together with an adjacent property, developing the properties into apartments and commercial units and selling the apartments and commercial units be a supply that is 'ineligible for the margin scheme’ as defined in section 195-1 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)? | A1: As paragraphs (a) to (g) of subsection 75-5(3) do not apply, X Ltd did not acquire the Property through a supply that was 'ineligible for the margin scheme’. Consequently X Ltd will be able to apply the margin scheme to the sale of the Property by X Ltd to the company or the trustee of the unit trust provided subsections 75-5(1) and 75-5(1A) are complied with. As the company or trustee will not acquire the Property from X Ltd through a supply that is 'ineligible for the margin scheme’ the company or trustee will be able to apply the margin scheme to the sales of the apartments and commercial units.

Relevant facts and circumstances: X Ltd registered for GST with effect from July 201X. Pursuant to a Contract for Houses and Residential Land (Contract) dated June 201X X Ltd purchased the Property from XX and YY (Sellers) for a Purchase Price of $. The Reference Schedule in the Contract indicates that the Property was sold by the Sellers to X Ltd subject to X residential tenancies and X commercial tenancies. Clause 2.1 of the Terms of Contract states: GST Unless otherwise specified in this contract, the Purchase Price includes any GST payable on the supply of the Property to the Buyer. It was stated in the ruling request that the Purchase Price did not include GST, that the Sellers did not issue a tax invoice to X Ltd and that X Ltd did not claim an input tax credit (ITC) in respect of the purchase of the Property. The X units at the adjacent property have been purchased by other entities (either a company or one or more individuals). X Ltd and those other entities intend to sell the Properties and the X units at the adjacent property to either a company or the trustee of a unit trust which is yet to be established. X Ltd and the other entities will hold either shares in the company or units in the unit trust and shares or units will also be issued to a developer. As soon as the company or unit trust is established X Ltd and each other entity will grant to either the company or trustee of the unit trust an option to purchase the Property plus the X units at the adjacent property. The company or trustee will develop the Property and the adjacent property into more than YY apartments plus commercial units. After obtaining a Development Approval the company or trustee will exercise the options, commence off-plan sales of the YY apartments and commercial units and demolish the existing buildings on the Property and the adjacent property. The agreement pursuant to which X Ltd grants the company or the trustee of the unit trust an option to purchase the Property will include a term whereby X Ltd and the company or trustee agree that the margin scheme will apply to any sale of the Property upon exercise of the option.

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

Reasons for decision: Summary: All legislative references are to A New Tax System (Goods and Services Tax) Act 1999 (GST Act) unless otherwise stated. As paragraphs (a) to (g) of subsection 75-5(3) do not apply, X Ltd did not acquire the Property through a supply that was 'ineligible for the margin scheme’. Consequently X Ltd will be able to apply the margin scheme to the sale of the Property by X Ltd to the company or the trustee of the unit trust provided subsections 75-5(1) and 75-5(1A) are complied with. As the company or trustee will not acquire the Property from X Ltd through a supply that is 'ineligible for the margin scheme’ the company or trustee will be able to apply the margin scheme to the sales of the apartments and commercial units. | Detailed Reasoning - Detailed reasoning: Subsection 75-5(1) provides that the margin scheme applies in working out the amount of GST on a taxable supply of real property made by selling a freehold interest in land, a stratum unit or granting or selling a long term lease if the supplier and the recipient of the supply have agreed in writing that the margin scheme is to apply. However subsection 75-5(2) provides that the margin scheme does not apply to the supply of a freehold interest etc. if the supplier acquired the freehold interest in the Property through a supply that was 'ineligible for the margin scheme’. Section 195-1 provides that 'ineligible for the margin scheme’ has the meaning given by subsections 75-5(3) and (4). Whether paragraphs 75-5(3)(a) to (d) apply: Section 3 and Item 11 of Schedule 6 to the Tax Laws Amendment (2005 Measures No 2) Act 2005 (2005 Amendment Act) repealed the former subsection 75-5(2) and substituted subsections 75-5(2), (3) and (4) as follows: (2) However, the * margin scheme does not apply if you acquired the entire freehold interest, * stratum unit or * long-term lease through a supply that was * ineligible for the margin scheme. Note: If you acquired part of the interest, unit or lease through a supply that was ineligible for the margin scheme, you may have an increasing adjustment: see section 75-22. (3) A supply is ineligible for the margin scheme if: (a) it is a * taxable supply on which the GST was worked out without applying the * margin scheme; or (b) it is a supply of a thing you acquired by * inheriting it from a deceased person, and the deceased person had acquired all of it through a supply that was ineligible for the margin scheme; or (c) it is a supply in relation to which all of the following apply: (i) you were a * member of a * GST group at the time you acquired the interest, unit or lease in question; (ii) the entity from whom you acquired it was a member of the GST group at that time; (iii) the last supply of the interest, unit or lease by an entity who was not (at the time of that supply) a member of the GST group to an entity who was (at that time) such a member was a supply that was ineligible for the margin scheme; or (d) it is a supply in relation to which both of the following apply: (i) you acquired the interest, unit or lease from the * joint venture operator of a * GST joint venture at a time when you were a * participant in the joint venture; (ii) the joint venture operator had acquired the interest, unit or lease through a supply that was ineligible for the margin scheme. (4) A reference in paragraph (3)(b), (c) or (d) to a supply that was ineligible for the margin scheme is a reference to a supply: (a) that was ineligible for the margin scheme because of one or more previous applications of subsection (3); or (b) that would have been ineligible for the margin scheme for that reason if subsection (3) had been in force at all relevant times. Item 28 in Schedule 6 to the 2005 Amendment Act provides that the amendments made by Schedule 6 (other than Items 3 to 7, 9 and 10) apply in relation to supplies made on or after the day the Bill for the 2005 Amendment Act was introduced into the Parliament (i.e. 17 March 2005). Paragraph 38 of Goods and Services Tax Ruling GSTR 2006/8 provides that for the sale of a freehold interest the supply and acquisition is made at settlement as that is when the purchaser (or the purchaser’s agent) obtains unconditional possession of a registrable instrument of transferor an instrument of transfer that would be registrable once stamped). The supply of the Property to X Ltd was made pursuant to the Contract dated June 201X which provided for settlement to occur 30 Days from the Contract Date. Consequently the supply of the Property to X Ltd was made after 17 March 2005 and subsection 75-5(2) and paragraphs 75-5(3)(a) to (d) as inserted by the 2005 Amendment Act apply to the supply of the Property to X Ltd. Paragraph 75-5(3)(a): The test in paragraph 75-5(3)(a) is similar to the test in the former subsection 75-5(2) before it was repealed and replaced by the 2005 Amendment Act, i.e. whether X Ltd acquired the freehold interest in the Property through a supply that was a taxable supply on which the GST was worked out without applying the margin scheme. Paragraph 29 of GSTR 2006/8 explains the operation of the test in the former subsection 75-5(2): 29. Under the subsection 75-5(2), prior to its amendment, you could not apply the margin scheme if you acquired the real property through a taxable supply and the GST on the supply was not calculated under the margin scheme. The effect of the former subsection 75-5(2) was that the margin scheme could only apply if the supply of the real property that you acquired was: ● from an entity that applied the margin scheme on the supply to you; or ● not a taxable supply. For example, supplies that are GST-free or input taxed, or from an entity that was not registered or required to be registered for GST purposes. It appears that the supply of the Property to X Ltd was not a taxable supply because it was a supply from entities that were not registered or required to be registered for GST. We have confirmed that the Sellers (XX and YY) have never been registered for GST. Although the Contract describes the use of the Property as 'residential and commercial’ and the Property was sold subject to the six leases referred to in Annexure A to the Contract, the annual rents from the X commercial leases (shop A and Shop B) amounted to $ which was below the GST registration turnover threshold which would have required the Sellers to register for GST. Clause 2.1 in the Terms of Contract merely states that the Purchase Price 'includes any GST payable’ on the supply of the Property. X Ltd would have been registered for GST by the date of Completion and would have been entitled to request a tax invoice and claim an ITC for any GST included in the Purchase Price of the Property, but it was stated in the ruling request that X Ltd was not supplied with a tax invoice and did not claim an ITC. We are therefore satisfied that the supply of the Property to X Ltd was not a taxable supply and that paragraph 75-5(3)(a) does not deem X Ltd to have acquired the Property through a supply that was ineligible for the margin scheme. Paragraph 75-5(3)(b): Paragraph 75-5(3)(b) provides that a supply is ineligible for the margin scheme if: It is a supply of a thing you acquired by *inheriting it from a deceased person, and the deceased person had acquired all of it through a supply that was ineligible for the margin scheme; As X Ltd did not inherit the Property from a deceased person, paragraph 75-5(3)(b) does not apply to the acquisition of the Property by X Ltd and therefore does not deem X Ltd to have acquired the Property through a supply that was ineligible for the margin scheme Paragraph 75-5(3)(c): Paragraph 75-5(3)(c) provides that a supply is ineligible for the margin scheme if it is a supply to which all of the following apply: (i) you were a *member of a *GST group at the time you acquired the interest, unit or lease in question; (ii) the entity from whom you acquired it was a member of the GST group at that time; (iii) the last supply of the interest, unit or lease by an entity who was not (at the time of that supply) a member of the GST group to an entity who was (at that time) such a member was a supply that was ineligible for the margin scheme; Our records indicate that, although X Ltd is registered for GST, X Ltd has never been a member of a GST group. Consequently all of the requirements of paragraph 75-5(3)(c) are not satisfied and paragraph 75-5(3)(c) does not deem X Ltd to have acquired the Property through a supply that was ineligible for the margin scheme. Paragraph 75-5(3)(d): Paragraph 75-5(3)(d) provides that a supply is ineligible for the margin scheme if it is a supply to which all of the following apply: (i) you acquired the interest, unit or lease from the *joint venture operator of a *GST joint venture at a time when you were a *participant in the joint venture; (ii) the joint venture operator had acquired the interest, unit or lease through a supply that was ineligible for the margin scheme; The definition of 'joint venture operator’ of a GST joint venture in section 195-1 excludes an entity that does not satisfy paragraph 51-10(c). Section 51-10 sets out the participation requirements of a GST joint venture and paragraph 51-10(c) requires an entity to be registered for GST in order to satisfy those requirements. As noted above, our records indicate that the Sellers have never been registered for GST. Consequently the Sellers could never be the joint venture operator of a GST joint venture, all of the requirements of paragraph 75-5(3)(d) are not satisfied and paragraph 75-5(3)(d) does not deem X Ltd to have acquired the Property through a supply that was ineligible for the margin scheme. Paragraphs 75-5(3)(e) to (g): Paragraphs 75-5(3)(e) to (g) were inserted by section 3 and Item 2 in Schedule 1 to the Tax Laws Amendment (2008 Measures No. 5) Act 2008 (2008 Amendment Act). Paragraph (1) in Item 13 in Schedule 1 to the 2008 Amendment Act (Item 13) states: (1) The amendments made by items 1 to 10 and 12 of this Schedule apply in relation to supplies that are supplies of things that the supplier acquired through a new supply to the supplier. Paragraph (4) of Item 13 states: (4) In this item: new supply means a supply that: (a) is made on or after 9 December 2008; and (b) is not made: (i) under a written agreement entered into before 9 December 2008; or (ii) pursuant to a right or option granted before 9 December 2008; that specifies in writing the consideration, or a way of working out the consideration, for the supply. The application of paragraphs 75-5(3)(e) to (g) turns on whether X Ltd acquired the Property through a 'new supply’ (as defined). As noted above, paragraph 38 of GSTR 2006/8 provides that, for the sale of a freehold interest, the supply and the acquisition is made at settlement and the Contract dated June 201X provided for settlement to occur 30 Days from the Contract Date. Consequently X Ltd acquired the Property on or after 9 December 2008 through a 'new supply’ and paragraphs 75-5(3)(e) to (g) must be considered. Paragraph 75-5(3)(e) Paragraph 75-5(3)(e) provides that a supply is ineligible for the margin scheme if it is a supply in relation to which all of the following apply: (i) you acquired the interest, unit or lease from an entity as, or as part of, a *supply of a going concern to you that was *GST-free under Subdivision 38-J; (ii) the entity was *registered or *required to be registered, at the time of the acquisition; (iii) the entity had acquired the entire interest, unit or lease through a taxable supply on which the GST was worked out without applying the margin scheme. As noted above, there is no evidence that the Sellers were ever registered for GST or required to be so registered, so the requirement in sub-paragraph 75-5(3)(e)(ii) is not satisfied. Consequently all of the requirements of paragraph 75-5(3)(e) are not satisfied and paragraph 75-5(3)(e) does not deem X Ltd to have acquired the Property through a supply that was ineligible for the margin scheme. Paragraph 75-5(3)(f): Paragraph 75-5(3)(f) provides that an supply is ineligible for the margin scheme if it is a supply to which all of the following apply: (i) you acquired the interest, unit or lease from an entity as, or as part of, a supply to you that was GST-free under Subdivision 38-O; (ii) the entity was registered or required to be registered, at the time of the acquisition; (iii) the entity had acquired the entire interest, unit or lease through a taxable supply on which the GST was worked out without applying the margin scheme; Subdivision 38-O of the GST Act contains two sections. Section 38-475 applies to the supply to an associate of the supplier of subdivided land on which a 'farming business’ has been carried on for at least five years. Section 38-480 applies to the supply of land on which a farming business has been carried on for at least the period of 5 years preceding the supply where the recipient intends that a farming business be carried on, on the land. As the Contract describes the Property as 'residential and commercial’, the supply of the Property to X Ltd by the Sellers was not a supply that was GST-free under Subdivision 38-O. For the reasons set out above we do not consider that the Sellers were registered or required to be registered for GST. Consequently sub-paragraphs (i) and (ii) of paragraph 75-5(3)(f) are not satisfied and paragraph 75-5(3)(f) does not deem X Ltd to have acquired the Property through a supply that was ineligible for the margin scheme. Paragraph 75-5(3)(g): Paragraph 75-5(3)(g) provides that an supply is ineligible for the margin scheme if it is a supply to which all of the following apply: (i) you acquired the interest, unit or lease from an entity who was your *associate, and who was registered or required to be registered, at the time of acquisition; (ii) the acquisition from your associate was without *consideration; (iii) the supply by your associate was not a taxable supply; (iv) your associate made the supply in the course or furtherance of an *enterprise your associate *carried on; (v) your associate had acquired the entire interest, unit or lease through a taxable supply on which the GST was worked out without applying the margin scheme. In the present case the Contract indicates that the acquisition of the Property by X Ltd was for consideration. Consequently all of the requirements of paragraph 75-5(3)(g) are not satisfied and paragraph 75-5(3)(g) does not deem X Ltd to have acquired the Property through a supply that was ineligible for the margin scheme. Subsection 75-5(4): As noted above, section 195-1 provides that 'ineligible for the margin scheme’ has the meaning given by subsections 75-5(3) and (4). Subsection 75-5(4) provides that a reference in paragraphs 75-5(3)(b), (c) or (d) to a supply that was ineligible for the margin scheme is a reference to a supply that either was ineligible for the margin scheme because of 'one or more previous applications’ of subsection 75-5(3) or would have been ineligible for the margin scheme for that reason if subsection 75-5(3) had been in force at all relevant times. In relation to paragraph 75-5(3)(b), for example (i.e. the supply of a thing a person acquired by inheriting it from a deceased person), if a first person acquired a property by inheriting it and then died and a second person acquired the property by inheriting it from the first person then both the first person and the second person would be subject to paragraph 75-5(3)(b). Paragraphs 75-5(3)(b), (c) and (d) and subsection 75-5(4) apply to supplies made on or after 17 March 2005. Records on www.rpdata.com.au indicate that there was one sale of the Property on or after 17 March 2005 – in April 20XX ZZ sold the Property to the Sellers. As the Sellers neither acquired the Property by inheriting it from a deceased person, were not members of a GST group when the Sellers acquired the Property, nor acquired the Property from the joint venture operator of a GST joint venture, subsection 75-5(4) does not apply. Subsections 75-5(1) and (1A): Subsection 75-5(1) states: (1) The *margin scheme applies in working out the amount of GST on a *taxable supply of *real property that you make by: (a) selling a freehold interest in land; or (b) selling a *stratum unit; or (c) 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) states: (1A) The agreement must be made: (a) on or before the making of the supply; or (b) within such further period as the Commissioner allows. In the ruling request it was stated that X Ltd and either the company or trustee will sign an agreement in writing that the margin scheme is to apply to the supply of the Property by X Ltd. Implications for subsequent supply of apartments and commercial units by either the company or the trustee of the unit trust: After acquiring the Property and the adjacent property and developing the properties into apartments and commercial units the company or trustee (which will be required to register for GST) may wish to apply the margin scheme when selling the apartments and commercial units. As noted above, subsection 75-5(1) provides that the margin scheme applies in working out the amount of GST on a taxable supply of real property made by selling a freehold interest in land, a stratum unit or granting or selling a long term lease if the supplier and the recipient of the supply have agreed in writing that the margin scheme is to apply, but subsection 75-5(2) provides that the margin scheme does not apply to the supply of a freehold interest etc. if the supplier acquired the freehold interest in the Property through a supply that was 'ineligible for the margin scheme’. With application to supplies made on or after 17 March 2005 paragraph 75-5(3)(a) states: (3) A supply is ineligible for the margin scheme if: (a) it is a * taxable supply on which the GST was worked out without applying the * margin scheme; or As noted above, paragraph 29 of GSTR 2006/8 explains the operation of the test in the former subsection 75-5(2) (which was similar to paragraph 75-5(3)(a): 29. Under the subsection 75-5(2), prior to its amendment, you could not apply the margin scheme if you acquired the real property through a taxable supply and the GST on the supply was not calculated under the margin scheme. The effect of the former subsection 75-5(2) was that the margin scheme could only apply if the supply of the real property that you acquired was: ● from an entity that applied the margin scheme on the supply to you; or ● not a taxable supply. For example, supplies that are GST-free or input taxed, or from an entity that was not registered or required to be registered for GST purposes. As the company or trustee will acquire the Property from X Ltd as a taxable supply to which X Ltd has applied the margin scheme, the company or trustee will not acquire the Property through a supply that is ineligible for the margin scheme under paragraph 75-5(3)(a). Nor will the company or trustee acquire the Property through a supply that is ineligible for the margin scheme under paragraphs 75-5(3)(b) to (g). Consequently the company or trustee will be able to apply the margin scheme to the sales of the apartments and commercial units.