1 Is Entity A entitled to apply the margin scheme to its sales of newly constructed residential premises pursuant to section 75-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?
Yes Question 2 When Entity A makes taxable supplies of newly constructed residential premises, can Entity A apply an approved valuation of the property determined at XX June 20XX, as the cost base for the calculation of the GST payable under the margin scheme, pursuant to subparagraph 75-11(5)(e)(i) of the GST Act? Answer Yes This ruling applies for the following period : XXYYYY - XXYYYY The scheme commences on XXYYYY
By Contract of Sale (Contract) dated XXYYYY, Entity A acquired the Property. The vendor under the Contract was Entity B (the Vendor) as nominee for the tax law partnership comprising Entity C, Entity D and Entity E [hereafter referred to as "the New Partnership"]. Settlement of the sale occurred on XXYYYY. The consideration for the acquisition of the Property by Entity A was $X. The sale of the Property to Entity A was treated as a GST-free supply on the basis that it was a supply of a going concern under section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act). Entity A acquired the Property subject to the existing leases in place at the time of the acquisition. Entity A has developed the Property into new residential apartments and wishes to use the margin scheme to calculate the GST payable in respect of the sale of those apartments. Entity A will also develop some commercial premises on the Property (for example, retail outlets, cafés, etc.). The Vendor's acquisition of the Property in YYYY
The Vendor acquired legal ownership of the Property by a Contract of Sale dated XXYYYY (Vendor's Purchase Contract) in its capacity as the nominee for the former partnership between Entity F, Entity C, Entity D and Entity E (hereafter referred to as "the Former Partnership"). Pursuant to the Vendor's Purchase Contract, the supply of the Property was a GST-free supply of a going concern. The Vendor's Purchase Contract states that the Vendor acquired the Property in YYYY for a purchase price of $X from Entity G. Entity D had a X% interest in the Former Partnership and the remaining partners, Entity F, Entity C and Entity D each had a X% interest. The Former Partnership was registered for GST at the time the Vendor acquired the Property in YYYY. The Former Partnership also entered into a co-ownership agreement at the time of acquiring the Property. The Vendor (Entity B) has never been registered for GST in its own corporate capacity. The Vendor held the Property as nominee for the Former Partnership for period XXYYYY until XXYYYY. Entity F's exit in YYYY from the Former Partnership
On XXYYYY, pursuant to a Deed, Entity F disposed of its X% interest in the Property to Entity D, Entity C and Entity E. At the time of Entity F's disposal of its interest in the Property, the Property was subject to a commercial lease and the supply was treated as a GST-free supply of a going concern. The Deed relevantly provided the following: "The Purchasers and Entity F agree the supply of Entity F's Participating Interest being sold pursuant to this Deed, is the supply of a going concern." As a consequence of the sale of Entity F's interest to the remaining partners, a New Partnership was formed. Entity D had a X% interest in the Property with each of Entity C and Entity E holding a X% interest. The cash amount paid to Entity F for its X% interest in the Property was $X. The New Partnership also assumed liabilities of approximately $X for Entity F's share of the debts relating to the Property. The Australian Business Register confirms the New Partnership (that is, the partnership comprising Entity D, Entity C and Entity E) became registered for GST from XXYYYY. Other information provided
A selected extract from the YYYY Contract for Sale for the Property, entered into between Entity G and Entity B. A copy of the Purchase contract concluded in YYYY for the Property. Historical search and the transfer instrument lodged with Land Registry Services in relation to the transfer of the Property in YYYY. Entity F's disposal of its X% interest in the Property would not have resulted in a change in the legal title to the Property. The Vendor would have been the legal owner of the Property both before and after Entity F's disposal (until the transfer of ownership in YYYY to Entity A). It appears that for this reason, there is no transfer recorded with the Land Registry Services in relation to the sale of the X% interest in YYYY. Entity A is not aware whether Entity F had obtained any valuation of its interest in XXYYYY. Entity A does not have any documentation in relation to how the sale price of Entity F's interest was determined, noting that it is likely to have been agreed between the partners of the Former Partnership at that point in time.
Entity A was advised that the sale price for Entity F's X% interest was $X (comprising cash amount of $X and the assumption of debt liability of $X). Entity A is not aware how this price was agreed.
A New Tax System (Goods and Services Tax) Act 1999 Section 9-5 A New Tax System (Goods and Services Tax) Act 1999 Section 9-20 A New Tax System (Goods and Services Tax) Act 1999 Section 75-10 A New Tax System (Goods and Services Tax) Act 1999 Subsection 75-10(1) A New Tax System (Goods and Services Tax) Act 1999 Subsection 75-10(2) A New Tax System (Goods and Services Tax) Act 1999 Subsection 75-11(5) A New Tax System (Goods and Services Tax) Act 1999 Section 75-14 A New Tax System (Goods and Services Tax) Act 1999 Sub-paragraph 75-11(5)(e)(ii) A New Tax System (Goods and Services Tax) Act 1999 Section 195-1 A New Tax System (Goods and Services Tax) Act 1999 Section 38-325 A New Tax System (Goods and Services Tax) Act 1999 Subsection 38-325(1) A New Tax System (Goods and Services Tax) Act
In this ruling, • unless otherwise stated, all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) • all reference materials, published by the Australian Taxation Office (ATO), that are referred to are available on the ATO website ato.gov.au Question 1 Pursuant to section 7-1, GST is payable on all taxable supplies. Subsection 75-5(1) provides that 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. However, subsection 75-5(2) provides that 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. If the supply of Property to you was not ineligible for the margin scheme and you choose to apply the margin scheme to your supply, the GST on any sale will be calculated as 1/11 th of the relevant margin, that is, 1/11 th
of the amount by which the consideration for your supply exceeds the consideration for your acquisition of the interest, unit or lease in question. Eligibility Subsection 75-5(3) lists the circumstances in which you acquire the entire freehold interest, stratum unit or long-term lease through a supply that is ineligible for the margin scheme. Paragraphs 75-5(3)(a) and (e) are relevant to your circumstances. Paragraph 75-5(3(a) provides that a supply is "ineligible for the margin scheme" if, it is a taxable supply on which the GST was worked out without applying the margin scheme. 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.
Based on the information provided, we have concluded that Entity A is not ineligible to apply the margin scheme. Question 2 Application of the margin scheme to your circumstances The next issue to consider is which provision in Division 75 applies to you when determining the margin for the supplies that you make, to calculate the GST payable. Section 75-10 explains how to determine the amount of GST on taxable supplies. In particular, subsection (2) states: Subject to subsection (3) and section 75-11, the margin for the supply is the amount by which the consideration for the supply exceeds the consideration for your acquisition, unit or lease in question. In summary, if a provision in section 75-11 or subsection 75-10(3) does not apply, then the cost base will be the consideration you paid for the Property. Section 75-11 explains how margins for supplies of real property are calculated in particular circumstances. Based on the facts presented it is our view that subsection 75-11(5) applies to you. This subsection states: (5) If: (a) you acquired the interest, unit or lease in question from an entity as, or as part of:
(i) a supply of a going concern to you that was GST-free under Subdivision 38-J; or (ii) a supply to you that was GST-free under Subdivision 38-O; and (b) the entity was registered or required to be registered, at the time of the acquisition; and (c) none of subsections (1) to (4) applies; the margin for the supply you make is the amount by which the consideration for the supply exceeds: (d) ... (i) ... (ii) ... (e) if that entity had acquired the interest, unit or lease on or after 1 July 2000 and had been registered or required to be registered at the time of the acquisition: (i) if the entity's acquisition was for consideration and you choose to apply an approved valuation to work out the margin for the supply - an approved valuation of the interest, unit or lease as at the day on which the entity had acquired it; or (ii) if the entity's acquisition was for consideration and subparagraph (i) does not apply - that consideration; or (iii) if the entity's acquisition was without consideration - the GST inclusive market value of the interest, unit or lease as at the time of the acquisition.
In your case, the requirements of paragraphs 75-11(5)(a) to (c) are satisfied. This is because you acquired the interest in the Property as a supply of going concern, from an entity, being the New Partnership comprising Entity C, Entity D and Entity E, which was registered at the time of the acquisition, and subsections 75-11(1) to (4) do not apply. The margin for the supply of the new residential premises by you can be determined using the methods specified in paragraphs 75-11(5)(d) to (f). As an interest in the Property was acquired by the New Partnership on XXYYYY, for consideration, the margin can be determined under paragraph 75-11(5)(e)(i). This means that you can choose to apply an approved valuation of the entire interest in the Property on the day the New Partnership acquired that interest to work out the margin for the supply. Other matters to consider A Valuation Report prepared by Entity W at XXYYYY, was provided with your ruling application. This report expresses the view that the market value of the property as at XXYYYY was $X. A valuation of an interest, unit or lease, made in accordance with the requirements set out by the Commissioner in
A New Tax System (Goods and Services Tax) Act 1999 Margin Scheme Valuation Requirements Determination 2021 (MSV 2020/1), is an approved valuation of that interest, unit or lease. We have not ruled on whether the Valuation Report prepared by Entity W is an approved valuation in accordance with the requirements of MSV 2020/1.