GST on Real Estate
Whether real estate is subject to GST depends on whether the premises is new, residential or commercial. The sale of an existing home is input taxed, but are not normally subject to GST anyway because most owners are not registered as dealers.
The sale of a new residential property is subject to GST, as is the sale of a commercial residential premise such as a hotel.
Special rules allow tax payers such as dealers and developers to calculate GST on a ‘margin basis’
GST does not normally apply to residential rent, but special rules apply to long term commercial residential accommodation. Rent on a commercial premises is subject to GST, but the renter would usually claim offsetting input tax credits if they are in business. Certain grants on crown land, farm land and farm subdivisions may be GST free.
The difference between "input-taxed purchases" and "GST-free items"
Input-taxed is a supply that the seller cannot charge GST on and also cannot claim any GST incurred in relation to that supply.
There are input taxed sales and input taxed purchases. Input taxed sales are things like interest income, dividend income, or residential income. Input taxed purchases are expenses related to any input taxed sales.
Examples of input-taxed supplies include:
- Financial supplies (which includes most transactions relating to money)
- Supplies of residential rents
- Sales of residential premises (but not new homes)
- Precious metal supplies
- Food supplied by school tuckshops and canteens
- Fundraising events by charities and
- Coin-operated devices
GST free is a supply that the seller cannot charge GST on but can claim any GST incurred in relation to that supply.
Examples of GST free supplies include:
- Exports
- Education
- Some Foods like milk & bread
- Health and Medical care
- Water, Sewerage and Drainage
- Cars for disabled persons
Mostly, unless a specific exemption applies, such as a sale of a going concern, sales of real property are taxable, but in input taxed when;
- The property is a residential premises
- The premises are used mainly for residential accommodation
- The premises are not commercial residential premises
- The premises are not new residential premises, except for ones used for residential accommodation before 02.December.1998
The definition of real property
Real property includes;
- An interest in land or a right over land. The ATO considers that this is limited to legal or equitable interests (An equitable interest is a title that indicates a beneficial interest in property and that gives the holder the right to acquire formal legal title) or rights.
- A personal right to be granted such rights or interests.
- A licence to occupy land.
- Any other contractual right exercisable in relation to land, such as a restrictive covenant.
According to common law, there will not be a licence to occupy land if the right is only ancillary to some other supply that does not involve land. For example, a licence to occupy a car parking space is a supply of real property, but the supply of valet parking services is not.
The hire of a room for a function is a supply of real property, but the supply of tickets to an entertainment event is not.
Fixtures
Real property includes fixtures attached to the land. Although the ATO views a house that has been physically removed from the land and sold separately as not real property.
Chattels
As opposed to fixtures, chattels would usually be treated as separate from the real property itself. If tax payer purchased chattels used in renovating a residential property and then sold it, the ATO would usually treat the sale of chattels as taxable and the sale of the premises as input taxed.
If a new residential premises is sold with certain chattels included the ATO says that the consideration should be apportioned to enable the real property element eligible for the margin scheme to be identified.
Foreign property
The sale of foreign property is not subject to GST
Time sharing schemes
An interest in an accommodation time-sharing scheme may constitute a real property
Emissions rights
Eligible emissions units are treated as personal property rights, rather than real property rights.
Time of supply
A supply by sale of land under the Torrens title system does not take place until the registration of the transfer document, technically speaking. However, in practice, the ATO accepts that the supply and acquisition occurs on settlement.
Sale of pre-existing non-commercial residential premises
Usually, the sale of non-commercial residential premises that are not new are input taxed, if the premises are real property to be used predominately for residential accommodation. This means that no GST is payable and there are no input tax credits for acquisitions relating to the sale.
In most cases the sale of existing residences are not subject to GST because the owner is not selling in the course of business and so is not required to be registered.
Definition of a residential premises
Residential premises is defined as land or building that is;
a) Actually occupied as a residence or for residential accommodation
b) Intended to be occupied as a residence or for residential accommodation, provided that it is capable of being used in that way.
This test must be satisfied at the time of the related supply.
The term of the intended occupation is irrelevant. This means the premises do not need to be a home or permanent place of abode. On this basis, for example, serviced apartments let on a short term basis may be a residential premises. Lodging, sleeping or overnight accommodation is also included.
It is mainly the physical characteristics that define a building as a residential premises. The key is that it must provide the occupants with shelter and basic living facilities, such as provided by a bedroom and bathroom. The building must also be fit for human habitation. This requirement can be satisfied even if they are in a minor state of disrepair.
There is no specific restrictions on the area of land that can be included with a building and be treated as part of the residential premises. The ATOs view is that the relevant factor is the extent to which the physical characteristics of the land and building as a whole indicate that the land is to be enjoyed in conjunction with the residential building. The use of the land doesn’t determine whether the land forms part of the residential premises.
Vacant land is not residential premises, even if the intent is to erect residential accommodation on the land in the future. Whether the supply of vacant land is taxable will therefore depend on the usual conditions. For example, if the vacant land was sold as part of a developers business, it would be taxable, but for non-business private sale it would be non-taxable.
Individual units in a strata title block are residential premises. When aggregated with other units under the control of one management, the premises as a whole may be commercial residential premises.
Partial residences
If only part of the premises is residential, the transaction must be apportioned. This apportionment would presumably be on a value basis. If so, the value allocated in the contract will be important. Its important to pay attention to the relevant anti-avoidance rules in these situations.
Likewise, if a dealer sells a house with an adjoining disuse paddock that has not significant nexus with the house the sale may be input taxed to the extent that it relates to the house, but taxable to the extent that it relates to the paddock.
If the premises are only partially constructed and yet to be fit to live in they will not be considered to be residential premises.
Separately titled garages
Residential apartments can be sold together with garages, car parking spaces or storage areas located within a building complex. The ATOs view is that this may be treated as a composite supply of residential premises to be used predominately for residential purposes. This holds true regardless of whether the garage or similar is on a separate title, provided that it is physically located within the building complex. However, the sale of a separately titled garage by itself without the residential unit would be treated as taxable.
Sale with development consent
The assignment of a development consent as part of the input taxed sale of residential premises may be a separate taxable supply if it provides substantive rights to the purchaser in addition to those naturally attached to the premises. This would not apply if the consent automatically flows with the ownership of the premises and the assignment is merely formal.
Definition of a taxable supply
An entity makes a taxable supply if:
- It makes the supply for consideration
- The supply is made in the course or furtherance of an enterprise that it carries on
- The supply is connected with Australia
- The entity is either registered or required to be registered for GST, and
- The supply is not GST-free or input taxed.
GST is payable at a rate of 10% on the value of "taxable supplies".
GST is also payable on "taxable importations". However, in such cases, it is the importer, rather than the supplier, which is required to account for the GST.
Sale of new residential premises
The sale of new residential premises is usually taxable. This means that GST may be payable if the vendor is registered. This will typically apply to builders and developers.
There is an exception to this rule if the premises were used for residential accommodation before December 2. If so, the sale will be input taxed. In this case, the permeases also needs to be within the definition of residential premises at the time.
The use of premises as a commercial residential premises is not treated as use for residential accommodation.
New residential premises fall into three categories;
1) Those that have not previously been sold as residential premises or not previously subject to long term lease
2) Those that have been created by ‘substantial’ renovations
3) Those that have been built to replace demolished premises
‘New’ residential premises do not include residential premises that have been used solely for rental purposes for a period of at least 5 years since they were built, substantially renovated or replaced. This 5 year period might include short periods between tenancies, but not periods when the premises was used for a private purpose of left vacant with no attempt to rent.
Residential premises that qualify as new under 2 or cease to qualify as new once they fail to satisfy category 1. For example, when they are sold or supplied under a long term lease as a residential premises.
Subdivisions, strata titles and development leases
Special provisions apply to subdivisions and development leases in deciding whether premises is new.
1) Where a premises is created under a property subdivision plan of existing residential premises that are not new, this does not by itself result in the subdivided premises becoming a new premises. ‘Property subdivision plans’ include strata title plans or plans to subdivide land. This provision doesn’t prevent the subdivided premises from being treated as new if they themselves are then substantially renovated, or are demolished and rebuilt.
2) If there is a grant of strata-lot leases in relation to newly constructed residential premises on the registration of a property subdivision plan, this does not mean that those premises cease to be new. In effect, the grant is disregarded. This provision particularly relates to jurisdictions where land tenure is by the way of long term lease hold.
A third specific provision is designed to ensure that certain sales of newly constructed residential premises by a developer to home buyers and investors will be taxable supplies of new residential premises, even though there may have been earlier ‘wholesale supply’ of the premises. The effect is that the earlier supply is disregarded if the residential premises have been constructed pursuant to an arrangement between a 1) developer or builder becomes entitled to the freehold or long term lease hold title of the premises conditional on specified building or renovation works being undertaken.
Sometimes a supply falls between both rules 2 & 3. If so, it seems that neither rule will apply if the supply falls within the transitional provision for rule 3 even though it does not fall within the transitional provision for rule 2.
Supplies within groups
New residential premises do not lose the status simply by being supplied within a GST group or between joint ventures. This measure was primarily directed against artificial arrangements designed to exploit the group or joint venture rules, though it was likely that these arrangements could have been struck down under the anti-avoidance rules anyway.
Previous sale as a commercial residential premises
Premises can still be treated as new residential premises even though they have previously been sold as commercial residential premises. For example, if a motel is sold, then strata titled, the subsequent sale of the individual units could be treated as a sale of new premises.
Time of supply
Under most standard forms of sale contract, it appears that the supply would not take place until settlement. If so, there can be no taxable supply if the settlement occurred before 1 July 2000. However, GST may potentially apply if the settlement occurs on or after that date.
Purchaser to remit GST from 1 July 2018
A draft bill has been introduced to require buyers of newly constructed residential premises or new subdivisions of potential residential land to remit the GST amount directly to the tax office.
The purpose of this measure is to avoid the practice of some developer /vendors who fail to remit the GST even though they have claimed input tax credits on the construction costs. Developers have been known to simply dissolve the business before their next BAS lodgement.
The amount to be remitted is 1/11 of the GST inclusive cost of the supply. It usually must be paid on or before the day that any consideration for the supply is first provided on or after 01.July.2018. However, if the contract was entered into before 01.July 2018, the obligation does not apply if the consideration is first provide before 1 July 2020. It appears that the full amount must be paid even if the purchase price is paid in instalments. But no obligation arises from the mere payment of a deposit. The obligation will not apply if the supply was not taxable or to transactions between members of a GST group or participants in a joint venture.
At least 14 days before making a supply the vendor musty provide the purchaser with a withholding notice setting out when and how much GST must be remitted to the Tax Office, plus any other details such as the vendors ABN. This applies to supplies of any residential premises or potential residential land. Failure to provide this attracts a penalty as does failure by the purchaser to pay any required GST.
The vendor will be credited with the amount paid to the tax office. Refunds may be available to the vendor if too much GST has been remitted, such as where the vendor is using a margin scheme or the purchaser has withheld in error. The refund may be claimed as part of the procedure.
Sale of commercial residential premises
Input tax does not apply to the sale of commercial residential premises, meaning that GST may apply if the vendor is registered.
There are various types of commercial residential premises, which include;
1) Hotels, motels, inns, hostels, boarding houses or similar premises
2) School accommodation or similar premises
3) Charter vessels or cruise ships
4) Marinas
5) Caravan Parks, camping grounds or similar
Sale of non-residential premises
Sales of non-residential premises are subject to GST, as are the sales of new residential premises and commercial residential premises.
Long term leases
A long term lease of premises is treated in the same way as the sale of premises. So, for example, a long term lease of new residential premises, commercial residential premises, or non-residential premises is generally taxable, but a long term lease of an established home is input taxed. A long term lease of vacant land may be taxable, irrespective of whether it is subject to a condition that the lessee constructs residential premises on the land. A long term lease means a lease for at least 50 years, where it is reasonable to expect that it will continue for at least that period.
Unless the lessor is an Australian government agency, the terms of the lease must be ‘substantially the same’ as those under which the lessor held the premises. This requirement may be relevant, for example, where a lessee under a head lease grants a sublease.
Renewals or extensions can, in and of themselves, qualify as long term leases. They are treated as supplies separate from the original grant.
These rules also apply to hiring or licensing arrangements.
A supply by way of sale of a long term lease takes place on settlement. Typically, this is when the registerable transfer is unconditionally provided to the recipient. The recipient acquires the lease at the same time.
Development leases
Under various types of development lease arrangements, a private developer undertakes a development on land owned by a government agency on the contractual basis that the land will be supplied to the developer on a short term lease during the development phase, and will then be transferred to the developer by way of the freehold or a long term lease once the development is completed. According to ATO guidelines, the main GST implications are as follows;
- The grant of the short term development lease is treated as a taxable supply of the vacant land to the developer by way of lease or licence. Any rent or lump sum payable by the developer on the grant would be consideration for that supply.
- By completing development works, the developer is supplying services to the government agency. The ultimate supply of land by way of freehold or long term lease by the agency would be consideration for that supply. Both supplies are taxable.
Special rules apply on situations where ‘in kind’ developer contributions are made in return for the grant of subdivision or rezoning rights approvals.
Subdivision and sale
The subdivision and sale of land by a registered developer would form part of the developer’s business enterprise and could be subject to GST. The transaction is not input taxed because if the lad is sold vacant, it would be treated as non-residential and if it is sold with newly erected houses it would be treated as a new residential premises.
Even if the subdivision and sale is an isolated transaction it is normally treated as ‘an adventure in the nature of trade’ and therefore part of the registered sellers enterprise. So GST could apply.
However, This may not apply where there is a mere advantageous realisation for example, where the land which is inherited or held for some purposes is subsequently subdivided and sold off to the best advantage.
Where it is a isolated transaction, the ATO considers that if several of the following factors are present it may be an indication that there is an enterprise being carried on, rather than a mere realisation;
1) There is a change of purpose for which the land is held
2) Additional land is acquired to be added to the original parcel of land
3) The parcel of land is brought into account as a business asset
4) There is a coherent plan for the subdivision of land
5) There is a business organisation, for example a manager, office and letterhead
6) Borrowed funds financed the acquisition or subdivision
7) Interest on the money borrowed to defray subdivisional costs was claimed as a business expense
8) There is a level of development of the land beyond that necessary to secure council approval for the subdivision
9) Buildings have been erected on the land
Partitions of co-owned land
There is a partition of land where it is divided up and redistributed among the former co-owners. This may occur, for example, as a result of a dispute between the owners or the conclusion of a business venture. The ATO has the view that a partition has the following GST implications;
- If the partition is by agreement between the parties, each transfer by a co-owner to the others is a supply. However, just because the land held by co-owners is subdivided does not amount to a supply.
- This also applies even if the partition is made up by the parties pursuant to a court direction .Although there cannot be a supply unless the supplier does something, this does not mean it has to be a voluntary act.
- The supply by each co-owner will normally be mad as part of carrying on an enterprise, if the land was applied or intended to be supplied as part of an enterprise carried on by that co-owner. This is so even if the partition results in the termination of the enterprise
- The consideration for the supply is that each co-owner gives up their interests in part of the land in return for the same from the other co-owner
- The margin scheme can be applied to work out the amount of GST payable on the supply.
- A partnership makes a supply to the partners in the course of its enterprise when it makes an in specie
distribution of partnership land to them, or when it supplies an interest in the land by way of a partition.
Attribution of GST and credits on taxable sales
Where the sale of real estate is a taxable supply, for example if it is non-residential, new residential or commercial residential – It is necessary to attribute the GST and input tax credit to the appropriate tax periods.
In the case of a standard contract for the sale of land;
- The supplier should attribute the GST on the sale to the tax period in which the supply takes place. So, when the settlement of the sale takes place. This applies whether the supplier is on the cash basis or the accruals basis.
- Similarly, the purchaser should claim the input tax credit for the tax period in which settlement of the sale occurs. This is also applicable whether the purchaser is on the cash basis or the accruals basis. However, the purchaser must be registered and hold a tax invoice in accordance with the normal rules.
- These rules apply irrespective of whether the contract is subject to conditions such as a ‘subject to finance’ clause.
Easements, restrictive covenants and options
For GST purposes, the granting of an easement or restrictive covenant affecting land is a supply of a real property interest or right. Provided that the land is in Australia, GST may therefore if the grantor is registered (or required to be registered), there is consideration, and the grant is made as part of an enterprise carried on by a grantor.
If GST applies, the grantee can claim an input tax credit if the grantee is registered (or required to be registered), pays consideration and acquires the interest as part of its enterprise.
Options
The grant of an option to acquire land is a ‘supply’ of a right over real property. Whether the supply is taxable depends on the circumstances. The supply of a right to receive a taxable supply,( for example, of commercial property) is itself taxable if it meets the usual requirements as to consideration, connection, with Australia, etc.
The supply of a right to receive an input taxed supply is itself input taxed and the supply of a right to receive a GST free supply is itself GST free.
Other GST issues to consider when dealing with property
- Home loans are input taxed as financial supplies, so no GST is payable on them. Similarly, where a purchaser is given time to pay under an instalment contract, this is a credit arrangement that may be treated as an input taxed financial supply. This is separate from the supply of property itself.
- There will be a GST adjustment if a property development originally carried out for the purposes of sale is actually used for rental purposes
- Water, sewage and stormwater drainage supplies are GST free
- GST does not apply to local government services for which rates are payable
- Electricity and gas supplies are taxable
- GST does not apply to development or building applications, but building inspections are taxable
- Stamp duty is not treated as part of the consideration, and therefore does not attract GST. However, it appears that stamp duty will be imposed on the GST-inclusive price.
- Adjustment for rates, land taxes, and other outgoings on the settlement of a taxable sale of real property are taken into account in calculating the consideration on which GST is based.
- Home insurance is taxable
- New house construction costs are subject to GST
- House alterations are subject to GST
- If an amount under a building contract is retained pending satisfactory completion, the GST is deferred until it is actually paid over.
Special Margin Rules
How the margin scheme works
The margin scheme enables GST on certain sales to of real estate to be calculated on a concessional basis. It is typically applicable to new residential property developments.
Normally GST on a simply is calculated as 1/11th of the GST inclusive price and a purchaser can claim an input tax credit for the GST component. Under the margin scheme, however, the GST on the sale is instead calculated as 1/11th of the margin, and no input tax is allowed to the purchaser.
In broad terms the margin is calculated as follows;
- If you acquired the property before 1 July 2000, then margin is the increase in value since that date
- If you acquired the property after 30 June 2000, the margin is the difference between your sale price and the price you paid.
Eligibility rules
The margin scheme applies in working out the GST where;
- You make a taxable supply of real property. From there to be a taxable supply, it must be made for consideration, in the course of a registered suppliers enterprise, and it must be connected with Australia and be neither GST-free or input taxed. The supply of real property must be either the sale of a freehold interest, a strata unit, or the grant or sale of a long-term lease. Freehold interests includes the fractional interests of a co-owner.
- Both parties agree that the margin scheme will apply
The margin scheme cannot be applied to a supply that you make if you had acquired the property in any of the following circumstances;
1) You acquired it under a taxable supply on which the GST was worked out without using the margin scheme. The rationale for this exclusion is that in such a case, you would have been entitled to an input tax credit on the purchase and you should have therefore not be entitled to any further relief by way of the margin scheme.
2) You acquired it by way of inheritance, if the deceased person had acquired it through a supply that was not eligible for the margin scheme.
3) You acquired it from another GST group member, and the last supply of the property from another group member had been ineligible for the margin scheme
4) You acquired it from the operator of a joint venture in which you were a participant, and the operator has acquired it through a supply that was ineligible for the margin scheme.
5) You acquired it as a GST-free supply of a going concern, a farm or a subdivided farm land from an entity was registered or required to be and that entity had acquired it through a taxable supply on which GST was worked out without applying the margin scheme.
6) You acquired it for no consideration from an associate that was registered or required to be where the taxable supply by that associate was not a taxable supply in the course of an enterprise, and the associate had acquired the property through a taxable supply on which the GST was worked out without using the margin scheme. This exclusion can also apply where, for example, a government entity acquired the property for no consideration from an associate without the associate technically making a supply.
The ineligibility of rules 5 & 6 are intended to prevent arrangements under which taxpayers ‘refreshed’ their eligibility to us the margin scheme by interposing a GST free or non-taxable supply before selling the property. These rules apply to supplies of things that you acquired through a supply that was; 1) made on or after 9 December 2008 and 2) not made under a written contract made before that date , or pursuant to an option granted before that date that specified the consideration or a way of working it out.
The ineligibility of rules 5 & 6 do not apply if more than one GST-free or non-taxable sale is interposed. This recognises the complexity that would arise if it were necessary to look back through multiple transactions. However, it is likely that the general anti avoidance rules in Div 165 may apply in any event where there is a contrived arrangement designed to exploit this rule.
Pros & Cons of margin scheme
The upside of the margin scheme is of course that the GST is reduced. The downside is that the purchaser cannot claim an input tax credit. This means that the margin scheme will be particularly relevant where the purchaser may not have been entitled to an input tax credit in any event, for example, where a developer sells new residential units, a project builder sells house and land packages or land is sold to an unregistered purchaser. It also means that a developer could also consider using the margin scheme on sales to purchases who cannot claim input tax credits in any event, for example, unregistered purchases, and using the normal method of calculating GST on sales to registered purchases who can claim the GST back as an input tax credit.
Selling land as part of a business
It seems that the margin scheme can apply where land is being sold as part of closing down a business, such as a sale is treated as being made in the course of carrying on an enterprise.
However, this would not apply id the sale was a GST free supply of a going concern.
Subdivisions
Taxpayers can now use the consideration method, the valuation method or the GST-inclusive method, whichever is appropriate, when calculating the margin on a taxable supply of subdivided land. This measure took effect from the first quarterly tax period commencing after 28 June 2013.
How to calculate the margin
The margin is generally calculated as the difference between your cost and the amount you charge on disposing of it.
The GST is 1/11 of that margin.
Property held at 1 July 2000
Special rules apply to real property held on 1 July 2000. These rules reflect the fact that GST applies only from that date. Their effect is:
- If you acquired the property before 1 July 2000, the cost is calculated as the value as at 1 July 2000. In effect, you will be liable for GST only on the value added since that date.
- If you were not registered or required to be registered a 1 July 2000, the cost is calculated as the value as at the date you become registered. In effect, you will be liable for GST only on the value added by you after registration.
Calculating the cost
In calculating the margin, your cost does not include any consideration for improvements, construction or development costs of building work, additional costs such as solicitor’s fees and stamp duty, or any expenses in bringing the property into legal or physical existence.
The cost includes any additional amount paid as an adjustment for council rates and land tax paid in advance by the vendor of the property proper to settlement, but not legal fees, stamp duty or registration fees on the purchase.
If the sale is part of a subdivision, your cost is calculated on a pro rata basis. You may use any reasonable method of apportionment such as on the basis of area or expected resale price. Note that certain subdivisions by farmers are GST free in any event.
If the full price under the contract has not been paid, the margin will reflect only the amount paid. If there is a subsequent additional payment, the supplier will be entitled to a decreasing adjustment.
In calculating the margin where the land was sold on the exercise of a purchase option, the consideration for the supply did not include the amount paid for the purchase option, even though it was applied to the purchase price. The option fee is instead treated as a consideration for the supply of the call option, not for the separate supply of the bland. This applies even if the contract specifically states that the purchase price is inclusive of the option fee.
Requirements for valuation
Valuations may be needed for real property acquired by the supplier before 1 July 2000 or in other special situations. The methods of valuation must be approved by the ATO.
Broadly, the approved valuation methods are;
1) A written valuation by a professional valuer. If unimproved government land held at 1 July 2000 has subsequently been improved, the valuation must be ion an unimproved basis.
2) Adoption of the amount of consideration received by the supplier in a contract signed or exchanged before the valuation date by parties dealing on an arm’s length basis.
This method does not apply where unimproved government land held at 1 July 2000 has subsequently been improved.
1) Adoption of the value determined by the government as the most recent valuation of the land for rating or land tax purpose before the valuation date.
Valuations under these methods must be made by the due date for lodgement of the BAS for the tax period to which the GST on the supply is attributable. However, if the commissioner has allowed an extension of the period for the parties to agree that the margin scheme is to be applied, the valuation must be made by the later of:
- Eight weeks from the end of that extended period, or from the date of the commissioner’s decision to grant the parties the extended period. For the supplies made before 1 March 2010, the reference to eight weeks was instead to six weeks.
- An additional period that the commissioner may allow. This may apply, for example, where: (a) The valuation obtained by the supplier was invalid (b) the parties contacted on the incorrect basis that the supply was GST free, input taxed or otherwise non-taxable. (c) The supplier mistakenly believed that a valuation had already been obtained (d) the supplier and recipient agreed to use the margin scheme but the supplier forgot to instruct the valuer or failed to notice that the had not valued all the lots of the subdivision, or(e) the valuation was not undertaken for reasons outside the control of the parties, such as, if a settlement is close to the end of a tax period and the supplier has taken reasonable steps top obtains a valuation on time, but there is not enough time to get one.
A valuation may also be approved if it is obtained by the commissioner in specified circumstances where this is appropriate to ensure that GST is payable only on the value added after the commencement of the GST system or the tax payers entry into it.
Different valuation required for builder
It is very important to distinguish the valuation required under the margin scheme form the valuation required for construction contracts. The valuation under the margin scheme is for the purpose of determining the developers GST liability on the eventual sale of the property, and includes the land. The valuation for construction in progress is the for the purpose of deterring the builders liability for GST ion work and materials supplied, and does not include land.
Bad debts under the margin scheme
If the buyer defaults, there may be a GST bad debt adjustment for the suppler. This adjustment is limited to 1/11th of the margin.
There is no adjustment for the purchaser because a purchaser under the margin scheme is not eligible for input tax credits.
Special situations
The following rules govern how the margin scheme applies in particular situations.
Property acquired from or supplied to associate
- Where real property was acquired on or after 9 December 2008, the taxable supply of that property to an associate may be deemed to be a ‘sale’ – and so might fall within the margin scheme – even if no consideration is provided. However, a supply to an associate for less than market value may be treated as a sale.
- The margin scheme may not apply in certain situations where there has been interposed non-taxable supply to an associate prior to the sale of the property by the supplying entity.
Usually, if you acquired the property from an associate, the margin on your subsequent supply of the property will be the amount by which the consideration for that supply exceeds an approved valuation of the property as at 1 July 2000. However, a special rule applies if you originally acquired the property on or after 9 December 2008 for no consideration from a registered associate under a non-taxable supply made in the course of the associate’s enterprise. In such a case, the margin on your subsequent sale of the property is calculated as the difference between; (1) the price you sell the property for and (2) the price for which the associate acquired - the property, or its market value at the date of the acquisition. If the acquisition by the associate was pre-1 July 2000, a valuation is made as at that date
- If you supply the property to an associate, the margin is calculated as if the consideration for the supply was the GST-inclusive market value of the property. For property that you acquired on or after 9 December 2008, this applies whether or not the supply was for consideration.
The ATO considers that if a general law partnership supplies real property that was acquired from its partners by way of capital contribution, the margin is calculated as stated above. The ATO also considers that the margin scheme cam apply where(1) a partner supplies real property as a capital contribution to a partnership, in exchange for an interests in the partnership, provided that the interest becomes partnership property. Or (2) the partnership distributes real property to a partner as a result of a general dissolution, provided that the real property becomes the property of the partner and it is no longer partnership property. However, the margin scheme does not apply where there is merely a reconstitution of a partnership that holds real property.
Inherited property
If you inherited property, you and the deceased are treated as on entity for the purposes of the margin rules. This rule helps taxpayers as it circumnavigates previous anomaly such that the full price was subject to GST because the beneficiary had not paid any consideration.
In calculating the margin on the subsequent supply of property, you can treat the cost as the consideration for the acquisition of the property by the deceased. Alternatively, you can determine the cost on the basis of a valuation, in accordance with the following rules;
1) If the deceased acquired the property on or after 1 July 2000, the margin on your subsequent of the property is the amount by which the consideration for that supply exceeds an approved valuation of the property as at the date the deceased acquired it.
2) If the deceased acquired the property before 1 July 2000 and it was registered, or required to be, the date of the valuation is the later of 1 July 2000 or the first day on which the deceased registered or was required to register
Inherit includes acquiring property from a deceased estate by way of court order or deed of arrangement.
These rules don’t apply if the special rules covering acquisitions from fellow GST group members apply. The margin scheme will not apply in any event if the deceased would not have been eligible to apply it on subsequent supply.
Multiple acquisitions and amalgamated property
The general rule is that real property is not eligible for the margin scheme if it was acquired by the supplier through a taxable supply to which the margin scheme was not applied. The margin scheme may also not apply even though part of the property was not eligible. However, in this case, there will be an increasing adjustment to recover any input tax credits that have been claimed in relation to the ineligible property. Corresponding adjustments must be made if the real property is partly ineligible under the other ineligibility rules.
For property acquired on or after 9 December 2008, there is also provision for apportionment of the margin in cases where the property was acquired through several acquisitions which involve different ways of calculating the margin.
GST Groups and joint ventures
The purpose is that GST group transactions cannot be used to re-open eligibility to the margin scheme. This means that if you acquire real property from a fellow GST group member, the margin scheme cannot apply to your subsequent supply of the property unless the group member who first acquired the property from outside the group could have applied the margin scheme to a supply outside the group. The government regards this rule as clarifying the law, not change it.
The margin on a supply to outside the group is generally the difference between the consideration for the supply and the consideration paid by that first acquiring member. However, if the acquisition by that member was before 1 July 2000, the margin is the difference between the consideration for the supply and an approved valuation of the property as at 1 July 2000. For sales made before 16 march 2005, it has been held that the margin could be calculated on the basis of the consideration paid by the member making the supply.
Bodies Corporate
A body corporate is an entity for GST purposes, and is considered to carry on an enterprise by providing services to members, contracting with contractors, acting is a business like way and undertaking to discharge its responsibility to manage and maintain the building.
However if a body corporate is a non-profit body it’s not required to register unless it returns over GST of 150,000 or more.
The ATOs view is that a body will be a non-profit body where;
- It is prevented from distributing its profits or assets among its members (while both functional and winding up) by its constituent documents or by operation of law(a stature governing the body’s activities, for example)
- Or if the law or constituent documents do not prohibit such distributions, but it is clear from the objects, policy statements, history, intention, activities, and proposed future directions of the body corporate that there will be no such distributions to its members
A return of a members own funds is a return of capital, not a distribution of profits. However, the ATO will view a body corporate as a not qualifying as a non-profit body in the unusual case where it has the intent to distribute interest or other income members. If so, the compulsory registration threshold is the usual $75,000, rather than $150,000.