Edited version of private advice

Authorisation Number: 7910159674212

Date of advice: 30 August 2023

Ruling

Subject: Margin scheme eligibility on future sales of property

Question 1

Is the sale of the Property to your Nominee an input taxed supply of residential premises under section 40-65 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

With respect to the Dwelling Area part of the Property - yes.

With respect to the Grassed Area part of the Property - no.

Question 2

Are you eligible to use the margin scheme under section 75-5 of the GST Act when you, through your Nominee, sell new residential premises that you intend to construct on the Property, following the Nominee's acquisition of it upon settlement?

Answer

Yes, to the extent that the entire freehold interest in the new residential premises was not acquired through a supply that was ineligible for the margin scheme. See "Reasons for decision" for more information.

Question 3

If the answer to Question 2 is yes, is the purchase price of the Property the consideration for the acquisition of it, for the purposes of working out the margin under section 75-10 of the GST Act when the new residential premises are sold?

Answer

Yes. Section 75-15 will also apply in that you must only use the portion of the consideration for the acquisition of the Property that corresponds to the new residential premises being sold.

Relevant facts and circumstances

You are a tax law partnership. You have been registered for GST since DD MM YYYY and have an ABN.

On DD MM YYYY you and/or nominee entered into a contract of sale (Sale Contract) to purchase the Property from the Vendor. The purchase was made off the back of initial enquiries being made about the Property on or around DD MM YYYY. You exercised your power under the Sale Contract to nominate another entity as the substitute transferee of the title to the Property (the Nominee). Consequently the Nominee will be the entity acquiring the Property upon settlement of the sale. Settlement is due on DD MM YYYY.

The Nominee is an Australian company and does not have an ABN and is not registered for GST. Under a Joint Venture Agreement dated DD MM YYYY, the Nominee will hold the Property as bare trustee for you upon settlement.

Description and features of the Property

The Property is approximately X square metres in size and is zoned 'General Residential Zone'. It comprises a dwelling (Dwelling Area) and a large grassed area (Grassed Area). The Dwelling and the Grassed Area are separated by a fence with a gate allowing the occupier of the Property exclusive access between the two. The Dwelling Area is approximately X square metres in size while the Grassed Area is X square metres in size.

At the time the Sale Contract was entered into between the parties, the Dwelling Area and Grassed Area of the Property were situated on separate land titles, both of which were owned by the Vendor. The Dwelling Area was acquired by the Vendor on DD MM YYYY from the previous owner, who occupied the dwelling in the Dwelling Area as a residence. The Grassed Area formed part of another parcel of land that contained equipment operated by the Vendor. Although part of the same title of land, the equipment was not situated on the Grassed Area specifically. The Grassed Area was surplus land.

As part of the sale of the Property, it was agreed by the parties that both the Dwelling Area and Grassed Area should be joined together on a single title. To that end, Special Condition X of the Sale Contract makes settlement of the sale subject to a plan of subdivision being registered that gives effect to this intention. The plan of subdivision was registered on DD MM YYYY, joining the Dwelling Area and Grassed Area together to form the Property.

The Dwelling Area contains an x-bedroom dwelling with outdoor amenities. It has not been occupied or leased by the Vendor since it acquired it from the previous owner.

The Grassed Area does not contain any structures or man-made improvements. It has not been used for any specific purpose since the Sale Contract was entered into. A fence was erected around the Grassed Area by the Vendor by DD MM YYYY at the latest to ensure the occupant of the Property had quiet enjoyment of, and exclusive access to, the Grassed Area. A private gate which provides access between the Grassed Area and Dwelling Area was also erected by the same date at the latest. The private gate is the only point of access to the Grassed Area. Prior to the Vendor acquiring the Dwelling Area, the occupant of the Dwelling Area had no access to the Grassed Area - access to the Grassed Area by the occupant only became available once the Vendor acquired the Dwelling Area.

Your intentions for the Property

You intend to subdivide the Property and construct and sell residential premises on it pursuant to the arrangements under the Joint Venture Agreement. You intend to rent the whole of the Property (i.e. the Dwelling Area and Grassed Area) to a residential tenant under a residential lease while you seek development approval for the proposed residential development of the Property.

Sale contracts for the properties to be developed will be in the name of the Nominee as vendor, as your bare trustee pursuant to the Joint Venture Agreement. Clauses in the contracts will be included to indicate that you and the purchaser agree that the margin scheme will be used to calculate any GST payable on the sale of the properties.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 section 9-5

A New Tax System (Goods and Services Tax) Act 1999 section 40-65

A New Tax System (Goods and Services Tax) Act 1999 section 40-75

A New Tax System (Goods and Services Tax) Act 1999 section 75-5

A New Tax System (Goods and Services Tax) Act 1999 section 75-10

A New Tax System (Goods and Services Tax) Act 1999 section 75-15

A New Tax System (Goods and Services Tax) Act 1999 section 75-22

A New Tax System (Goods and Services Tax) Act 1999 section 195-1

Reasons for decision

In this reasoning, please note:

•                     unless otherwise stated, all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)

•                     all legislative terms of the GST Act marked with an asterisk are defined in section 195-1 of the GST Act

•                     all reference materials, published by the Australian Taxation Office (ATO), that are referred to are available on the ATO's website ato.gov.au

Question 1

Summary

The sale of the Dwelling Area part of the Property by the Vendor to you is input taxed under section 40-65.

The sale of the Grassed Area part of the Property by the Vendor to you is not input taxed under section 40-65. The question of whether this part of the sale of the Property is a taxable supply under section 9-5 made by the Vendor is not considered in this ruling.

Detailed reasoning

Section 40-65 provides that the sale of real property is input taxed, but only to the extent that the property is residential premises to be used predominantly for residential accommodation (regardless of the term of occupation). However the sale will not be input taxed to the extent the residential premises are commercial residential premises or new residential premises.

In this case the Property does not meet the definitions of new residential premises or commercial residential premises under the GST Act.

Section 195-1 of the GST Act defines 'residential premises' to mean land or a building that:

(a)          is occupied as a residence or for residential accommodation; or

(b)          is intended to be occupied, and is capable of being occupied, as a residence or for residential accommodation.

The ATO's position on what constitutes residential premises to be used predominantly for residential accommodation under section 40-65 is set out in the public ruling Goods and Services Tax Ruling GSTR 2012/5 Goods and services tax: residential premises(GSTR 2012/5).

Paragraphs 6 and 7 of GSTR 2012/5provide that:

6. Premises, comprising land or a building, are residential premises under paragraph (a) of the definition of residential premises in section 195-1 where the premises are occupied as a residence or for residential accommodation, regardless of the term of occupation. The actual use of the premises as a residence or for residential accommodation is relevant to satisfying this limb of the definition.

7. Premises, comprising land or a building, are also residential premises under paragraph (b) of the definition of residential premises if the premises are intended to be occupied, and are capable of being occupied, as a residence or for residential accommodation, regardless of the term of the intended occupation. This limb of the definition refers to premises that are designed, built or modified so as to be suitable to be occupied, and capable of being occupied, as a residence or for residential accommodation. This is demonstrated through the physical characteristics of the premises.

To satisfy the requirements of section 40-65, not only must the Property meet the definition of 'residential premises', but it also needs to be residential premises that is predominantly used for residential accommodation (regardless of the term of occupation). This limb of section 40-65 is a single test that looks to the physical characteristics of the property to determine the premises' suitability and capability for residential accommodation. Paragraphs 9, 10 and 11 of GSTR 2012/5 look at this aspect of section 40-65 in more detail:

9. The requirement in sections 40-35, 40-65 and 40-70 that premises be 'residential premises to be used predominantly for residential accommodation (regardless of the term of occupation)' is to be interpreted as a single test that looks to the physical characteristics of the property to determine the premises' suitability and capability for residential accommodation.

10. The requirement for residential premises to be used predominantly for residential accommodation does not require an examination of the subjective intention of, or use by, any particular person. Premises that display physical characteristics evidencing their suitability and capability to provide residential accommodation are residential premises even if they are used for a purpose other than to provide residential accommodation (for example, where the premises are used as a business office).

11. Premises that do not display physical characteristics demonstrating that they are suitable for, and capable of, being occupied as a residence or for residential accommodation are not residential premises to be used predominantly for residential accommodation, even if the premises are actually occupied as a residence or for residential accommodation. For example, someone might occupy premises that lack the physical characteristics of premises suitable for, or capable of, residential accommodation (such as a squatter residing in a disused factory). Although the premises may satisfy paragraph (a) of the definition of residential premises in section 195-1, the premises are not residential premises to be used predominantly for residential accommodation.

The facts of your case also raise issues of whether land supplied with a building forms part of residential premises to be used predominantly for residential accommodation, or whether it is to be treated separately as vacant land. The Commissioner's view on these issues are set out in paragraphs 46, 47, 91 and 92 of GSTR 2012/5:

Land supplied with a building

46. There is no specific restriction, in the definition of residential premises, on the area of land that can be included with a building. The extent to which land forms part of residential premises to be used predominantly for residential accommodation is a question of fact and degree in each case. A relevant factor in determining this 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 is not a determining factor in deciding if the land forms part of the residential premises.

Vacant land

47. Vacant land is not capable of being occupied as a residence or for residential accommodation as it does not provide shelter and basic living facilities. Vacant land is not residential premises.

...

Land supplied with a building

91. The GST Act does not restrict the area of land that can be included in residential premises. The extent to which land forms part of residential premises to be used predominantly for residential accommodation is a question of fact and degree in each case. A relevant factor in determining this is the extent to which the physical characteristics of the land and building as a whole indicate that the land is enjoyed in conjunction with the residential building. Just because land is used privately does not mean that the land necessarily has the physical characteristics to indicate that the land is to be enjoyed in conjunction with the residential building.

Vacant land

92. Vacant land cannot be residential premises. In Vidler v. Federal Commissioner of Taxation, Sundberg, Bennett and Nicholas JJ stated that 'vacant land is not land that is capable of being occupied as a residence or for residential accommodation'. This is because vacant land, of itself, does not provide shelter and basic living facilities, and cannot, therefore, be occupied as a residence or for residential accommodation.

The above principles of GSTR 2012/5 will now be applied to the circumstances in your case. Given that section 40-65 applies to make a supply of real property input taxed only to the extent that it is residential premises to be used predominantly for residential accommodation, we will consider the application of section 40-65 and GSTR 2012/5 separately with respect to the Dwelling Area and Grassed Area.

Dwelling Area

The Dwelling Area contains a residence with outdoor amenities, and surrounding backyard and front yard areas. These provide, at a minimum, basic living facilities that demonstrate the Dwelling Area is designed and intended to be used predominantly for residential accommodation. We therefore conclude that the Dwelling Area in its entirety is residential premises to be used predominantly for residential accommodation and the sale of the Dwelling Area part of the Property is input taxed under section 40-65.

Grassed Area

Paragraph 46 of GSTR 2012/5 quoted above shows that, where it can be concluded that land on a property is to be used for the better enjoyment of the residential premises and the physical characteristics of the land as a whole indicate they are to be enjoyed in conjunction with the residential premises, the supply of the land is incidental to the supply of the residential premises on the land.

In your case, we consider that there are some facts which point towards the Grassed Area being land that forms part of the residential premises situated on the Property, and other facts that point towards it being vacant land and not forming part of the residential premises.

We consider the following facts point towards the Grassed Area forming part of the residential premises to be used predominantly for residential accommodation situated on the Property:

•                     the entirety of the Property is zoned 'General Residential Zone'.

•                     the Grassed Area has been fenced off from the surrounding land and can only be accessed from the Dwelling Area through the single gate situated between the Dwelling Area and Grassed Area

•                     the Grassed Area can only be accessed by the occupier of the Property and, therefore, the occupier has exclusive access to, and quiet enjoyment of, the Grassed Area.

We consider the following facts point towards the Grassed Area being vacant land and not intended to be used predominantly for residential accommodation:

•                     prior to DD MM YYYY, when the Vendor acquired the property which the Dwelling Area was situated on at that time, the Grassed Area was the Vendor's surplus land which formed part of property containing electricity distribution equipment that the Vendor operated

•                     prior to DD MM YYYY, the occupier of the Dwelling Area had no access to the Grassed Area, as it was not part of the property which the Dwelling Area was situated on at that time; the Grassed Area did not form part of any residential premises to be used predominantly for residential accommodation at this time

•                     following the vendor's acquisition of the Dwelling Area on DD MM YYYY until DD MM YYYY at the latest, the Grassed Area remained as-is with no fence erected around its perimeter and there was also no gate erected providing access between the Dwelling Area and the Grassed Area

•                     the joining of the Grassed Area with the Dwelling Area was done as a condition of the Sale Contract as part of facilitating the transaction between yourself and the Vendor.

You have submitted in your private ruling application that the characteristics of the Property's residential dwelling and Grassed Area as a whole indicate that the Grassed Area is to be enjoyed in conjunction with the residential dwelling. That is, you submit that the Grassed Area contributes to the enjoyment of the residential dwelling and/or to the fulfilment of its purpose as a dwelling for residential purposes, being akin to an extended backyard.

We disagree with your submission in relation to the Grassed Area. Balancing the facts extracted above, we conclude that the Grassed Area was never intended to form part of the Dwelling Area because, at all material times including following entry into the Sale Contract, the Grassed Area has remained in the same state that it was prior to subdivision - that is, surplus vacant land. The Grassed Area was joined with the Dwelling Area on title only after the Sale Contract was entered into, and only because it was a condition of fulfilling that contract. Furthermore, the fact that no fence was erected around the Grassed Area to enclose it within the Property from a physical standpoint until DD MM YYYY shows that the Grassed Area was not intended to be exclusively accessible to the occupier of the Dwelling Area prior to DD MM YYYY. Even with the erection of the fence and gate in DD MM YYYY, the state of the Grassed Area remained unchanged. The physical characteristics of the Property as a whole show distinctly where the Dwelling Area and Grassed Areas begin and end. The physical characteristics of the Property do not show that the Dwelling Area and Grassed Area are designed and intended to be occupied as a single residential space, for the reasons stated above.

In conclusion, the Grassed Area is vacant land that does not form part of the residential premises situated on the Property to be used predominantly for residential accommodation. The sale of the Property to you by the Vendor will not be input taxed under section 40-65 with respect to the Grassed Area part of the Property.

Question 2

Summary

You are eligible to apply the margin scheme under section 75-5 to calculate any GST payable on the sale of the envisaged properties to the extent that the entire freehold interest of the new property was not acquired through a supply that was ineligible for the margin scheme.

You should note the potential application of section 75-22 to your circumstances if you sell a new property where part of the freehold interest was acquired through a supply that was ineligible for the margin scheme.

Detailed reasoning

Subsection 75-5(1) provides that you may apply the margin scheme to work out the amount of GST payable on a taxable supply of real property that you make by, among other things, selling a freehold interest in land if that entity and the recipient have agreed in writing that the margin scheme is to apply. Subsection 75-5(1A) provides that the written agreement must be made on or before making the supply or within such further period as the Commissioner allows.

However, subsection 75-5(2) provides that the margin scheme does not apply if you acquired the entire freehold interest through a supply that was ineligible for the margin scheme. Under subsection 75-5(3), a supply is ineligible for the margin scheme if, among other things, the supply was a taxable supply and the GST on that taxable supply was worked out without applying the margin scheme.

Each of the elements to establish your eligibility for the margin scheme will now be worked through in turn.

You make a taxable supply of real property

It first needs to be determined whether the envisaged sales are taxable supplies of real property that you make, as referred to in subsection 75-5(1).

Section 9-5 provides that you make a taxable supply if:

(a)          you make the supply for consideration; and

(b)          the supply is made in the course or furtherance of an enterprise that you carry on; and

(c)           the supply is connected with the indirect tax zone; and

(d)          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.

As the Nominee will hold legal title to the Property and will be the vendor entity stated in the contracts of sale for the new properties under the Joint Venture Agreement, it needs to be determined which entity is making the supply when the new properties are sold.

Goods and Services Tax Ruling GSTR 2008/3 Goods and services tax: dealings in real property by bare trusts (GSTR 2008/3) provides the Commissioner's view on which entity in a bare trust arrangement makes a supply of real property for GST purposes. Paragraphs 29-30 and 37-40, are relevant:

29. A bare trust arrangement does not itself create the relationship of agency between the trustee and beneficiary. An entity does not, merely by acting in its capacity as bare trustee, contract as agent for the beneficiary of the trust but as principal. Accordingly, transactions involving a bare trust, without more, need to be analysed in a way that does not rely on a finding of agency.

30. In applying the GST law to a dealing in real property held on a bare trust, the question arises as to which entity makes the relevant taxable supply or creditable acquisition as the case may be - the trustee or the beneficiary.

...

37. The activities of a bare trustee are essentially passive in nature. A trustee of the type of trust considered in this Ruling has either no active duties to perform or only minor active duties. A bare trust as that term is used in this Ruling does not carry on an enterprise for GST purposes by virtue of its dealings in the trust property.

38. On the other hand, a beneficiary of a bare trust may carry on an enterprise involving an asset held on trust for the beneficiary by the bare trustee. For instance, in the example at paragraph 11 of this Ruling, despite legal title to the property being held by T, the property is used by B in carrying on its enterprise.

39. If the asset is sold, the transaction will involve a transfer of the legal title to the property to a third party by the trustee at the direction of the beneficiary.

40. The definition of 'taxable supply' concerns itself with supplies made in the course of an enterprise. It is the entity which conducts that enterprise that makes the relevant supply. In other words, if T transfer legal title to the property to a third party at the direction of B, it is B that causes the supply to be made in the course of its enterprise and is liable for GST, if the other requirements for a taxable supply in section 9-5 are met.

Based on the above extracts from GSTR 2008/3, it will be you who makes the supplies of the new properties for GST purposes, not your Nominee. You will therefore be the entity which will be accountable for GST payable on any taxable supplies made in selling the new properties.

Based on the facts, we consider that the envisaged sale of the new properties to be constructed will be:

•                     for consideration, being the purchase price of the new properties

•                     in the course or furtherance of a property development enterprise that you will carry on in subdividing and developing the Property into the envisaged new properties for sale

•                     connected to the indirect tax zone as the sales will be done in Australia.

Consequently, paragraphs 9-5(a), (b) and (c) are met.

You are registered for GST, therefore paragraph 9-5(d) is also met.

The sale of the envisaged new properties will not be GST-free.

As the new properties will be newly built and never previously sold as residential premises or been the subject of a long-term lease, they will satisfy the definition of new residential premises under subsection 40-75(1). Consequently, the sale of the envisaged new properties will not be input taxed under section 40-65.

Therefore, the requirements of section 9-5 are met and the sale of the new properties will be taxable supplies of real property, for the purposes of section 75-5.

You and the recipient have agreed in writing that the margin scheme is to apply

As noted in the facts, the sale contracts for the new properties will include clauses indicating that you and the purchaser agree that the margin scheme will be used to calculate any GST payable. Provided that this does in fact occur, then this element of section 75-5 will be satisfied.

Did you acquire the entire freehold interest through a supply that was ineligible for the margin scheme?

As per the answer to Question 1, the sale of the Property is only partly an input taxed supply of residential premises, namely the Dwelling Area. We consider that part of the supply is not ineligible for the margin scheme. The remainder of the sale of the Property is not an input taxed supply of residential premises. We have not considered in this ruling whether the supply to you of that part of the Property (the Grassed Area) is a taxable supply made by the Vendor, or if the margin scheme can or will be applied. We have insufficient facts about the Vendor's circumstances in order to rule on whether the Vendor is making a taxable supply with respect to the sale of the Grassed Area.

Under subsection 75-5(2), 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. The phrase "entire freehold interest, stratum unit or long-term lease" in subsection 75-5(2) refers to the freehold interest, stratum unit or long-term lease that you supply in subsection 75-5(1).

Therefore, when you are selling a new property you will be eligible to apply the margin scheme where the freehold interest in that new property was acquired through a supply that was not ineligible for the margin scheme. In this case, that means the land encompassing the Dwelling Area, as that was acquired as through a supply (or part of a supply) that was not ineligible for the margin scheme.

If you sell a new property where the freehold interest in that new property was acquired through a supply that was ineligible for the margin scheme, you will not be able to apply the margin scheme to your supply. In this case and with respect to the Grassed Area, you will not be able to apply the margin scheme to a sale of a new property where the entire freehold interest in that new property was acquired through a supply (or part of a supply) that was ineligible for the margin scheme. This will depend on whether the sale of that freehold interest to you was through a taxable supply where the margin scheme was not applied. As stated above, we have not considered whether the sale of the Grassed Area to you was taxable although it was not input taxed.

Where you sell a new property, and the freehold interest for that new property was acquired partly through a supply that was ineligible for the margin scheme and partly eligible for the margin scheme, then subsection 75-5(2) will not apply and you will still be eligible to apply the margin scheme. This is because the "entire" freehold interest was not acquired through a supply that was ineligible for the margin scheme. You should, however, note the potential application of section 75-22 in these circumstances.

Question 3

Summary

The purchase price of the Property is to be used as the consideration for your acquisition for the purposes of calculating the margin under section 75-10. As per section 75-15 you must only use the portion of the consideration for the acquisition of the Property that corresponds to the new property being sold.

Detailed reasoning

Subsection 75-10(1) provides that the GST payable on a taxable supply of real property made under the margin scheme is 1/11 of the margin for that supply.

Subsection 75-10(2) provides that, subject to subsection 75-10(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 of the interest, unit or lease in question.

In your case, we consider subsection 75-10(3) and 75-11 do not apply. Therefore, the general principle stated in subsection 75-10(2) will apply. Given the purchase price for the Property is the consideration you will provide for your acquisition of it upon settlement, this is the amount to use for your acquisition cost for the purposes of calculating the margin under section 75-10 where you are eligible to apply the margin scheme.

As you will be selling subdivided real property, section 75-15 will apply to you in that you must use only the portion of the consideration for the acquisition of the Property that corresponds to the new property being sold.

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