Goods and Services Tax (GST) is a particularly complex issue for the property sector. As well as being a highly technical area, GST has a significant financial impact on property projects and mistakes can be costly. There have been a number of recent GST developments that have a significant impact on the property sector and this article briefly highlights some of these, including:
- amendments to overcome the Gloxinia court decision
- ATO backs down on margin scheme refunds
- retirement village developments
- replacing the going concern/farm land exemptions with a reverse charge mechanism
- redrafting the margin scheme provisions
- other developments.
Taxpayers need to be aware of these developments, since they create risks that need to be understood and proactively managed.
Redrafting the margin scheme provisions
The margin scheme is a method of calculating GST and is primarily used for residential property sales. The Government has made numerous amendments to the margin scheme since GST commenced (including substantive amendments in 2005 and 2008), with the consequence that it is now one of the most complex aspects of the GST law to apply. Each set of amendments generally provides for transitional relief and therefore different versions of the margin scheme rules apply depending on when property was acquired or sold.
In this context, the Government has announced that it will redraft the margin scheme provisions 'to give prominence to the core provisions with exceptions set out separately and to insert objects clauses for the key provisions so that the intention is clear'. It will also implement a minor technical amendment concerning subdivided land. These changes are intended to apply from 1 July 2012.
While the redrafting is not intended to significantly change the way the margin scheme operates, this exercise will involve restructuring and rewording the various margin scheme provisions. No exposure draft legislation has been released to date, nevertheless, the amendments are unlikely to be purely cosmetic and will no doubt create new uncertainties, challenges and opportunities in the operation of the margin scheme.
ATO backs down on margin scheme refunds
Many taxpayers are not aware of the GST provision that gives the ATO a discretion not to pay GST refunds in certain circumstances (section 105-65 of Schedule 1 to the Taxation Administration Act 1953). A particularly contentious issue has been the ATO's view that it can use this provision to avoid paying margin scheme GST refunds. On 30 September 2011, the ATO reversed its position on this issue and now accepts that the provision should not apply to margin scheme refunds. This is a very good result for taxpayers.
For example, assume a developer purchased vacant land before 1 July 2000 on which it constructed a strata-titled residential apartment block. It applies the margin scheme to the sale of the individual apartments and calculates the margin scheme cost base of the vacant land by reference to a valuation of that land that it obtained. If the taxpayer subsequently determines that the valuation was too low, it has paid too much GST on the sale of the apartments and should be entitled to a GST refund. The ATO's view set out in public rulings has been that it does not need to pay the GST refund to the developer. Of course, if the developer underpaid GST on the sale of the apartments for some reason, the ATO is quick to demand the underpaid GST.
A recent Federal Court decision (International All Sports v Commissioner of Taxation  FCA 824) raises doubt as to the ATO's interpretation and suggests that the ATO has no discretion to withhold margin scheme GST refunds. On 30 September 2011, the ATO issued a Decision Impact Statement (DIS), which sets out its view of the case. The DIS indicates that the provision should not apply to margin scheme refunds with the result that taxpayers are now entitled to claim such refunds. This is a very good result. Nevertheless, taxpayers should be aware of the possibility that the Federal Government will now make legislative amendments to ensure that the ATO has a discretion not to pay GST refunds in all relevant circumstances.
On a related note, it is becoming more common for taxpayers to include provisions in their GST clauses specifically dealing with GST refunds as a result of the ATO's position highlighted above.
Amendments to overcome the Gloxinia court decision
The first sale of new residential premises is intended to be subject to GST. Subsequent sales are intended to be input taxed (that is, not subject to GST, but the supplier is not able to claim GST credits on expenses related to the supply). In Commissioner of Taxation v Gloxinia Investments (Trustee)  FCAFC 46, the Full Federal Court held that sales of newly constructed residential premises under development lease arrangements were input taxed supplies of residential premises.
The Government has announced proposed legislative amendments to overcome the effect of the Gloxinia decision and consequently released exposure draft legislation on 23 September 2011. In particular, the draft legislation ensures that sales of newly constructed residential premises under development lease arrangements will be taxable supplies of new residential premises. There are also a number of other related legislative amendments. Most of the amendments are effective from 27 January 2011 (the date of the Government's announcement). Transitional rules generally apply to protect taxpayers that applied the Gloxinia decision.
Taxpayers with development lease and similar arrangements should ensure they understand the impact of the amendments on their projects.
Retirement village developments
GST has been a particularly contentious issue for retirement villages and the subject of numerous disputes between the ATO and industry.
Earlier this year, the ATO issued GST public ruling GSTR 2011/1, which deals with GST issues regarding the sale of a retirement village tenanted under a 'loan-lease' arrangement. Contrary to earlier public GST rulings, the ruling decides that the consideration for the sale of a retirement village includes the resident loans (that is, the obligation of the purchaser to repay the resident loan to the resident is part of the consideration for the sale of the village). The effect of the ruling will be to significantly increase the GST liability on the sale of a taxable retirement village. The ruling also deals with the extent to which the owner/operator of a retirement village in these circumstances can claim GST credits on its expenses.
It is also noted that the ATO will shortly publish two GST draft rulings concerning the GST treatment of exit payments (including deferred management fees), accommodation bonds and residential care services in retirement villages.
Taxpayers involved in the retirement village industry need to ensure they understand the GST issues that arise in this complex area.
Replacing the going concern/farm land exemptions with a reverse charge mechanism
The going concern exemption allows the sale of tenanted property and the sale of a business that is executed by way of an asset sale to be treated as GST-free (that is, the sale is not subject to GST). Similarly, the sale of farm land that has been farmed for five years and is intended to be used for farming is GST-free. These exemptions are primarily used for cash flow and stamp duty savings.
The Government previously announced that the going concern and farm land exemptions are to be removed. These exemptions are intended to be replaced with an optional reverse charge mechanism. Normally, the vendor remits the GST on a taxable transaction. Under this mechanism, the parties can instead agree that the purchaser will be responsible for remitting GST on the transaction. Where the purchaser is entitled to claim a full input tax credit on the transaction, it will have a zero net GST liability. In addition, the definition of a going concern will be expanded so that it is easier to meet the criteria and there will be a carve-out for the sale of real property to be sold under the margin scheme.
The amendments were originally intended to commence on 1 July 2010, were deferred until 1 July 2011 and were recently deferred again. There is no announced start date for the proposal, although it is expected the amendments will commence some time in 2012 (the amendments commence on the first day of the first or a later quarterly tax period after royal assent of the amending legislation).
Where taxpayers have transactions that could potentially be covered by the new rules, they will need to seek advice as to how to treat their arrangements. Existing GST going concern and farm land clauses are unlikely to be sufficient to appropriately deal with the new reverse charge mechanism.
There have been a number of relevant GST legislative amendments enacted or proposed, as follows:
- amendments to the GST grouping and joint venture rules with effect from 1 July 2010, allowing entities to self-assess their eligibility to form a GST group or GST joint venture, to form or change a GST group or GST joint venture at any time during a tax period and allowing GST group members and joint venture participants to enter into indirect tax sharing agreements to limit their GST liabilities
- proposed amendments to expand and simplify the GST grouping membership interest rules, including allowing a broader range of stapled entities to form a GST group (no specific start date announced at this stage)
- proposed amendments to clarify the GST treatment of general law partnerships, tax law partnerships and bare trusts (no specific start date announced at this stage)
- proposed amendments to simplify the GST change of use adjustment rules (no specific start date announced at this stage)
- amendments to simplify the GST tax invoice rules (from 1 July 2010)
- a new GST regime for the treatment of government taxes, fees and charges (from 1 July 2011). This particularly affects local councils and development charges
- a new system that applies to GST rulings (from 1 July 2010)
- the Financial Acquisition Threshold input tax credit test will be increased from $50,000 to $150,000.
There have been a number of recent GST cases concerning property issues, including cases on the going concern provisions, the margin scheme, classification of property as residential and commercial residential premises and enterprise issues. There are also a number of GST cases in the pipeline.
A number of recent GST rulings and determinations have been released by the ATO, including a draft GST ruling on residential premises and commercial residential premises (GSTR 2011/D2) and a draft GST Determination dealing with the farm land GST-free exemption (GST Determination GSTD 2011/D1).
The ATO has recently issued a number of useful publications for the property industry, including a margin scheme guide and a property contract and tax invoice GST checklist. The margin scheme guide in particular demonstrates how complex the margin scheme has become as a result of the legislative amendments in 2005 and 2008.
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