Australia: GST Margin Scheme Changes Finally Before Parliament

The Federal Government has introduced a Bill to implement changes to the operation of the margin scheme on the sale of real property

The Federal Government has introduced a Bill to implement changes to the operation of the margin scheme on the sale of real property. The changes take effect from the date of royal assent of the Tax Laws Amendment (2008 Measures No. 5) Bill 2008 (Bill). Importantly, the Bill has no retrospective effect. However, the changes to the way the margin scheme operates could cause problems for developers buying land under a GST-free or non-taxable supply. Developers may wish to expedite the signing of contracts or option agreements for properties that can be acquired GST-free. Otherwise, developers will need to account for the new margin scheme rules in any costings for developments that will be acquired on or after the Bill receives royal assent.

Under the existing margin scheme, GST is calculated on the margin rather than the sale price itself. The margin is generally the difference between the purchase price paid by the seller and the price paid by the buyer.

The Bill implements three new measures:

  1. it ensures that eligibility to use the margin scheme cannot be "freshened up" by interposing a GST-free supply;
  2. it ensures that, where real property is acquired GST-free or by way of certain non-taxable supplies, the calculation of GST under the margin scheme on the subsequent sale of that property accounts for the value added by the previous owner; and
  3. it strengthens the anti-avoidance provisions in the GST Act.

"Freshening up" margin scheme eligibility

The Bill ensures that if a property is sold as a taxable supply (first sale) without the application of the margin scheme, and the second sale of that property is:

  • a GST-free supply of a going concern;
  • a GST-free supply of farmland; or
  • a supply to a registered associate that is non-taxable because no consideration is provided;

then the GST on the third sale of that property cannot be worked out using the margin scheme. In the words of the explanatory memorandum, this is an integrity measure that "ensures that eligibility to use the margin scheme cannot be reinstated by interposing a GST-free or non-taxable supply". It should be noted that if two GST-free or non-taxable supplies are interposed, it is possible to apply the margin scheme to a subsequent supply (subject to the operation of the anti-avoidance measures).

Value added by previous owner

The Bill ensures that, where A sells a property to B and the supply is:

  • a GST-free supply of a going concern;
  • a GST-free supply of farmland; or
  • a supply to a registered associate that is non-taxable because no consideration is provided;

then if B later sells the property to C and uses the margin scheme to calculate the GST, the value added by A is included in B's margin. The Bill allows the GST to be calculated either by way of a valuation as at the date A acquired the property or by reference to A's acquisition price. This is to allow for the fact that subsequent vendors may not have access to previous acquisition prices. Nothing in the Bill imposes an obligation on vendors to disclose the price at which they acquired the relevant property.

Anti-avoidance measures

The Bill strengthens the anti-avoidance provisions of the GST Act. Under current provisions, if a GST benefit is obtained through the making of a choice that is contemplated by the GST Act, the anti-avoidance provisions cannot apply. For example, by choosing to calculate GST under the margin scheme, a vendor's GST liability is lower. As this is a choice specifically contained in the legislation, there is no scope for application of the anti-avoidance provisions.

The changes in the Bill mean that if a GST benefit is attributable to the making of a choice, then the Commissioner can look at the purpose of the taxpayer in creating any circumstance which enables that choice to be made. For example, if a taxpayer artificially interposes two GST-free supplies by transferring a property among associates for no consideration only so that it can use the margin scheme on a later sale to a third party, the Commissioner can deny the application of the margin scheme as the taxpayer has acted artificially to bring about a circumstance in which they can elect to apply the margin scheme.

No retrospectivity

The good news for developers is that the changes will only apply where the GST-free acquisition of the property was made after the Bill receives royal assent. For example, if B enters a contract to acquire property as a going concern on 31 December 2008, and the legislation receives royal assent on 1 January 2009, B can sell the property under the margin scheme and calculate the margin as the difference between B's sale price and B's acquisition price. This is also the case if B enters an option or is granted a right to purchase the property as a going concern prior to the date the Bill receives royal assent.

Steps to Consider

In the window of opportunity before the Bill receives royal assent, developers may wish to expedite the signing of contracts or option agreements for properties that can be acquired GST-free. This will allow them to calculate GST under the margin scheme on a subsequent sale as the difference between their acquisition and sale price, rather than having to include the value added by the previous holder of the property. Regard must always be given to the anti-avoidance measures in the GST Act, which are now stronger and allow the Commissioner to overturn artificial schemes designed to gain access to a GST benefit.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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