The Tax Laws Amendment (2008 Measures No. 5) Act 2008 (Act) received Royal Assent on 9 December 2008. The Act changes the operation of the margin scheme on the sale of real property. The Act has no retrospective effect. However, developers entering contracts to buy property from 9 December 2008 need to account for the new margin scheme rules in any costings for developments.

Changes made by the Act

Our legal update of 2 October 2008 ( click here to view the full legal update) summarised what was at that stage the Bill, as follows:

"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."

Value added by previous owner

The most talked about aspect of the Act is the requirement for the "margin" to include the value added by a previous owner of the property (A). This will affect a purchaser (B) who enters a contract to acquire property from A after 9 December 2008 GST-free because it 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;

where B later sells the property under the margin scheme. Previously, the margin on B's sale to C was the difference between what C paid for the property and what B paid for the property. Under the Act, the margin is the difference between what C paid for the property and what A paid for the property. The Act allows B to choose to use a valuation of the property at the date of A's acquisition rather than A's acquisition price.

The Act does not apply retrospectively. Property owners selling under the margin scheme who acquired the property under a contract entered into prior to 9 December 2008, or under a contract entered into pursuant to an option or some other right entered into prior to 9 December 2008, can calculate the margin using the standard rules.

"Freshening up" margin scheme eligibility

Previously, if a property was sold by A to B as a taxable supply without the application of the margin scheme, and B sold the property to C as:

  • 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 C could later sell the property under the margin scheme. The Act ensures that this is no longer the case and C cannot calculate GST using the margin scheme. 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).

Anti-avoidance measures

The Act 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. The changes in the Act 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.

Example

For example, Developer A enters a contract on 1 January 2009 to buy property from Property Tycoon X as a GST-free supply of a going concern for $100,000. Developer A subdivides the property into 10 lots and wants to sell each lot under the margin scheme.

Step 1: Developer A must first enquire as to how Property Tycoon X acquired the property to determine if the margin scheme can be used. If Property Tycoon X acquired the property as a taxable supply without applying the margin scheme, Developer A will not be able to use the margin scheme.

Step 2: Calculating the margin. Assume Developer A is entitled to use the margin scheme and that the 10 lots are of equal value. Developer A must ascertain what price Property Tycoon X paid when acquiring the property, and attribute this price to each lot. The margin will then be Developer A's sale price less Property Tycoon X's acquisition price. Developer A could instead obtain a valuation of the property at the date Property Tycoon X acquired it.

Steps to Consider

Any person acquiring property after 9 December 2008 needs to consider the changes introduced by the Act. Developers of residential property should be particularly aware of the new provisions as residential developers are persons most likely to seek to apply the margin scheme on a later sale of the property. Purchasers should consider contractual provisions such as warranties regarding the GST treatment when the vendor acquired the property, and the vendor's date and cost of acquisition.

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.