Who does this affect?

The proposed margin scheme amendments will principally impact on Developers who acquire property GST-free, as a going concern or as farm land, for the purposes of developing the property into new residential premises.

What do you need to do?

Developers who are currently considering acquiring a residential development site as a going concern or as farm land and who enter into a contract or option to acquire that property before the amendments are passed into law, will obtain the benefit of the transitional arrangements. For properties that may be acquired after the amendments have commenced (without the benefit of transition relief), Developers should take any increased GST costs into account as a part of their feasibility studies.

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Peter Fogarty  
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Peter Fogarty  
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Frank Brody  
Developers who are currently considering acquiring a residential development site as a going concern or as farm land and who enter into a contract or option to acquire that property before the amendments are passed into law, will obtain the benefit of the transitional arrangements. For properties that may be acquired after the amendments have commenced (without the benefit of transition relief), Developers should take any increased GST costs into account as a part of their feasibility studies. Peter Fogarty  
Developers who are currently considering acquiring a residential development site as a going concern or as farm land and who enter into a contract or option to acquire that property before the amendments are passed into law, will obtain the benefit of the transitional arrangements. For properties that may be acquired after the amendments have commenced (without the benefit of transition relief), Developers should take any increased GST costs into account as a part of their feasibility studies.

26 September 2008

Changes to GST Margin Scheme Rules - 26 September 2008

A Bill setting out a range of proposed margin scheme amendments was yesterday introduced into Parliament. The amendments had previously been announced in May as part of the Federal Budget.

1. Purpose of the amendments

The amendments are aimed at margin scheme sales where the vendor initially acquired the property being sold through a GST-free supply as either a "going concern" or "farm land", or where the vendor acquired the land from an "associate" for no consideration.

In summary, the amendments are intended to:

  • a) ensure that the eligibility to apply the margin scheme is not "reinstated" by the vendor acquiring the property as a going concern or as farm land (or through a supply from an associate for no consideration)
  • b) change the manner in which the "margin" is calculated where the vendor acquired the property as a going concern or as farm land, or from an associate for no consideration, and
  • c) further extend the anti-avoidance provisions in the GST Act.

These issues are separately dealt with in more detail below.

Issue 1(a): Amendments relating to the eligibility to apply the margin scheme

Under current law, a vendor is not eligible to apply the margin scheme to the sale of property that it acquired through a taxable supply (where the margin scheme was not applied). However, generally speaking, a vendor is entitled to apply the margin scheme if it acquired a property in another manner for GST purposes (including acquiring the property GST-free as a going concern or as farm land).

The proposed amendments are intended to further restrict the availability of the margin scheme by requiring a vendor who has acquired a property as a going concern or as farm land to "look back" to determine whether the entity that supplied the property to the vendor was entitled to apply the margin scheme. Note that the vendor is only required to look back to the previous sale to it. The vendor is not required to look back through any earlier sales.

Example

A acquired a parcel of land on 1 July 2005 for $1.1 million through a taxable supply (where the margin scheme was not applied). Consequently A would not be entitled to later sell the land under the margin scheme. A has been developing the site and constructing new residential apartments. A decides to sell the land and the partly completed development to B, GST-free as a going concern, for $4 million on 1 July 2008.

Under the existing margin scheme provisions, B would be entitled to sell the completed apartments under the margin scheme. However, under the proposed amendments, B would be required to "look back" to determine whether A could have used the margin scheme. As A bought the property through a taxable supply (without the margin scheme being applied), it would not be eligible to use the margin scheme, and consequently neither would B.

Issue 1(b): Amendments relating to the calculation of the margin and GST payable

Generally speaking, under current law, the "margin" for margin scheme purposes is calculated as the difference between the consideration that the vendor will receive for its sales and either:

  • the consideration that the vendor paid or provided to acquire the property, or
  • the value of the property as at the relevant valuation date (which is usually, but not always, 1 July 2000).

Treasury is concerned that where a vendor acquires a property as a going concern or as farm land, that the margin scheme calculation is distorted and an insufficient amount of GST is paid by the vendor (as illustrated in the example below). To address this concern, it is proposed that the vendor will be required to "look back", through one transaction, to determine the consideration that was paid or provided (or the valuation amount that would have been relevant) if the entity that had sold the property to the vendor had applied the margin scheme.

Example

A acquired a parcel of land on 1 July 2006 for $1 million under the margin scheme. A has commenced development of the site and has decided to sell the partly completed development, GST-free as a going concern, to B for $4 million. B completes the development and is able to sell off the new residential premises, under the margin scheme, for $5 million (including GST).

Under the existing margin scheme provisions, B's margin would be $1 million (i.e. $5 million - $4 million). Therefore, B's GST liability would be $90,909.09 (1/11th of $1 million).

Under the proposed amendments, B would be required to look back to determine the consideration that A paid to acquire the property (which was $1 million). Therefore, B's margin would be $4 million (i.e. $5 million - $1 million) and its GST liability would be $363,636.36 (1/11th of $4 million).

As you will note, this revised GST liability is the same amount that would have been payable if A itself had completed the development and sold the new residential premises for $5 million. In other words, the amendments will remove the distorting effect of the interposed GST-free supply from A to B.

Issue 1(c): Extension of the anti-avoidance provisions

As explained above, if the proposed amendments are passed into law, the vendor is only required to look back through one preceding transaction. Therefore, it may be possible for a taxpayer to structure their arrangements so that there are multiple interposed GST-free supplies, so as to overcome the effect of the amendments.

To reduce the risk of this occurring, it is proposed that the general anti-avoidance provisions be extended. The general anti-avoid provisions are intended to allow the Commissioner to deny a "GST benefit" that arises as a result of an artificial or contrived scheme or arrangement.

At present, the general anti-avoidance provisions do not apply where a "GST benefit" is derived from a choice or election that is available under the GST Act (such as the choice or election to sell a property GST-free as a going concern or under the margin scheme). It is proposed that the provisions will be amended so that they may also apply where the taxpayer has deliberately structured their arrangements so as to make a choice or election available.

It should be noted that the extended anti-avoidance provisions will not be limited to margin scheme sales, but will apply more broadly. Industry groups have raised this with Treasury as being of concern. It may be that some current arrangements which are not viewed as falling foul of the anti-avoidance provisions may need to be reconsidered if the amendments are passed unchanged.

The following is an example of a situation, which does not involve the margin scheme, that may fall foul of the proposed anti-avoidance provisions. Depending on all of the factual circumstances, such an arrangement may not currently fall foul of the existing anti-avoidance rules.

Example

A owns a commercial property that is currently unoccupied. B intends to acquire the property with a view to leasing it to its subsidiary, C. To minimise stamp duty costs, B wants to acquire the property GST-free as a going concern. If A agrees to lease the premises to C one day prior to completion, so that the property can be sold to B as a going concern, will the proposed anti-avoidance provisions apply?

2. Representations and warranties to be included in contracts

The proposed amendments will likely result in new representations and warranties being included in contracts where a property is sold GST-free as a going concern or as farm land, particularly if the purchaser intends to later sell the property under the margin scheme. Specifically, the purchaser will likely request representations and warranties regarding:

  • the entitlement of the vendor to apply the margin scheme (if it wasn't selling the property GST-free), and
  • the consideration (or valuation amount) that would have been relevant if the vendor had applied the margin scheme.

If the purchaser does later decide to sell the property under the margin scheme, it will need this information to be able to determine whether it can apply the margin scheme and the amount of the margin on its sales.

3. Transitional arrangements

If passed, the amendments will only apply to "new supplies" that occur on or after the date that the Bill receives royal assent. For these purposes, a vendor will make a "new supply" if it acquired, on or after the date of royal assent, the property that it is proposing to selling under the margin scheme and it did not acquire the property under either:

  • a written agreement which was entered into before the date of royal assent, or
  • an option or right entered into prior to the date of royal assent.

Note that the written agreement or option / right must specify the consideration for the property, or a way of working out the consideration for the property.

Where the vendor acquired the property before the date of royal assent (or under a written agreement or option / right entered into prior to that date), the existing margin scheme provisions will continue to apply.

Example

Assume the date of royal assent is 1 November 2008. A acquired a property GST-free as farm land on 1 October 2008. Sometime in 2010, A sells the property under the margin scheme. As A acquired the property prior to the date of royal assent, the existing margin scheme provisions will continue to apply to A's sale in 2010. The existing margin scheme provisions would also have continued to apply if had A bought the property after 1 November 2008, pursuant to a contract or option agreement entered into prior to that date.