Issue #10
The last edition of ‘The Assessment’ (Issue 9) dealt with Key Tax Issues from the 2008 Federal Budget. In this edition we are looking at what is potentially the most significant tax issue in the Budget – proposed GST changes to the margin scheme.
Before doing so, however you may have noted that Issue 9 was contributed by Neil Jones of TaxBanter. We would like to take this opportunity to explain the connection between Webb Martin Consulting and TaxBanter.
Webb Martin Consulting/TaxBanter Alliance
Webb Martin Consulting has formed an exciting alliance with Australia’s newest tax training business, TaxBanter.
TaxBanter was formed in early 2008 by some of Australia’s leading tax trainers including Jo-anne Hotston FCA and Neil Jones in conjunction with the recognised expertise of the team at Webb Martin Consulting.
TaxBanter offers:
- in-house delivery of tax training by professional trainers who are expert in tax matters; and
- comprehensive and easy to understand materials.
To find out more about TaxBanter visit www.taxbanter.com.au , or email to enquiries@taxbanter.com.au or call Michael Doran on 03 9660 3500.
Budget 2008 – GST and Margin Scheme
2008 may well be known in GST circles as the ‘year of the margin scheme’. First, there was the Brady King decision which has thrown doubt over the operation of the margin scheme generally. By way of update, the Brady King appeal has been heard and the decision is pending. Now, potentially the most significant announcement in the 2008 Federal Budget, further changes to the margin scheme.
The margin scheme has consistently been the cause for issues for taxpayers – whether that be documenting the relevant choice election, ensuring there is an agreement between the relevant parties, holding a valid valuation, etc. The announcements in the 2008 Federal Budget, while scant in detail, imply fundamental changes to the operation of the margin scheme including its application to common transactions.
Set out in full below are the two separate announcements made in the 2008 Federal Budget.
1. GST and the sale of real property – integrity measure
The Government will ensure that the interactions between a number of provisions in the GST law do not allow real property transactions to be structured to reduce the GST liability. This measure has an ongoing gain to revenue which is estimated to be $620.0 million over the forward estimates period. This measure is also expected to increase GST payments to the States by $620.0 million over this period. This measure will have effect from the date of Royal Assent of the enabling legislation.
The GST provisions dealing with real property are intended to ensure that GST is payable on the value added to land once it enters the GST system. The margin scheme achieves this outcome by applying GST to the ‘margin’, that is, the difference between the purchase price paid by the seller and the price paid by the buyer. This measure provides that, where the margin scheme is used after a GST free or non-taxable supply, the value added by the registered entity which made that supply is included in determining the GST subsequently payable under the margin scheme. The measure will also strengthen the GST anti-avoidance provisions to ensure that they can apply to contrived arrangements entered into to avoid GST.
This measure will include amendments to address a previously announced but deferred tax integrity measure. See the related revenue measure titled GST and the sale of real property – not to proceed with previously announced deferred integrity measure in the Treasury portfolio.
2. GST and the sale of real property – not to proceed with previously announced deferred integrity measure
The Government will not proceed with a tax integrity measure previously announced in the 2005-06 Budget and then deferred in the 2006-07 Budget. This measure has an ongoing unquantifiable revenue impact.
This was an integrity measure designed to prevent the interaction of the margin scheme with the GST free going concern and the GST free farmland provisions from inappropriately reducing GST revenue.
Instead, the Government has decided to introduce a better targeted integrity measure – see GST and the sale of real property – integrity measure in the Treasury portfolio.
The references above to a previously announced integrity measure itself had its genesis in 2005 when amendments were made to the margin scheme provisions.
The proposed version of the 2005 amendments included changes to the calculation of the margin if the property was acquired as a GST-free going concern or GST-free farm land. Following significant lobbying to Parliament, this aspect of the proposed amendments was removed prior to enacting the balance of the relevant amending legislation.
Immediately after the 2005 margin scheme amendments were passed, Treasury set out its proposed options for dealing with the ‘GST-free’ issue and undertook industry consultation. No further developments on this matter appear to have been made until the 2008 Federal Budget announcements.
Some of the key issues raised by the new measures announced above include:
- The measures would apply to acquisitions that are GST-free (going concern or farm land) or non-taxable (such as ‘outside scope’ supplies). These measures could be wider than the previously announced integrity measure.
- Changes to the calculation of the margin. The first announcement refers to the value added by the Vendor of the GST-free/non taxable supply and implies that this value added will need to be taken into account by the entity applying the margin scheme when subsequently selling the property. This will give rise to commercial and contractual implications. By way of example: A buys farm land for $1m and later sells the farm land GST-free to B for $3m. B develops the land and sells it for $10m. Will the margin be $7m or $9m (or some other number)? The announcement implies it would be $9m, whereas currently it would be $7m.
- When will the changes take effect? The announcement states that the new measures will only apply from the date of Royal Assent of the enabling legislation. However, depending on how that legislation is drafted, it could in part have retrospective application. Again using the above example: Assume A bought the farm land in 2002, and sold the farm land to B in 2007. Assume B sells the developed land after the date of Royal Assent. If the new measures apply to property sold under the margin scheme after the date of Royal Assent, then the changes will effectively be retrospective. If, however, the relevant transaction to take place after Royal Assent is the acquisition of land under the GST-free/non taxable supply, then the above example would not be caught by the proposed changes.
- The GST anti-avoidance provisions will be strengthened to catch contrived arrangements seeking to avoid GST.
We reiterate that the above examples are reflective of what appears to be intended by the proposed measures.
As usual, it appears that announcements relating to GST and the margin scheme automatically come with a ‘watch this space’ warning.
If you have any questions in relation to the above announcement please do not hesitate to contact Simon Calabria on (03) 8662 3200 or via email at simonc@webbmartinconsulting.com.au
