Issue #14
GST Margin Scheme Changes
Urgent: Potential Window of Opportunity for Property Developers
We refer to announcements in the Federal Budget 2008 that changes would be made to the margin scheme where property is acquired via a non-taxable supply (eg. as a supply of a going concern, or farm land, or from associates). See our newsletter “ for more detail on the budget announcement, and the potential issues raised.
Window for Current Rule/Transactions
The proposed amendments were introduced into Parliament late last week. The proposed transitional rules allow a window whereby the current margin scheme rules will apply provided transactions are entered into between now and when the new rules receive Royal Assent. This window should be at least two weeks, noting that Parliament resumes sitting from 13 October, and that this Bill could be passed during that sitting.
The proposed rules only apply to “new supplies”. The existing margin scheme rules will apply but only to arrangements where a written agreement is entered into (or an option is granted) before the date of Royal Assent, and that agreement specifies in writing the consideration (or a way of working out the consideration) for the supply.
Proposed Changes
The Explanatory Memorandum (EM) to the Bill describes that the introduction of the proposed rules are to “maintain the integrity of the GST tax base by ensuring that the interaction of the margin scheme provisions and the going concern, farmland and associates provisions does not allow property sales to be structured in a way that results in GST not applying to the value added to real property from 1 July 2000 by an entity registered or required to be registered for GST”.
The key changes relate to:
- ensuring the GST cannot be minimised by interposing certain GST-free or non-taxable supplies prior to a sale under the margin scheme – that is, the margin scheme ‘base value’ cannot be refreshed via the use of a GST-free or non-taxable acquisition;
- amends the way the margin is calculated, making it necessary to look through certain GST-free or non-taxable supplies of real property when calculating the margin; and
- amends the GST general anti-avoidance rules so that contrived arrangements arising from a choice, election, application or agreement do not result in a GST benefit.
Example
To briefly explain the effect of the rules we refer to the following example that we used in The Assessment (Issue 10):
“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.”
If we assume that:
- A acquired the land under a fully taxable supply such that is net cost is $1m;
- A sells the land to B GST-free after the date of Royal Assent as a “new supply”; and
- B sells the land under the margin scheme,
The proposed rules would result in a margin of $9m (being the difference between $10m and $1m).
If the GST-free sale to B took place before the date of Royal Assent, and the written agreement meets the transitional rules conditions, then the margin would be calculated as $7m (being the difference between $10m and $3m).
Note: This example is illustrative only based on the limited facts stated. It also only provides an example relating to one aspect of the proposed changes. Different facts and circumstances may give rise to different outcomes, and we strongly recommend specific advice be sought on the potential application of the proposed rules.
Contracts and Negotiations
The changes will also impact on contractual arrangements between parties, and would require necessary documentation evidencing a vendor’s acquisition price when it originally acquired the property.
Anti-Avoidance Rules
While the proposed amendments to the GST general anti-avoidance rules (Division 165) have been introduced as part of these margin scheme changes, and the EM provides an example of when the new rules would apply to a contrived margin scheme arrangement, the proposed changes are not limited to just the margin scheme.
As currently drafted, Division 165 does not apply if a GST benefit is attributable to making a choice, election, application or agreement expressly provided for by the GST law. The proposed change introduces a concept that already exists in the income tax general anti-avoidance rules (i.e. “Part IVA”). That is, the GST benefit will not be attributable to the choice, election, application or agreement if the scheme was entered into with a sole or dominant purpose of creating circumstances or a state of affairs to enable the choice, election, application or agreement to be made.
This edition of ‘The Assessment’ was prepared by Simon Calabria. If you have any questions in relation to this edition, please contact Simon directly on (03) 8662 3200 or via email at simonc@webbmartinconsulting.com.au .
