Property Transactions Margin Scheme Finance in Practice, Taxation Unit, GST Team

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1 Property Transactions Margin Scheme Finance in Practice, Taxation Unit, GST Team Custodian/Review Officer: Manager, GST Team Version no: 5 Applicable To: All staff in QH divisions and Commercialised Business Units as well as Hospital and Health Service staff. Approval Date: 10/08/2012 Effective Date: 10/08/2012 Next Review Date: 10/08/2015 Authority: Approving Officer: Director, Taxation Unit Signature Supersedes: 4.1 Key Words: tax, GST, margin scheme, tax codes, purchaser, seller, valuation method, mixed supply, real property, input tax credits Accreditation References: EQuIP and other criteria and standards 1 Purpose To provide information and advice regarding GST on certain sales of real estate to be calculated under the Margin Scheme. 2 Scope This procedure relates to the treatment of the Margin Scheme. 3 Supporting Documents References Division 75 of the GST Act GSTR 2000/21 The margin scheme for supplies of real property held prior to 1 July 2000 GSTR 2006/7 The margin scheme for supplies of real property made on or after 1 December 2005 that was acquired or held before 1 July 2000 GSTR 2006/8 The margin scheme for supplies of real property acquired on or after 1 July 2000 Private Ruling Staff Accommodation (current from 5 April 2005) Related Information GSTR 2009/2 Partitioning of Land 4 Consultation Key stakeholders (position and business area) who reviewed this version are: Director, Taxation Manager, GST Team Senior Finance Officer, GST Team Version No.: 5 Effective From: 10/08/2012 Page 1 of 12

2 Contents Introduction... 3 Summary of Tax Codes... 4 When the Margin Scheme can be used... 4 Use of Margin Scheme... 5 Decision to use the Margin Scheme... 5 Timing of decision to use the Margin Scheme... 5 Consequences of using the Margin Scheme... 5 Queensland Health as Purchaser... 5 Queensland Health ATO Private Ruling... 6 Queensland Health as Seller... 6 Calculation of GST using the Margin Scheme... 6 Establishing the Valuation Method to be used in Margin Scheme calculations... 7 Valuations... 9 Documentation that a professional valuer is required to provide... 9 Margin Scheme applied to mixed supply of Real Property Entitlement to Input Tax Credits Tax Invoices Record keeping Decision Tree Conclusion Version Control Version Date Author Version Date Author No No 1 24/06/ /03/2009 S Singh 2 13/12/ /08/2009 C Mardon 3 3/11/2006 A Kellner 4 9/01/2007 C Mardon Version No.: 5 Effective From: 10/08/2012 Page 2 of 12

3 Introduction Queensland Health Procedure: Property Transactions Margin Scheme The Margin Scheme enables the GST on certain sales of real estate to be calculated on a concessional basis. The GST payable under the margin scheme is usually lower than when the GST is calculated under the basic rule in Section 9-70 of the Act. Because of this, the margin scheme is used particularly if the recipient of the supply is not entitled to an Input Tax Credit for the acquisition. 1 If a taxable supply of real property is made, the GST payable under the basic rule in Section 9-70 of the Act is 1/11 th of the price. However, under Section 75-5(1), the margin scheme can be applied if a taxable supply of real property is made by: Selling a freehold interest in land Selling a stratum unit or Granting or selling a long term lease (over 50 years) Examples: 1. Residential land or new residential premises supplied to private owners for their own use or for investment purposes 2. Acquisition of taxable residential land or taxable residential premises where recipient is not entitled to Input Tax Credits; e.g. to provide residential accommodation to staff The margin scheme may be applied if the supplier and the recipient agree in writing that the margin scheme is to apply. 2 Sub-section 75-5(1A) provides that the agreement must be made on or before making the supply, or within such further period as the Commissioner allows. The latter requirement follows amendments to the Act and is applicable to transactions on or after 29 June There are three (3) main public rulings dealing with the margin scheme and the following table summarises the major differences between these rulings. 3 Ruling Number GSTR 2000/21 GSTR 2006/7 Description of Contents Applies where the real property was acquired or held before 1 July 2000 and was supplied before 1 December 2005 Applies where the real property was acquired or held before 1 July 2000 and was supplied on or after 1 December 2005 GSTR 2006/8 Applies where the real property was acquired on or after 1 July GSTR 2006/7 Para 19 2 GSTR 2006/7 Para17 & GSTR 2006/8 Para 12 3 GSTR 2006/7 Para 16 Version No.: 5 Effective From: 10/08/2012 Page 3 of 12

4 Summary of Tax Codes Queensland Health Procedure: Property Transactions Margin Scheme Description Margin scheme can only be used by ABN & GST registered enterprises Information Acquisition Tax Code Disposal Tax Code GST-free portion C5 S5 Taxable (& non-claimable portion) C2 S0 Adjustment for rates To be deducted from purchase or sale price P5 S9 When the Margin Scheme can be used There must be a sale of a freehold interest in land or a stratum unit or a grant or sale of a long-term lease. The margin scheme cannot apply to other supplies of real property such as a lease (other than a long-term lease) or the granting of a licence to occupy land. These are not sales of real property. The following table illustrates how GST is applied to some supplies of real property by way of sale: 4 Type of Supply Sale of residential properties that are not new, for example, existing residential properties Sale of newly constructed residential property (from GST registered supplier) Sale of commercial or industrial property Sale of vacant land by an individual (not registered for GST) Sale of vacant land by (GST registered) developer Sale of real property as part of a going concern. Both parties must agree in writing that the property is a going concern Sale of farming land to a recipient who intends to carry on farming GST consequences Input Taxed Taxable Taxable Not taxable Taxable GST-free GST-free 4 GSTR 2000/21 Para 14 Version No.: 5 Effective From: 10/08/2012 Page 4 of 12

5 Use of Margin Scheme Queensland Health Procedure: Property Transactions Margin Scheme CAN be used: CANNOT be used: If sale qualifies as a taxable supply of real property (as indicated in previous table Previous vendor has used Margin Scheme Previous vendor has not sold as taxable supply Land purchased (under Margin Scheme), then a building constructed on land and property sold Previous sale was a taxable supply * Real property is GST-free; e.g. First sale of Unimproved Crown Land; or Input Taxed supply and therefore does not attract GST; e.g. sale of existing residential premises Purchase from unregistered vendor *Note: The margin scheme cannot be used if a previous acquisition of the real property was a taxable supply and the GST on the acquisition was not calculated under the margin scheme. Decision to use the Margin Scheme The application of the margin scheme is an important issue for both the seller and the purchaser. It is essential that the parties give careful consideration to the implication of using the margin scheme. It is also important to ensure that the vendor and purchaser have an agreement in writing prior to or at the time of settlement. Timing of decision to use the Margin Scheme To be entitled to apply the margin scheme, the supplier must have chosen to apply the margin scheme at or before the time the supply is made; i.e. settlement date. If the choice is not made by that date, it is the Commissioner s view that it cannot be made at a later date. 5 The decision should be made on a sale by sale basis. Consequences of using the Margin Scheme Queensland Health as Purchaser The Margin Scheme is only beneficial when an entity is purchasing vacant land (taxable supply) for construction of residential premises (Input Taxed Supply) as no refund of GST is available for this type of purchase. 5 GSTR 2006/7 Para 31 Version No.: 5 Effective From: 10/08/2012 Page 5 of 12

6 This will mean that the use of the Margin Scheme will reduce the overall cost of the acquisition. This will result in a reduced amount of GST being included in the purchase price. Queensland Health ATO Private Ruling Queensland Health holds an ATO Private Ruling , which in part, allows accommodation for nursing staff to be treated as GST-free. Although all expenses, which contain GST in the price, that are related to residential premises, are processed using tax codes C1/P1, Queensland Health is able to claim a partial refund of the GST Credits not previously claimed. This apportionment is carried out as part of the monthly Business Activity Statement process by the GST Team. WARNING: When the Margin Scheme is applied, GST Credits can not be claimed under any circumstances, even though a portion of the purchase price does include GST. It is therefore not recommended that Queensland Health, as the purchaser, agree to the application of the Margin Scheme as this results in additional costs to the department. Queensland Health as Seller If Queensland Health is selling these types of properties, the Margin Scheme is particularly beneficial where the recipient of the supply is: not entitled to claim a GST refund or intends to onward sell to a recipient who is not entitled to claim a refund; e.g. a land developer who intends to sell blocks of land to the public. Calculation of GST using the Margin Scheme The amount of GST payable is 1/11 th of the tax inclusive margin for the supply. For this purpose, the GST is nominally calculated at 10% of the sale price before tax and then added to that price. The margin for the supply is the difference between the consideration for the acquisition and the consideration for the supply. That is, the difference between the GST inclusive cost price of the land and the selling price. However, any costs not directly part of the acquisition must be excluded from this calculation. Any costs on which input tax credits have been claimed are also excluded. Example: Midas Investments Pty Ltd purchases a vacant block of land from an unregistered person for $500,000 dollars. No GST is charged as it is not a taxable supply. A house is built on the land and the selling price is calculated at $1,050, excluding GST. Midas Investments Pty Ltd is registered for GST and wishes to apply the margin scheme. Version No.: 5 Effective From: 10/08/2012 Page 6 of 12

7 The table below shows the calculations for the Margin Scheme and the reduced amount of GST to be included in the selling price 6 : MARGIN SCHEME RULES NORMAL RULES Code Description Formula Amounts 10% GST T = Taxable (GST incl.) E GST Exclusive Selling Price $1,050, $105,000 $1,155, V 1/7/2000 or Consideration (Acquisition price) if after 1/7/2000 $ 500, I GST incl. per Margin Scheme ((E-V)/10)+E $1,105, M Margin I - V $ 605, G GST payable M/11 $ 55, I Margin Scheme Selling Price E + G $1,105, Difference in Selling Price/ Saving in Purchase Price using Normal Rules and Margin Scheme Rules T I $ 50, Establishing the Valuation Method to be used in Margin Scheme calculations In very broad terms, the methods that can be applied for the purpose of valuation are: 7 The market value of the property determined in writing by a professional valuer; The value of the consideration provided by a purchaser in a contract for the sale and purchase of real property executed or exchanged prior to 1 July 2000 by parties dealing at arm s length; or The value as determined by the State Government or Territory Government department as the unimproved value, the site value or the capital value of the land; e.g. DERM Valuation as on Rates Notice. The table below should be used to establish valuation methods according to dates to acquisition and disposal of properties: 6 GSTR 2006/7 Para 87 7 GSTR 2006/7, Para Version No.: 5 Effective From: 10/08/2012 Page 7 of 12

8 GST Ruling Description Valuation Date to be used Valuation methods GSTR 2000/21 Applies where the real property was acquired or held before 1 July 2000 and was supplied before 1 December July 2000 Para 21 (a) Market Value at 1/7/2000, (b) consideration at time of purchase, (c) most recent value as determined by State Govt as unimproved value, site value or capital value of the land Para 70 GSTR 2006/7 Applies where the real property was acquired or held before 1 July 2000 and was supplied on or after 1 December July 2000 (a) Market Value at 1/7/2000, (b) consideration in a contract of sale prior to 1/7/2000, (c) most recent value as determined by State Govt as unimproved value, site value or capital value of the land Para 118 GSTR 2006/8 Applies where the real property was acquired on or after 1 July July 2000 (a) Market Value at 1/7/2000, (b) consideration in a contract of sale prior to 1/7/2000, (c) most recent value as determined by State Govt as unimproved value, site value or capital value of the land Legislation allows the supplier to choose the calculation or valuation that will result in paying the least amount of GST. Provided the decision to apply the margin scheme was made at or before the time of supply of the real property, the decision as to which valuation method to adopt can be changed from consideration to valuation and vice versa for an unlimited number of times. However, the decision must be firm by the due date for lodgement of the BAS for the relevant tax period to which GST on the supply is attributed. Example using Valuation Method MARGIN SCHEME RULES Code Description Formula Amounts 10% GST NORMAL RULES T = Taxable (GST incl.) E GST Exclusive Selling Price $1,050, $105,000 $1,155, V 1/7/2000 $ 500, I GST incl. per Margin Scheme ((E-V)/10)+E $1,105, M Margin I - V $ 605, G GST payable M/11 $ 55, Version No.: 5 Effective From: 10/08/2012 Page 8 of 12

9 I Margin Scheme Selling Price E + G $1,105, Difference in Selling Price/ Saving in Purchase Price using Normal Rules and Margin Scheme Rules T I $ 50, Example using Consideration Method (Property purchased after 1/7/2000) MARGIN SCHEME RULES Code Description Formula Amounts 10% GST NORMAL RULES T = Taxable (GST incl.) E GST Exclusive Selling Price $1,050, $105,000 $1,155, V 1/7/2001 $ 750, I GST incl. per Margin Scheme ((E-V)/10)+E $1,080, M Margin I - V $ 330, G GST payable M/11 $ 33, I Margin Scheme Selling Price E + G $1,083, Difference in Selling Price/ Saving in Purchase Price using Normal Rules and Margin Scheme Rules T I $ 72, Valuations To calculate the margin for the supply of real property, a valuation is required as at the valuation date which will normally be 1 July The valuation process itself does not have to have been undertaken on the [actual] date. 8 The valuation must be made by the due date for lodgement of the supplier s Business Activity Statement for the tax period to which the GST on the supply is attributable. 9 The valuation is to be carried out by a professional valuer in accordance with standards recognised in Australia. Documentation that a professional valuer is required to provide The valuation must include a signed certificate which specifies 10 : a) a full description of the property being valued b) the applicable valuation date c) the date the valuer provides the valuation to the supplier d) the market value of the property at the valuation date 8 GSTR 2006/7 Para 61 9 GSTR 2006/7 Para GSTR 2006/7 Para 79 Version No.: 5 Effective From: 10/08/2012 Page 9 of 12

10 e) the valuation approach and the valuation calculation and f) the qualifications of the valuer Margin Scheme applied to mixed supply of Real Property If a supply of real property is partly input taxed and partly taxable or partly taxable and partly GST-free (a mixed supply), then the margin scheme can apply to the taxable component. Examples of supplies that may be mixed supplies are: Supply of a building that contains areas that are residential premises (Input Taxed Supply) and commercial premises (Taxable Supply) or Supply of a building that includes new residential premises (Taxable Supply) as well as an area which is supplied as a going concern (GST-free Supply). Entitlement to Input Tax Credits If the GST payable on a supply of real property has been worked out under the margin scheme, the acquisition of the property by the recipient of the supply is not a creditable acquisition. This means that the recipient is not entitled to an Input Tax Credit for the acquisition of the real property. WARNING: When the Margin Scheme is applied, GST Credits can not be claimed under any circumstances, even though a portion of the purchase price does include GST. It is therefore not recommended that Queensland Health, as the purchaser, agree to the application of the Margin Scheme as this results in additional costs to the department. Tax Invoices As the purchaser will not be entitled to an Input Tax Credit where real property has been supplied solely under the margin scheme, there is no requirement to provide a compliant Tax Invoice. Record keeping As well as retaining accounting records, when the margin scheme has been applied, ATO legislation requires retention of the following records: a) contracts of sale and purchase together with settlement statements and b) details of how the margin was calculated for any supply of real property under the margin scheme The following records must also be retained, if applicable: Version No.: 5 Effective From: 10/08/2012 Page 10 of 12

11 a) the approved valuation b) any written request for a further period to obtain an approved valuation and the tax office response c) if an approved valuation is required, documents describing the real property at the valuation date d) the agreement in writing to use the margin scheme and e) the request for a further period in which to agree to use the margin scheme and the tax office response Decision Tree (This Flowchart is to be used as a guide only) Version No.: 5 Effective From: 10/08/2012 Page 11 of 12

12 Conclusion This Business Procedure covers the basic information contained in the Act and ensuing GST Rulings. If Queensland Health faces an issue with the Margin Scheme that is not covered in this document, it is recommended that contact be made with the GST Team by phoning the Help Desk on or sending details by at DISCLAIMER: This procedure is written in accordance with A New Tax System (Goods and Services Tax) Act For further information regarding Queensland Health policies and procedures, the appropriate resources should be researched and/or contacted. For the latest version of this GST Business Procedure, check the GST site on QHEPS: Version No.: 5 Effective From: 10/08/2012 Page 12 of 12