A transaction type that we regularly receive queries on is whether land purchased GST-free (either on a going concern basis or under specific rules related to farm land) can later be sold using the margin scheme. For example, land is acquired GST-free, property development occurs and the land is subdivided and sold as lots.
The answer to this initial question is determined by how, for GST purposes, the land came to be acquired. The GST law includes a concept of “a supply that was ineligible for the margin scheme” which requires the GST treatment applied when the land was acquired to be considered to determine whether the margin scheme is available on a later sale. The concept of what is “a supply that was ineligible for the margin scheme” is a story for another day. For the purpose of this article let’s assume the land sold on a GST-free basis was also owned by the seller as at 1 July 2000 meaning any later sales by the purchaser (including of sub-divided lots) would not be a “supply that was ineligible for the margin scheme”.
So on the assumption the margin scheme can be applied let’s focus on a common (and costly) misconception regarding how the margin scheme applies in this situation.
The normal operation of the margin scheme results is as follows:
Margin = “consideration for the sale” less “consideration for the acquisition”
GST payable = 1/11th of margin.
For example, say you purchased land GST-free in 2010 for $1m and sold GST inclusive for $2.1m the margin would be $1.1m and the GST payable $0.1m.
Changes to the GST-law in 2008 alter the normal operation in a range of situations (primarily anti-avoidance and related party type transactions) but are often overlooked where land is acquired post the law change on a GST-free basis from a third party in arm’s length dealings in a GST-free transaction, being either a going concern supply or under specific rules related to farm land. (Note: the range of other situations covered by the 2008 law changes are quite broad and beyond the scope of this article).
Where land is acquired post the law change on a GST-free basis either as a going concern or under specific rules related to farm land the “consideration for the acquisition” is not be the amount paid for the acquisition of the land but instead a substituted amount specified in law. For example, where the vendor in the going concern sale held the land as 1 July 2000 the substituted “consideration for the acquisition” is the market valuation of the land as at 1 July 2000 – i.e. not what was paid for the land when it was acquired in the GST-free acquisition. Returning to the example, say the land that was purchased GST-free in 2010 for $1m and sold GST inclusive for $2.1m had a market value at 1 July 2000 of $100,000. In this example, the margin would instead be $2m and the GST $0.181m.
Obviously the impact of a substituted “consideration for the acquisition” can have a major impact on the end GST liability.
The message here is clear. Any proposed use of the margin scheme and/or calculation there under needs to fully consider the purchase history of the land both to make sure the sale is eligible for the margin scheme and to ensure GST liabilities are correctly determined.
The transaction we have used as an example is both a common one and at the simple end of the spectrum of possibilities. As these changes have been around for a while, we hope the correct treatment as outlined above is not news to you – because it is for many!