• Introduction
• All recent publications
• Tax publications
• Tax services

Focus: Tax – October 2008

Residential property developers beware – proposed amendments to GST margin scheme provisions

In brief: The Federal Government recently introduced a Bill that proposes changes to the GST margin scheme provisions. The changes seek to diminish the benefits to property developers acquiring land using the GST 'going concern' or 'farm land' exemptions by changing the way the margin scheme GST paid on subsequent supplies of new residential premises will be calculated. The Federal Government sees the changes as integral to maintaining the policy intent of the GST system and estimates that additional GST of $523 million will be collected over the next four years. Partner Peter Allen (view CV) and Senior Associate Marc Johnston analyse the main proposed change.

• Margin scheme changes
• Existing residential developments protected
• Changed margin scheme calculations
• Impact on current negotiations to acquire land
• Conclusion

Margin scheme changes

The Tax Laws Amendment (2008 Measures No. 5) Bill 2008 (the Bill) was introduced by the Federal Government into the House of Representatives on 25 September 2008. The Bill proposes a number of taxation and revenue-related changes, including some amendments to the way the GST margin scheme provisions will operate.

Basically, the GST changes in the Bill will:

• prevent the margin scheme from being 'refreshed' in the hands of a developer simply because a landowner supplies land to that developer using the GST 'going concern' or 'farm land' exemptions (or via an acquisition from an associate for no consideration) in situations where that landowner would otherwise have been unable to utilise the margin scheme;
• alter the way margin scheme GST is calculated on the supply of new residential premises where the land that has been developed was acquired by a developer GST-free as a going concern or via the farm land exemption (as well as for certain acquisitions from GST registered associates of the developer for no consideration). We discuss this change in more detail below; and
• stop contrived arrangements aimed at avoiding GST by preventing taxpayers from arguing that there cannot be a GST benefit if that benefit arises from a choice, election, application or agreement expressly provided for in the A New Tax System (Goods and Services Tax) Act 1999 (Cth) where a scheme was entered into with the sole or dominant purpose of creating a circumstance or state of affairs to enable that choice, election, application or agreement to be made.

The stated aim of the Bill is to ensure that the correct amount of GST is collected on supplies of real property consistent with the policy intent of the GST system. These changes are seen as integrity measures to make sure that the margin scheme does not prevent GST from being collected on the value added to real property on or after 1 July 2000 by GST-registered entities. The existing margin scheme rules operate in a way that effectively results in no GST being collected on the value added to real property by a GST-registered entity that sells that real property to a residential property developer via the going concern or farm land exemptions (or where they are an associate and the supply occurs for no consideration).

Existing residential developments protected

The changes will only apply where there is a 'new supply' of land. The existing margin scheme rules will apply to land that has been acquired before, or that is the subject of an acquisition agreement executed before, the Bill receives Royal Assent. This is an important transitional provision which seeks to protect existing residential developments (ie the new rules will only apply to land acquired after the Bill has been passed and received Royal Assent, assuming that occurs).

More specifically, based upon the provisions in the Bill, provided that an agreement for the acquisition of the land is executed prior to the date the Bill is passed and receives Royal Assent, it is irrelevant when settlement happens (as long as the agreement 'specifies in writing the consideration, or a way of working out the consideration, for the supply').

That is because the purchaser will still be able to rely upon the existing margin scheme provisions (ie the amended provisions will not apply to any future supply of new residential premises where the underlying land that has been developed was acquired, or was agreed to be acquired, before Royal Assent). The definition of 'new supply' also extends to a right or option to acquire the land as long as the consideration is specified.

Changed margin scheme calculations

The Federal Government expects to collect additional GST of $523 million over the next four years as a result of the margin scheme changes in the Bill. It will do this by preventing developers from resetting the margin for GST purposes and, instead of using their acquisition cost for the land, the margin will be basically the difference between the sale price for the land being sold and either the consideration paid for that land by the original owner or its value. How this is achieved depends in part upon the date the original owner became registered or required to be registered for GST.

Impact on current negotiations to acquire land

Future acquisitions of land after the date of Royal Assent will require additional due diligence activities on the part of a developer that wants to use the margin scheme in the future. The developer must be certain that the vendor did not acquire their land through a supply that was ineligible for the margin scheme. If they proceed on the basis that they will be able to use the margin scheme when they sell new residential premises in the future but it turns out that the vendor's acquisition was ineligible, the developer will have a greater GST liability than originally anticipated. That is because they will not be able to use the margin scheme, which could seriously impact upon the feasibility of a residential development.

If a land acquisition agreement is entered into before Royal Assent, the purchaser will still be able to calculate their margin scheme GST in the future based upon the acquisition price for the land in that agreement (and not based upon the price originally paid for the land by the vendor or its value). This will often be of significant benefit for a developer as it could increase the profitability of a proposed development or make an otherwise uneconomic development commercially viable.

Conclusion

The Bill was read a second time but was not debated before the House of Representatives adjourned until 13 October 2008. As such, if you are negotiating for the acquisition of land and you want to use the going concern or farm land exemptions (and you will be making taxable supplies of new residential premises in the future), there is a two-week window of opportunity (at the minimum) within which to sign a contract (or an option) and thereby ensure that future margin scheme GST will be calculated with reference to the existing rules. The actual time available will depend upon how quickly the Federal Government can push the Bill through the Senate (if at all).

The changes are not likely to be as relevant for a purchaser who does not intend making supplies of new residential premises (such as a commercial office development). That is because the purchaser will generally not utilise the margin scheme as buyers will usually be entitled to claim full offsetting input tax credits (whereas no input tax credits can be claimed if the margin scheme applies).

For further information, please contact:

• Peter AllenPartner, Brisbane
  Ph: +61 7 3334 3350
  Peter.Allen@aar.com.au
• Ross StittPartner, Sydney
  Ph: +61 2 9230 4643
  Ross.Stitt@aar.com.au
• Marc JohnstonSenior Associate, Brisbane
  Ph: +61 7 3334 3272
  Marc.Johnston@aar.com.au
• Michael PerezPartner, Melbourne
  Ph: +61 3 9613 8500
  Michael.Perez@aar.com.au

Bookmark with What are these?