Headache turns to nightmare!
If the application of the margin scheme for the treatment of GST in relation to land sales wasn’t already complicated enough, the Australian Tax Office (“the ATO”) has taken it one step further, adding further salt to the wound of lawyers and accountants. The ATO has now introduced a series of amendments, complicating this legitimate method of reducing GST.
As most would be aware, GST was initially intended to be a tax on business activities rather than a tax on land. Supporting this, the margin scheme was adopted to allow the ATO to collect GST from those conducting a business involving the sale of land. The idea was that it would only be collected on the ‘profit’ (the increase in the value of the land sold), rather than the entire sale price (the usual 10% of the total price).
Whilst the legislation relating to the margin scheme is inherently complex, many have adopted these simple rules in deciding whether they could utilise the margin scheme. In summary:
You may be able to apply the margin scheme on a sale if the margin scheme was applied when you purchased, or you purchased on a tax-free basis (i.e. the Vendor was not registered nor required to be registered for GST or the transaction was that of a GST-exempt going concern or farm land sale). You may not have the option of using the margin scheme if when you purchased, the ‘full tax method’ was applied and the Vendor remitted 1/11th of the purchase price to the ATO.
It has now been brought to the attention of the ATO that some people were entering into additional transactions to reap the benefits of applying the margin scheme where it normally couldn’t be used. Clever advisers were starting to perform preliminary transfers to related entities whereby either the going concern exemption was adopted via a newly created lease; or an entity was deregistered for GST making it a non taxable supply.
These clever transactions had the effect of making the margin scheme available for application where they otherwise would have been unavailable.
Recently, the ATO has also alerted itself to the insertion of a GST free transaction between two taxable transactions (defined in accordance with the margin scheme).
In a simplified example:
Amy sells the ‘land’ to Barry using the margin scheme. Barry then develops the ‘land’ making it considerably more valuable. Barry wishes to sell the land but to avoid paying GST on what would be a considerable margin based profit, he instead embarks on the following series of transactions leaving no GST payable: Barry leases the land to an associate or related party. Barry then sells the land at market value as a going concern (available given the existence of the lease) to a different associate or related party named Chris with no GST being payable (due to the going concern exemption) despite a considerable ‘margin’ existing. Chris then sells the land utilising the margin scheme at the same value as the purchase price, and again no GST is payable, (this time as no profit, or ‘margin’, exists). Effectively, Barry together with Chris have increased the value of the land considerably yet never paid any GST due to a combination of going-concern and margin scheme transactions.
Given that we are all honest, law abiding citizens we would all recognise and appreciate that the above example may give rise to a classic breach of the anti-avoidance provisions contained within the relevant tax laws.
However, rather than sensibly utilise the anti-avoidance provisions to combat this, the ATO has instead introduced a series of complex changes that were adopted and are to apply to all contracts entered into on or after the 9th of December 2008.
In a nutshell, if you use the margin scheme to work out the GST payable when selling a property, you:
must include the value that you and the previous seller added to the property; and cannot use the margin scheme if, broadly speaking, the previous seller could not use the margin scheme.
This will likely cause headaches for most accountants and legal practitioners in the future as they try to determine whether or not previous owners of the land (many of whom the taxpayer may never have dealt with) were able to utilise the margin scheme, thereby allowing their taxpayer client to adopt this in dealing with GST.
This is only one of the recent changes relating to the margin scheme which are currently in force. If you require any information about this or any specific GST and land sales advice, contact our Business Law Division at BJT Legal.