Recent changes in GST & Property

There have been several changes in recent weeks that will affect the way property developers and owners account for GST. Some changes are welcomed, others are not.

Partitions

The ATO have previously maintained that the margin scheme cannot be applied to a partition. This was because the ATO stated (correctly) that the margin scheme was only applicable where there had been a sale or a grant of a long lease; the ATO considered a partition was not a sale. The ATO have recently announced, in a draft GST Ruling (GSTR 2008/D3), that they now regard a partition as being a sale. This means that the margin scheme can apply to the partition. The consideration is non-monetary consideration as each owner gives up their interest in part of the land in return for the land from the other co-owners.

Similarly, where there is a partition of land by a joint venture a taxable supply has been made by the participant in the joint venture. Also, an in specie distribution of land, or a supply of an interest in land by way of a partition by a general law partnership is a supply to the partner or partners. Again, the margin scheme can be used.

This is good news for anybody that is holding property that they wish to develop for residential purposes as a joint tenant or as a tenant in common.

Bare Trusts

The ATO have also confirmed, today, in their Ruling GSTR 2008/3 that where land is held for a party by a bare trustee that it will regard any supplies that are made as being made by the beneficiary and not the bare trust. The beneficiary must account for all the GST on any supplies made and can claim the appropriate credits. The trust or trustee does not need to register for GST or account for GST, as long as it does nothing other than hold the property and dispose of it according to the instructions of the beneficiary.

Margin Scheme

New legislation has been proposed in this year’s Federal budget that will increase the margin that is subject to GST where property has been acquired GST-free. Property may be acquired GST-free when acquired through a supply of a going concern or where the property was rural property. When this legislation is enacted, it will no longer be possible to use the acquisition price; taxpayers will need to use the 1 July 2000 value. As well as increasing the GST payable the change increases the possibility for error (as getting historic valuations is fraught with difficulty) and also makes a challenge by the ATO more likely.

The ATO have not yet released the draft legislation, so it is difficult to comment fully on the proposals. It is understood, however, that the new legislation will only apply to acquisitions made after the date of the budget (or may only apply to acquisitions made after 30 June 2008). Until the legislation is published, however, there is a lack of certainty regarding how the legislation will be applied. It will, however, be necessary to take into account this potential increase in cost when making forecasts and budgets.

Partnerships

The ATO have issued a new draft ruling that has an interesting impact upon partnerships. For example, a partner retiring from a firm causes a deemed transfer of the partnership interest to the remaining partners by the partnership. Also, where partners own property together, but not in partnership, and then form a partnership, there is a taxable supply to the partnership by the individuals. These are not new opinions published by the ATO, but they have been highlighted by a new draft ruling in respect of the way that partnership transactions effects real property and the margin scheme. Where property is held in partnership, it is important that the effects of GST are considered to ensure that an unexpected cost does not arise.

For more information, contact:

Krish Patel 
Partner - Tax
T  +61 2 8297 2400
E  krish.patel@au.gt.com