GST Margin Scheme revision Mar 2006 (Remember to consult an adviser.)

1,1 Can the margin scheme apply to a ‘tenants in common’ interest?
The ATO considers that the margin scheme can apply to the supply of a tenancy in common interest in real property. The ATO considers that when tenants in common acquire freehold land, each tenant has a freehold interest in the land. This will also be the case in relation to an interest in a stratum unit. For similar reasons, the margin scheme can also apply if tenants in common are selling or granting a leasehold interest in land or a stratum unit. Refer to 5.75-5(1) and paragraphs 39-43 of GSTR 2005/D4.

2. The vendor and the recipient must now agree in writing to apply the margin scheme
One of the more significant changes to be made to the margin scheme is the additional requirement for the supplier and the recipient to agree in writing that the margin scheme is to apply. According to the Explanatory Memorandum (EM) to TLA (Measures No. 2) Act 2005, this change was introduced because some recipients were claiming GST input tax credits that they were not entitled to claim because the property was purchased under the margin scheme. Refer to S.75-20 and paragraph 6.38 of the EM.

Prior to the amendment, the legislation provided that the supplier could unilaterally ‘choose’ to apply the margin scheme. Further, Division 75 did not expressly state when the choice to use the margin scheme was required to be made.

As a result of the uncertainty these issues created, 5.75-5(1) now provides that the vendor can use the margin scheme provided that the supplier and the recipient have both agreed in writing for the margin scheme to apply. In addition, the agreement must be made on or before making the supply (usually settlement) or within such further time as the Commissioner allows. Refer to
S.75-5(1A).

The amendments generally apply to supplies made under contracts entered into on or after 29 June 2005 that are not made pursuant to rights or options granted before 29 June 2005.

The agreement in writing can be included in the sale of land contract (see example clause below) or it can be contained in a separate document.

EXAMPLE CLAUSE - Margin Scheme

The vendor and purchaser agree that the margin scheme for the purposes of Division 75 of A New Tax System (Goods and Services Tax) Act 1999 will apply to the supply of the relevant [freehold/stratum unit/long-term lease] (cross out whichever is not applicable) of the real property, which is the subject of this contract.

2.1 When will the Commissioner apply his discretion to extend the time to enter into a written agreement?
Practice Statement PS LA 2005/15 outlines the circumstances in which the Commissioner will exercise his discretion to extend the time in which an agreement in writing must be made to apply the margin scheme.

Although each case will be considered on its own merits, the Commissioner indicates at paragraph 2 of PS LA 2005/15, that he may exercise his discretion provided that all other requirements to apply the margin scheme (aside for the written agreement) have been satisfied; and the arrangement between the supplier and the recipient is not contrary to the policy intent of the legislation. The Commissioner provides examples at paragraph 12 of PS LA 2005/15 of when he would be likely to exercise this discretion, including:

• The supplier and the recipient agreed to apply the margin scheme but inadvertently failed to put the agreement in writing by the time of making the supply (i.e., settlement); or

• A failure to put the agreement in writing was due to a genuine error, such as the mistaken belief that the supply was GST-free, or the supplier did not realise that It needed to register for GST.

Requests for the Commissioner to exercise his discretion must be made in writing to the Commissioner, and should outline the period of delay in entering into the agreement, the explanation for the delay and any other relevant circumstances. For further details, refer to paragraph 13 of PS LA 2005115.

TAX TIP - Supplies made before 29 June 2005

The Commissioner has issued PS LA 2005/2 (GA) in relation to the time that the choice to apply the margin scheme must be made. PS LA 2005/2 (GA) only applies for supplies made before 29 June 2005 (or the taxpayer entered into a contract or granted rights or options over the real property before 29 June 2005 but supplied the property on or after this date).

In PS LA 2005/2 (GA) the Commissioner provides that he will, in limited circumstances, allow an entity who did not choose the margin scheme before the time of the supply (usually settlement), to calculate the GST as if the margin scheme applied.

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