Goods and services tax: the margin scheme for supplies of real property held prior to 1 July 2000

This ruling explains the determinations that the Commissioner has made under paragraph 75-10(3)(b) of the A New Tax System (Goods and Services Tax) Act 1999 ('GST Act'). The determinations are about the requirements for making valuations of a freehold interest, stratum unit , or long-term lease held prior to 1 July 2000.

If real property is supplied on or after 17 March 2005 and before 1 December 2005, the reader should also have regard to: • the legislative amendments contained in the Tax Laws Amendment (2005 Measures No. 2) Act 2005 ; and • A New Tax System (Goods and Services Tax) Margin Scheme Valuation Requirements Determination MSV 2005/1.

The ruling explains in particular: (a) in what circumstances the margin scheme may be used; (b) how valuations are to be made under the determinations made by the Commissioner; (c) what documentation is required to satisfy the determinations; and (d) when valuations are to be made under the GST Act. A copy of the determinations are attached at Schedule 1 and 2.

This ruling does not deal with the application of the margin scheme where the supplier acquired the freehold interest in land, the stratum unit, or the long-term lease on or after 1 July 2000.

Certain terms used in this ruling are defined or explained in the definitions section of the ruling. These terms when first mentioned elsewhere in the body of the ruling, appear in bold type.

Unless otherwise stated, all references in this ruling are to the GST Act.

This Ruling applies [to tax periods commencing] both before and after its date of issue. However, this Ruling will not apply to taxpayers to the extent that it conflicts with the terms of a settlement of a dispute agreed to before the date of issue of this Ruling (see paragraphs 75 and 76 of Taxation Ruling TR 2006/10).

This Ruling does not apply to supplies made on or after 1 December 2005. For supplies made on or after 1 December 2005, refer to Goods and Services Tax Ruling GSTR 2006/7 Goods and services tax : how the margin scheme applies to a supply of real property made on or after 1 December 2005 that was acquired or held before 1 July 2000 .

If you are registered or required to be registered and you make a taxable supply of real property , you must pay GST on that supply.

If you make a taxable supply of real property, the GST payable is 1/11 of the price. [F1] This is referred to in this ruling as the basic rule. However, under section 75-5, if you make a taxable supply of real property by: (a) selling a freehold interest in land; or (b) selling a stratum unit; or (c) granting or selling a long-term lease you may choose to apply the margin scheme in working out the amount of GST payable on the supply.

Under the margin scheme, the GST payable on the supply of certain real property is 1/11 of the margin for the supply. The margin for the supply is the difference between the consideration for the supply and the consideration for the acquisition of the interest, unit or long-term lease unless subsection 75-10(3) applies. Subsection 75-10(3) applies if you have obtained a valuation of the property that is in accordance with the Commissioner's written determination, and: • you acquired (or in some cases held) the real property before 1 July 2000; or • you acquired the real property on or after 1 July 2000, but the supply to you: (a) was GST-free under subsection 38-445(1A); and (b) related to a supply before 1 July 2000, by way of lease, that would have been GST-free under section 38-450 had it been made on or after 1 July 2000 (item 2A).

The GST payable under the margin scheme may be substantially lower than under the basic rule. The margin scheme can apply to all types of property including residential, commercial, retail and industrial and is particularly relevant if the recipient of your supply is not entitled to an input tax credit for the acquisition.

You may choose to apply the margin scheme if you make a taxable supply of real property by: • selling a freehold interest in land; or • selling a stratum unit; or • granting or selling a long-term lease.

Some situations where you, as the supplier of real property, can choose to apply the margin scheme are when you: • as a developer, sell new residential units; • as a project builder, sell house and land packages; or • sell land to an unregistered purchaser In the situations described above the purchaser is not entitled to an input tax credit for the acquisition.

GST is payable on a taxable supply of real property. A supply is a taxable supply if: (a) you make the supply for consideration; and (b) you make the supply in the course of or furtherance of an enterprise that you carry on; and (c) the supply is connected with Australia; and (d) you are registered or required to be registered for GST. However a supply is not a taxable supply to the extent that it is input taxed or GST-free. [F2]

The following table illustrates how GST is applied to some supplies of real property by way of sale: Type of supply GST consequences Sale of residential properties that are not new, for example existing residential properties. Input taxed Sale of newly constructed residential property in the course or furtherance of an enterprise (irrespective of whether bought by an owner occupier or as an investment property). Taxable supply Sale of commercial or industrial property. Taxable supply Sale of vacant land by an individual not in the course or furtherance of an enterprise. Not a taxable supply Sale of vacant land by a developer in the course of the developer's enterprise Taxable supply Sale of real property as part of a going concern, when the recipient is registered or required to be registered. However, both parties must agree in writing that the supply is a going concern. GST-free Sale of farming land to a recipient who intends to carry on farming. GST-free

You can only apply the margin scheme if the supply is a taxable supply. If the supply is new residential premises then the first supply will be a taxable supply to which the margin scheme can apply but subsequent sales of the property as residential premises will be input taxed under Subdivision 40-C. Subsequent sales of vacant residential land will be a taxable supply if sold by a supplier who is registered or required to be registered for GST.

Where the interest, unit, or long-term lease is acquired on or after 1 July 2000, and the circumstances in item 2A of the table in subsection 75-10(3) do not apply, then the margin is the difference between the consideration for the supply and the consideration for the acquisition of the interest, unit or long term lease. [F3] The consideration for the acquisition of the interest, unit or long-term lease is the original purchase price or in the case of subdivided land or a stratum unit the corresponding proportion of the original purchase price paid to acquire the relevant land. It does not include costs later incurred in developing the interest, unit or long term lease. [F4]

Where the interest, unit, or long-term lease is held at 1 July 2000 the margin for the supply is the difference between the consideration for its supply and the consideration for its acquisition unless subsection 75-10(3) applies. Subsection 75-10(3) will only apply if you have obtained a valuation in accordance with the Commissioner's written determination, and: • you acquired the real property before 1 July 2000; or • you acquired the real property on or after 1 July 2000, but the supply to you: (a) was GST-free under subsection 38-445(1A); and (b) related to a supply before 1 July 2000, by way of lease, that would have been GST-free under section 38-450 had it been made on or after 1 July 2000 (item 2A). If subsection 75-10(3) applies, the margin is the difference between the consideration for the supply and the valuation of the interest, unit or long-term lease at the relevant date.

For the purposes of subsection 75-10(3), the Commissioner considers that you have acquired or have held a sufficient interest in real property when you enter into, but have not completed a contract for the acquisition of the real property. [4A]

In particular, if you had entered into a contract for the acquisition of freehold title to land, out of which stratum units were to be created, for the purposes of subsection 75-10(3) you are taken to have held or acquired a sufficient interest in the stratum units on entering into the contract. Similarly, if you had entered into a contract for the acquisition of freehold title to land for subdivision, for the purposes of subsection 75-10(3) you are taken to have held or acquired a sufficient interest in the subdivided lots at the time you entered into the contract.

However, the Commissioner does not consider that a supply or acquisition of the real property itself [4B] occurs at the time of entry into a contract for the sale and purchase of that property. The Commissioner considers that the supply or acquisition of the property occurs on settlement of the contract. [4C]

If you choose to apply the margin scheme, and to calculate the margin for the supply under subsection 75-10(3), then you will be required to obtain a valuation. The table below sets out the particular circumstances and the date on which a valuation is required: Item When valuations may be used Valuation date 1 You acquired the freehold interest, stratum unit or long-term lease before 1 July 2000 and Items 2, 3, and 4 do not apply. 1 July 2000 2 You acquired the freehold interest, stratum unit or long-term lease before 1 July 2000 but you were not registered or required to be registered until after 1 July 2000. The earlier of the date of effect of your registration or the date of your application for registration 2A You acquired the freehold interest, stratum unit or long-term lease on or after 1 July 2000, but the supply to you: (a) was GST-free under subsection 38-445(1A); and (b) related to a supply before 1 July 2000, by way of a lease, that would have been GST-free under section 38-450 had it been made on or after 1 July 2000. 1 July 2000 3 You were registered or required to be registered and held the freehold interest, stratum unit or long-term lease since before 1 July 2000, and there were improvements on the land or premises as at 1 July 2000. 1 July 2000 4 The supplier is the Commonwealth, State, or Territory and has held the freehold interest, stratum unit or long-term lease since before 1 July 2000 and there were no improvements on the land or premises as at 1 July 2000. The day on which the taxable supply takes place Note : (a) a valuation must be made for the date specified in column 3 of the table; and (b) the valuation must comply with all requirements determined in writing by the Commissioner.

The margin scheme ensures that, in these circumstances, GST is payable only on the increase in the value on or after the valuation date.

Where the Commonwealth, a State or Territory supplies land on which there are no improvements at 1 July 2000 the supply of the unimproved land will be GST-free. [F5] If the land has improvements as at 1 July 2000, then the Commonwealth, a State, or Territory can still choose the margin scheme to calculate the GST payable on the supply under Item 3 in the Schedule in paragraph 17 above. However if the land has no improvements as at 1 July 2000 but there are improvements subsequently made to the land prior to the supply of the real property, the Commonwealth, a State, or Territory can work out the GST on the difference between the consideration for the supply and the value of the land at the date of supply as if there were no improvements on the land at the date of supply. [F6]

If you choose to calculate the margin for the supply under subsection 75-10(3), then you require a valuation of the real property as at the valuation date. The valuation process itself does not have to be undertaken on that date. It is sufficient that the valuation is undertaken no later than the end of the tax period in which the GST payable on the supply is attributable. For supplies of real property under a standard land contract the date the GST payable becomes attributable will be the date of settlement. [F7]

The value that you can adopt for completed premises or land subdivisional projects is: (a) the market value of the property determined in writing by a professional valuer; (b) the value of the consideration provided by a purchaser in a contract for the sale and purchase of real property executed or exchanged prior to 1 July 2000 by parties dealing at arm's length; or (c) the value as determined by the State Government or Territory Government department as the unimproved value, the site value, or the capital value of the land.

A professional valuer [F8] is: (a) a person registered or licensed to carry out property valuations under a Commonwealth, State or Territory law; (b) a person who carries on business as a valuer in a State or Territory where that person is not required to be licensed or registered to carry on a business as a valuer; or (c) a member of the Australian Property Institute and is accredited as a Certified Practising Valuer.

You may use an in-house employee who is a professional valuer.

Valuations provided by a professional valuer must comply with the following criteria: (a) Completed subdivided lots or land and buildings . If the property to be valued consists of subdivided allotments or land and buildings completed as at the valuation date, then the valuer should undertake a valuation of the allotments, the building, or individual stratum units within the building having regard to comparable sales data. However, where, having regard to the particular nature of the property, it is the expert opinion of the valuer that the use of comparable sales data is inappropriate, the valuation must be made using another acceptable method including summation, capitalization, and discounted cash flow; or (b) The supplier is the Commonwealth, State, or Territory If the supplier of the property is the Commonwealth, a State or Territory, and: (i) the supplier has held the interest, unit or lease since before 1 July 2000; (ii) there were no improvements on the land in question as at 1 July 2000; and (iii) there are improvements on the land in question on the day on which the taxable supply takes place, the valuer must have regard to what the market value of the land would be had the improvements not been made as at the date of supply, and should be based on comparable sales data. However, where, having regard to the particular nature of the property, it is the expert opinion of the valuer that the use of comparable sales data is inappropriate, the valuation must be made using another acceptable method including summation, capitalization, and discounted cash flow.

The valuer should provide a signed certificate which specifies: (a) a full description of the property being valued; (b) the valuation date; (c) the date the valuer provides the valuation to the supplier; (d) the market value of the property including the valuation approach and the valuation calculation; and (d) the qualifications of the valuer ( Note : qualifications of the valuer will have to satisfy the requirements outlined in paragraph 22 above.)

You can adopt, as the value, the consideration provided by a purchaser in a contract for the sale and purchase of real property executed or exchanged prior to 1 July 2000 between parties dealing at arm's length [F9] .

You can adopt as the value the most recent unimproved value, site value, or the capital value of the land as determined by a State Government or Territory Government department or undertaken by a professional valuer on behalf of a State Government or Territory Government department for rating or taxing purposes made prior to 1 July 2000. The value as at 1 July 2000 for the margin scheme purposes is the value shown in a notice of valuation or land tax notice of assessment or other similar document. This method will assist land developers who have large holdings of unimproved on hand at 1 July 2000.

Partly completed premises means in relation to: (a) a subdivision plan, where the linen plan has not been approved by the local government authority; (b) a building unit or strata title plan, where a certificate of completion or a certificate of occupancy has not been issued the local government authority; (c) the construction or major reconstruction of a building, where the building is still under construction.

The value that you can adopt for partly completed premises is: (a) a value determined in writing by a professional valuer having regard to the criteria listed in paragraph 30; or (b) the value determined by using the costs of completion method.

Where the property to be valued consists of a land subdivision or land and buildings that are partly completed as at the valuation date, then the valuer should undertake the valuation having regard to: (a) the market value of the completed land subdivision, or land and buildings; (b) the cost to complete the project; and (c) the profit margin and holding costs that are attributable to the period on or after the valuation date.

This method requires you to calculate the costs incurred prior to the valuation date as a percentage of the total costs of completion.

The valuation under Division 75 is this percentage applied to the consideration for the supply of the property.

The costs of completion method is an approximate method used to determine the value as at 1 July 2000. Accordingly you can only use this method if the sale of the freehold interest, stratum unit or long-term lease occurs prior to 1 July 2005. If the value is determined as a percentage of the sale price, it is considered that a sale occurring on or after this date will not reflect the value as at 1 July 2000 using this method. For sales occurring on or after 1 July 2005, the supplier will need a valuation by a professional valuer if the supplier chooses to calculate the GST payable using the margin scheme.

When calculating the total cost, you should include all of the costs you incur in completing the development or subdivision. These costs are not limited to the purchase of land and the direct construction costs. We also consider infrastructure costs (both internal and external) to be so closely associated with the development or subdivision, that they should be absorbed into the cost of the items of real property (absorption costing). In the case of stratum units, the costs of completion include the costs of developing the common property.

Residential subdivision may involve a developer buying broadacres, obtaining appropriate approvals, carrying out various construction works on the broadacres, subdividing the broadacres and selling the subdivided lots. Typically, subdivisional costs include internal and external infrastructure costs.

Internal infrastructure costs are those associated with developing the infrastructure land, i.e., the part of the unsubdivided land that does not ultimately form part of the subdivided lots (e.g., streets or specially dedicated areas).

External infrastructure costs may arise where a developer is required to undertake infrastructure works outside the subdivision area. Those works may include upgrading of roads, sewerage treatment works, water and sewerage mains, drainage schemes, etc. Alternatively, a developer may be required to make financial contributions towards such works.

Costs which you should not include are: • administrative costs that cannot be directly related to the finished premises or subdivided land; and • holding costs, such as rates and taxes, or interest on borrowings to acquire or develop the property.

If you are in the business of developing and subdividing undeveloped land, the approach to determining costs is the same as for valuing land as trading stock at cost for income tax purposes. [F10] The same approach applies to the construction of stratum units or commercial premises.

A land developer who, on 1 July 2000 is registered for GST, acquired the freehold interest in four hectares of undeveloped land on 13 September 1986 for development, subdivision and sale. The developer subdivides this land into a residential estate of thirty allotments. The development includes the provision of services and facilities.

At 30 June 2000, the costs incurred are: $ Land at cost 1,150,000 Legal fees 50,000 Design fees 60,000 Local government fees 20,000 Site administration expenses 20,000 Earthworks 200,000 Total 1,500,000

The total actual costs of completing the development and getting the allotments ready for sale is $2,500,000. The percentage of completion is 1,500,000 / 2,500,000, or 60%.

The allotments are of a uniform area, but are sold for varying sale prices, reflecting their positions on the estate. The GST inclusive sale prices are: $ 15 allotments, each 100,000 10 allotments, each 125,000 5 allotments, each 150,000 Total 3,500,000

The valuations of the allotments as at 1 July 2000 are: $ $100,000 allotments 60,000 $125,000 allotments 75,000 $150,000 allotments 90,000

The GST payable under the margin scheme on each of the 15 allotments sold for $100,000 is calculated as follows: Margin = GST inclusive sale price - value at 1 July 2000 = $100,000 - $60,000 = $40,000 GST payable = 1/11 of $40,000

You work out the margin and the GST payable on the other allotments in the same way.

In a multistage development the margin scheme should be used for each stage in the development as a separate development. Costs which can be specifically identified with a particular stage of a development should be allocated directly to that stage. However some of the development costs may be directly related to more than one stage of the development. In this situation, the costs should be allocated between the stages of development using one of the following methods: • anticipated selling price - under this method, costs are allocated on the basis of the total anticipated selling price of each development stage; • lots or sites - costs are allocated in proportion to the number of lots or sites; • area - costs are allocated on the basis of the total saleable area in each development stage.

Development costs should only be allocated to development stages that are reasonably certain to proceed.

Some of the types of expenditure which would be allocated to more than one stage of development are: • Dedicated reserves where the reserves are a condition of approval of more than one stage of development; • Costs of constructing a bridge or access road that is to service all the stages of the development; or • Construction of a reservoir to service all of the stages of the development.

Where development costs that are directly related to more than one stage of the development arise after one or more of the stages are completed, only significant costs should be allocated to the completed development stages. Minor costs incurred after that stage of development has been completed can be ignored for purposes of calculating the total cost of completion.

Gina is a land developer who is registered on 1 July 2000 for GST. On 3 November 1998 she acquires a freehold interest in 70 hectares of land, which she plans to subdivide into residential allotments in 3 stages. The first stage will be released in October 2000, stage 2 will be released in June 2001 and the remaining stage will be released in June 2002. Work on stages 2 and 3 have not commenced. Gina decides to use the costs of completion method to determine a value for the land as at 1 July 2000.

As part of the conditions for obtaining development approval for the three stages, Gina must set aside a reserve of 10 hectares to be dedicated to the local council for parkland, and upgrade an access road to the development. At 1 July 2000 Gina had partially completed the upgrade of the access road.

Gina decides to allocate the cost of land and the access road according to the number of lots in each development stage. Stage 1 of the development has 40 lots. It is proposed that stages 2 and 3 will consist of 30 lots each. Gina allocates these costs, as at the start of 1 July 2000 in the following manner: Expenditure Costs at the start of 1 July 2000 Total Allocated to stage 1 Allocated to stage 2 Allocated to stage 3 Cost of land to be subdivided 4,000,000 1,600,000 1,200,000 1,200,000 Cost of land for parkland 500,000 200,000 150,000 150,000 Costs of upgrading access road 500,000 200,000 150,000 150,000 Total 5,000,000 2,000,000 1,500,000 1,500,000

At the start of 1 July 2000, Gina had also incurred expenditure specifically on developing stage 1. The total costs incurred on stage 1 as at the start of 1 July 2000 are: Allocated costs Land for allotments $1,600,000 Land for parkland 200,000 Costs of upgrading access road 200,000 $2,000,000 Direct costs on stage 1 of the estate Roads and pathways 2,380,000 Earthworks 2,600,000 Contribution for headworks 280,000 Design fees 120,000 Legal fees 50,000 Local government fees 30,000 Site administration fees 40,000 5,500,000 Total $7,500,000

At the time of completion, the total actual cost of completing stage 1 is $13,000,000. The percentage cost of completion is 7,500,000/13,000,000 or 57.7%.

The percentage cost of completion for stage 2 is $1,500,000 divided by the total actual cost of completion for stage 2.

After stage 1 of the project was completed, Gina incurred further expenditure on the parkland of $15,000. The amount of expenditure which would have been allocated to stage 1 is $6,000. As this amount is only minor in comparison the total expenditure on stage 1, it can be ignored. However, the remaining expenditure should be allocated to stages 2 and 3.

Jack is a builder. He is registered on 1 July 2000 for GST. On this date he has a house under construction on land which he had previously purchased for $100,000. Jack sold the house and land on completion for a GST inclusive price of $340,000. At 30 June 2000, Jack had incurred the following costs for land, labour, materials, subcontractors and other costs: $ Land at cost 100,000 Local government application fees 2,000 Legal fees 1,000 Design fees 1,000 Labour 14,000 Materials 44,000 Subcontractors 21,000 Total 183,000

The total cost of the house and land package at completion is $305,000. The percentage complete as at the start of 1 July 2000 is $183,000/305,000, or 60%. Therefore, the value of the house and land package as at 1 July 2000 is 60% of $340,000, or $204,000.

The GST payable under the margin scheme is calculated as follows: Margin = GST inclusive sale price - value at 1 July 2000 = $340,000 - 204,000 = $136,000 GST payable = 1/11 of $136,000

Townhouses Pty Ltd constructs a block of 4 units. The company is registered for GST as at 1 July 2000. At 30 June 2000, it incurs costs of $900,000 made up as follows: $ Land at cost 250,000 Local government application fees 20,000 Legal fees for acquisition 10,000 Design fees 40,000 Construction costs 580,000 Total 900,000

Total costs to completion are $1,200,000. Construction costs include labour, materials and subcontracting expenses which relate both to the units directly and to common property.

The percentage of completion as at 1 July 2000 is calculated as 900,000/1,200,000, or 75%. The developer sold each of the residential units for a GST inclusive price of $360,000. The value of each residential unit at1 July 2000 is apportioned accordingly as 75% of $360,000, or $270,000.

The GST payable under the margin scheme is calculated as follows: Margin = GST inclusive sale price - value at 1 July 2000 = $360,000 - $270,000 = $90,000 GST payable = 1/11 of $90,000'

In some projects the selling price of the strata title units may vary over a wide range. This would usually happen when the project consists of a multi-storey development with penthouses selling at a substantial premium over units at lower levels.

The valuation of each unit is that percentage completed applied to the sale price for each of the units to be valued.

Azure Apartments Pty Ltd is a project developer registered on 1 July 2000 for GST. It constructs a residential tower which comprises five storeys, including a mix of one-bedroom apartments, two-bedroom apartments and penthouses: Levels 1 and 2 10 one-bedroom apartments Levels 3 and 4 8 two-bedroom apartments Level 5 2 penthouses

At 30 June 2000, work has not commenced on the upper two levels of the building, but the developer has incurred the following costs: $ Land at cost 1,100,000 Local government fees 60,000 Legal fees 20,000 Design fees 80,000 Construction costs 1,740,000 Total 3,000,000

On completion the developer finds that total project costs are $6,000,000. The percentage completion as at 1 July 2000 is calculated at 3,000,000/6,000,000, or 50%. The valuation of each apartment at 1 July 2000 is calculated as 50% of the GST inclusive sale price for the apartments.

The valuations for each apartment using this method are: Apartment GST inclusive sale price per unit Unit valuation Total unit valuation 6 one-bdrm 250,000 125,000 750,000 4 one-bdrm 240,000 120,000 480,000 8 two-bdrm 350,000 175,000 1,400,000 Penthouse 740,000 370,000 370,000 Penthouse 700,000 350,000 350,000 Total $3,350,000

If you are a developer registered for the GST you can claim input tax credits for any creditable acquisitions you make in relation to improvements added to the property on or after 1 July 2000. For buildings or subdivisional developments partly completed as at 1 July 2000, the fact that you have claimed an input tax credit for the GST payable to complete the building or subdivisional development made on or after 1 July 2000 (eg., input tax credits on subcontractors or building materials) will not prevent you from choosing the margin scheme. However the purchaser of the real property under the margin scheme, will not be entitled to an input tax credit for the GST payable on the acquisition. [F11]

For the purposes of Division 75 the GST inclusive sale price is the GST exclusive price plus the GST payable on the margin.

A builder or land developer should have regard to the ACCC Guidelines on Price Exploitation which were released in March 2000 when calculating the GST exclusive price. The following examples set out how to calculate the GST inclusive price where a valuation was determined using the costs of completion method or a valuation was obtained from a professional valuer.

The GST exclusive price is $96,364 and the percentage of completion as at 1 July 2000 was calculated using the costs of completion method as 60%. The GST payable on the margin is calculated as follows: I = ((11*E) / (10 + C)) Where: I is the GST inclusive price; E is the GST exclusive price; and C is the proportion of completion calculated using the costs of completion method and calculated as a decimal. GST inclusive price = (11 * GST exclusive price) / (10 + proportion of completion) = ((11 * 96,364) / (10 + 0.6)) = $100,000 Therefore the valuation as at 1 July 2000 using the costs of completion method = 100,000 * 60% or $60,000. The Margin = 100,000 - 60,000 or $40,000. The GST payable = 1/11 of $40,000.

The GST exclusive price is $96,364 and a valuation was obtained for the purposes of the margin scheme as at 1 July 2000 as $60,000. The GST inclusive price is calculated using the formula: I = ((11*E) - V)/10 Where: I is the GST inclusive price; E is the GST exclusive price; and V is the valuation as at 1 July 2000. GST inclusive price = ((11 x GST exclusive price) - Valuation amount) / 10 =(((11*96364)-60000)/10) = $100,000 The Margin = 100,000 - 60,000 or $40,000. The GST payable = 1/11 of $40,000.

Section 19 of the A New Tax System (Goods and Services Tax) Transition Act 1999 ('the Transition Act') and Division 75 are not alternative methods of valuing property in a particular situation. Section 19 applies to certain construction agreements which span 1 July 2000, and requires a valuation of work and materials permanently affixed to the construction site as at the start of 1 July 2000, or a later date as determined by the Commissioner.

This valuation, which does not include land, means the builder will be subject to GST only on the work and materials supplied and permanently affixed on the site on and after 1 July 2000. For more information on section 19 of the GST Transition Act, see GSTR 2000/14 titled 'Goods and services tax: transitional valuation of work in progress for head contractors in the building or civil engineering industries'.

Under Division 75, the need for a valuation as at 1 July 2000 or later date only arises where a freehold interest in land, a stratum unit, or a long term lease which is acquired or held before 1 July 2000 is granted or sold on or after that date. The valuation includes the land.

Andrew owns land on which he is developing a block of units. On 15 March 2000, Andrew enters into an agreement with Bob, a builder, under which Bob carries out the construction work. Construction is in progress as at 1 July 2000. Bob may value, under section 19, the work and materials that have gone into the building as at 1 July 2000 and he is not liable for GST on that value.

If Andrew chooses to apply the margin scheme in working out the GST on the subsequent sale of the units, Andrew values as at 1 July 2000 the freehold interest in the land and the building being constructed. Andrew may engage a professional valuer to determine the valuation, or choose the cost of completion method. In either event the value of the land itself is included.

The following terms are defined for the purposes of this ruling. Terms with asterisks are defined in section 195-1 of the GST Act:

Input taxed supply means a supply that is input taxed under Division 40. That Division sets out the supplies that are input taxed. They are financial supplies (section 40-5), residential rent (section 40-35), *residential premises (section 40-65), certain supplies of precious metals (section 40-100) and school tuckshops and canteens (section 40-130). If a supply is input taxed you do not charge GST on the supply, but you are not entitled to input tax credits for anything acquired or imported to make the supply

Long-term lease means a supply by way of lease, hire or licence (including a renewal or extension of a lease, hire or licence) for at least 50 years if: a) at the time of the lease, hire or licence, or the renewal or extension of the lease, hire or licence, it was reasonable to expect that it would continue for at least 50 years; and b) unless the supplier is an *Australian government agency - the terms of the lease, hire or licence, or the renewal or extension of the lease, hire or licence, as they apply to the *recipient are substantially the same as those under which the supplier held the premises.

New residential premises means *residential premises that: a) have not previously been sold as residential premises and have not previously been the subject of a *long-term lease; or b) have been created through *substantial renovations of the building; or c) have been built, or contain a building that has been built, to replace demolished premises on the same land.

To avoid doubt, if the residential premises are *new residential premises because of paragraph (b) or (c) of this definition, the new residential premises include land of which the new residential premises are a part.

Real property has its ordinary meaning for the purpose of the GST Act. Real property includes: a) any interest in or right over land; or b) a personal right to call for or be granted any interest in or right over land; or c) a licence to occupy land or any other contractual right exercisable over or in relation to land.

Residential premises means land or a building that: a) is occupied as a residence; or b) is intended to be occupied, and is capable of being occupied, as a residence; and includes a *floating home. Standard land contract

A standard land contract means a standard contract for the sale of land as prepared by the various law societies or institutes and real estate institutes in Australia [F12] that provides for: a) the payment of a deposit that is either to be forfeited if the purchaser defaults or applied as consideration on settlement; and b) the payment of the balance of the purchase upon settlement.

A stratum unit is a lot or unit (however described in an Australian law or a foreign law relating to strata title or similar title) and any accompanying common property.

Below is a detailed contents list for this draft Taxation Ruling: Paragraph What this Ruling is about 1 Date of effect 6 Background 7 Ruling and explanations 11 Who can use the margin scheme? 11 What is a taxable supply of real property? 13 How is the margin calculated? 16 What is the date of valuation of the property? 17 When are valuations to be made? 20 How do you determine value of the completed premises as at the valuation date? 21 Method 1: Value determined by a professional valuer 22 Documentation required 25 Method 2: Value is the consideration provided by a purchaser in a contract for the sale and purchase of real property 26 Method 3: Value as determined by the State Government or Territory Government 27 How do you value partly completed premises as at the valuation date? 28 Method 1: Value determined by a professional valuer 30 Method 2: Value determined using the costs of completion method 31 What types of costs are included using the costs of completion method? 34 Example 1 : Residential subdivision 40 Residential subdivision multistage development 47 Example 2 : Residential subdivision multistage development 51 Example 3 : House and land package 58 Example 4 : Strata title units of equal value 61 Strata title units of differing value 65 Example 5 : Strata title units of differing value 67 What is your entitlement to input tax credits? 71 How do you calculate GST inclusive sales price and the margin? 72 Example 6 : Where the GST exclusive price is known and a valuation using the cost of completion method was used 74 Example 7 : Where the GST exclusive price is known and a valuation as at 1 July 2000 was obtained . 75 Valuations made under section 19 of the GST Transition Act and Division 75 are not alternative methods for valuing real property? 76 Example 8 : Section 19 and Division 75 valuations 79 Definitions 81 Input taxed 82 Long-term lease 83 New residential premises 84 Real property 86 Residential premises 87 Standard land contract 88 Stratum unit 89 Detailed contents list 90 Schedule 1 page 24 Schedule 2 page 28