Schedule 1—GST and the sale of real property, integrity measure
The provisions relating to the goods and services tax (GST) and
the sale of real property were announced in the 2008–09 Budget and clarify
whether a supplier, when buying or selling a business (or real property), will incur
a liability for GST.
Special rules exist for real property that allow taxpayers an
alternative means of calculating GST.
These rules are known as the 'margin scheme'. The margin scheme is generally
used for new residential property developments.
The bill seeks to maintain the integrity of the GST tax base by
ensuring that property sales cannot be structured in a way that GST does not
apply to the value added to real property. These amendments:
- ensure that where the margin scheme is used, the value added is
included in determining the GST subsequently payable;
- ensure that eligibility to use the margin scheme cannot be
reinstated by interposing a GST-free or non-taxable supply; and
- confirm that the GST general anti-avoidance provisions can apply
to contrived arrangements entered into to avoid GST.
The Department of the Treasury claims that if the measure does
not proceed the 'risk to revenue will increase substantially as more property
developments are structured to take advantage of the tax minimisation
Operation of the margin scheme in the existing provisions
Under the margin scheme provisions, GST is generally payable only
on the value added to property on or after 1 July 2000. It levies GST only on the margin by which the value of the property increases each time it is
sold by a registered entity.
While the margin scheme was designed to ensure that GST is
payable only on the incremental value added to land by each party in a series
of transactions, the interaction between the margin scheme provisions and the
going concern provisions has given rise to an anomaly.
A supply of a going concern occurs when a business is sold, and
that sale includes all of the things that are necessary for the business to
continue operating; and the business is carried on, up until the day of sale. Real
property may be acquired GST-free under the going concern or farmland
provisions, or acquired from a registered associate without consideration.
Under the current legislative arrangements, as a result of the
interaction of these provisions, GST is only paid on the margin between the
final sale price and the amount paid to acquire the land before improvements
have been undertaken (i.e. they do not include the value added by the supplier
of the property as part of a going concern or the value added by an associate).
This is illustrated by the diagram and table supplied by Treasury reproduced on
the following two pages.
The Treasury considers that the interaction between these
provisions has created a loophole which allows entities registered for GST to
minimise the GST they pay on real estate transactions. As the explanatory
A registered entity that supplies real property as part of a
GST-free going concern, as GST-free farmland, or as a non-taxable supply to a
registered associate for no consideration does not pay GST on its value added.
If the entity that acquires the real property later sells it under the margin
scheme, it only pays GST on its own value added in these circumstances. The
value added by the entity from which it acquired the property is not taxed.
Illustration and table supplied
by the Department of the Treasury, Submission 6, p. 9
Under the proposed legislation there will be changes to the
margin scheme, requiring the final owner to pay GST on the full value added to
This ensures that each registered supplier in a series of transactions remits
the GST applicable to the value added by them.
Schedule 1 ensures that a supply that is ineligible for the
margin scheme continues to be ineligible for the margin scheme after it is
supplied as part of a GST‑free sale of a going concern. This is achieved
by specifying that a supply is ineligible for the margin scheme if the previous
supplier acquired the entire interest through a taxable supply on which the GST
was worked out without applying the margin scheme.
Both the Urban Development Institute of Australia (UDIA) and the
Property Council of Australia (PCA) expressed concern that the proposed
legislation will act as 'an increased tax on new housing developments' and
these will ultimately be passed on to the home buyer.
UDIA suggested that the changes 'will have a significant impact
on the future costs of housing developments', while PCA
claimed that the proposed margin scheme will affect housing supply:
The businesses that are developing property will face
significant increases in the cost of developing that property. Straight away
this increase in the cost of development means that there will be a reduced
supply of viable future residential developments. Essentially, what we are
saying is it will cost more to develop property, which will mean fewer houses
will be built.
The Urban Development Institute of Australia suggested that a
major developer has calculated that the cost of the measure to be in order of:
- $11,000 per lot on a 60 lot infill development; and
- $4,800 per lot on a 717 lot mixed townhouse and land development.
Both UDIA and PCA further argued that the proposed changes are at
odds with the Federal Government's commitment to improving housing
affordability and that the cost impact will exceed the benefit of the new first
home buyers grant:
Increased costs for new housing will affect the price of all
houses in the market. This will work against the government's initiative to
boost the first home [buyers] grant.
It is, in effect, an increased tax on new housing developments
which will be passed on to homebuyers through increased prices—and by this we
note that on Treasury's estimates the revenues that will be raised by this
measure are more than what the government will be spending on its Housing
By contrast, the Department of the Treasury suggested that groups
like UDIA and PCA had overstated the effect that the proposed changes would
have on house prices and housing supply. The Treasury argued that the current
(tax minimisation) scheme had simply resulted in 'above-normal profits' for
The section of the housing market directly affected by the
integrity measure is relatively small compared to the whole housing market.
In estimating the proportion of the market likely to be affected
by the changes the Treasury stated:
Based on ABS data of building activity in Australia, Treasury
estimates the total taxable value of new residential property in 2008/09 will
be around $30 billion rising to around $35 billion in 2011–12. New residential
property represents about 12 per cent of the total value of the market.
Treasury estimates that the value of property potentially affected in 2008/09
is around $3.7 billion or about 1.5 per cent of all residential property sales.
In refuting the claims of industry bodies, the Treasury further
suggested that they believed 'closing the loophole' would have 'no impact on
prices' and that the amendments would 'ensure a level playing field for
participants in the property industry'.
The financial impact of the proposed changes is estimated at:
2008–09 $43m; 2009–10 $135m; 2010–11 $160m; 2011–12 $185m; giving a total of
$523 million over the next 4 years.
This total of $0.5 billion needs to be placed within the context
of the total taxable value of new residential property. As outlined above, the
Treasury estimated that the value of the market is around $30 billion per year,
or at least $120 billion over four years.
Application of the measure
While there was some concern expressed by UDIA over whether the
measure would be applied retrospectively—largely because of the way that this
would affect existing developments—the explanatory memorandum clearly states:
'The measure has effect from the date of Royal Assent'.
This was further reinforced by the submission by the Department
of the Treasury which claimed that the changes will only apply from the date of
Royal Assent so as not to affect existing contractual arrangements.
Because the measure will be applied prospectively, the Treasury argued that
'property developers will be able to take the new provisions into account when
examining the feasibility of future development proposals'.
In its submission UDIA expressed concerns about the Schedule's
anti‑avoidance provisions (Div 165), claiming that the proposed amendment
will make the anti-avoidance provisions of the A New Tax System (Goods and
Services Tax) Act more stringent than those applicable to the Income Tax
Assessment Act. UDIA argues:
The extension of the anti-avoidance provisions in the manner
intended will create significant uncertainty for any taxpayer (not merely those
that are involved in dealing with real property) where they are considering
invoking one of the elections that is specifically provided for in the current
The Department of the Treasury explained that during the
consultations they undertook with key stakeholders concerns were raised about
the amendments to the GST anti-avoidance provisions. It suggested that such
concerns were unwarranted as the proposed amendments introduce a concept that is
already contained in the income tax anti-avoidance provisions and are intended
to clarify the operation of the GST anti-avoidance provisions and eliminate 'contrived
Date of acquisition
The UDIA also recommended that the proposed legislation clarify the
meaning of 'date of acquisition':
Under a real property scenario I can sign an agreement with you
to sell the property, but the date at which you acquire that property can be
some significant time later. And when I say significant, it can be years later.
When we are dealing with the date of acquisition there is now uncertainty as to
whether that is the date on which you sign the contract for the acquisition of
the property, or whether it is the date on which you actually take settlement
of that property.
The committee agreed with the Treasury that the proposed changes
to the legislation would not have a significant impact on the cost of housing.
The measures only affected a very small proportion of the housing market.
Moreover, only a proportion of the cost would be passed onto homebuyers, with
some passed back to the suppliers of land and some borne by the property
development sector in reduced profits.
The committee also agreed with Treasury that if the current
provisions were not changed, there was a risk that future property development
transactions would be structured in such a way as to give rise to a significant
and inequitable loss of GST revenue.
The committee notes the UDIA's uncertainty about the
interpretation of 'date of acquisition' and they should be given an explanation
or the definition clarified in the legislation.
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