Originally Published 3rd October 2008

Last week, the Tax Laws Amendment (2008 Measures No.5) Bill 2008 was introduced into parliament, making good on the Government's promise to restrict the application of the margin scheme on property sales that were previously acquired as a GST-free supply of a going concern or farmland.

Broadly, the proposed amendments ensure that:

  • the GST payable on property sold under the margin scheme, after being bought as a GST-free going concern or GST-free farmland, is calculated by the value added to the property by the entity from which it acquired the property. The GST-free transfer is effectively ignored and the purchaser's 'cost base' for the margin scheme will be calculated by reference to the previous acquisition value of the property prior to the sale of the going concern or farmland.

    For example, if A owned a property at 1 July 2000 and sold it to B as a going concern in December 2008, if B then sells the property under the margin scheme in July 2009, the margin will be calculated on the value at 1 July 2000, not the price paid to A in December 2008.
  • eligibility to use the margin scheme cannot be refreshed by interposing a GST-free or non-taxable supply. If entity A is not entitled to sell under the margin scheme, it cannot sell the property to entity B as a going concern so as to 'refresh' margin scheme eligibility for entity B
  • the GST anti-avoidance provisions are broadened to catch all arrangements entered into with a sole or dominant purpose of obtaining a GST benefit.

It is important to note these amendments will only apply prospectively from the date of Royal Assent. Any GST-free going concern or farmland sales which settle prior to Royal Assent will not be affected by the new rules.

In future, purchasers who acquire property as a going concern or farmland, and intend to resell under the margin scheme, will not get a 'step up' in their margin scheme cost base. Further information on the previous sale history will also be required by purchasers of GST-free going concerns or farmland to confirm their eligibility to apply the margin scheme and calculate the GST payable under the new rules.

Therefore, any future sales or purchases of GST-free going concerns or farmland should include clauses addressing the availability of the margin scheme to the purchaser on any subsequent sale.

Minter Ellison's GST team can help assess the impact of the new rules and drafting relevant provisions in any affected sales contracts. For further information please contact the authors of the Alert.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.