Tax Tip 474: Related Party Transfers and GST Margin Scheme

Related party transfers can affect GST claims down the track.


Example

Homer operates a discretionary trust which acquires a property. The trust would have been eligible to use the Margin Scheme if it develops the property and sells.

But it turns out that the use of a trust was the wrong entity, but the land is located in a state where it is possible for a trustee to transfer to a beneficiary without triggering stamp duty.



The trustee transfers title to Homer.



The transfer had to be for no consideration to avoid the stamp duty issues.



Homer develops and sells the property. He cannot use the Margin scheme to reduce the amount of GST payable.



See s75-5(3)(g)(ii) of A NEW TAX SYSTEM (GOODS AND SERVICES TAX) ACT 1999

A NEW TAX SYSTEM (GOODS AND SERVICES TAX) ACT 1999 - SECT 75.5 Applying the margin scheme

 

Take care with the s75.5 reading. It has grouped tests which can all be required IF they all apply eg...(g) says ""it is a supply in relation to which all of the following apply:"". Many other issues are also contained in other subsections. These are largely anti-avoidance rules to ensure the margin scheme starts and stops in a existing chain and doesnt roll onwards continually and stops its use to shift income tax on profits too as a consequence. . When parties arent at arms length.

Same with inherited property. JV property, grouping rules, and even some leased property issues etc.

Its a common problem area of tax law. So complex that at times I refer clients to obtain legal advice on how their sale / purchase contract must be prepared based on these limits.

 

Thanks gents - reading through, if an individual who is a 25% shareholder in a company sells to the company at arms length pricing (with stamps applying) is there potentially any concerns about the company building / developing and later using margin scheme on sales?

Read the link I didn’t see any but checking if something I may have missed.

Thanks as always.

 

Possibly.

 

If my wife transfers her share of PPR ( purchased 2008 ) to me ( currently 99% hers 1 % me ), am I able to use the margin scheme if I subdivide and sell the backyard. assuming its not a mere relalisation of capital?

Note There would be no consideration,
do we get a valuation so that we can work out the margin? or margin cant be used

 

Why no consideration?

 

I meant no consideration paid to my wife for the transfer of her 99% to me.

we are in Vic so no stamp duty and no sale price therefore there would be no consideration paid to her

 

You won’t be able to claim 99% of the interest in that case. Why no stamp duty?
Have you sought legal and tax advice?

 

Terry its going to continue to be our PPR
so claiming interest isnt a factor.

spouse can transfer to spouse in Vic and pay no stamp duty.

The only issue is if i one day do the subdivision, can i use the margin scheme?

if i understand the original post correctly, the margin scheme cant be used where there is no consideration paid?

 

Not necesarily. This is certainly a complex area where reliance on vague forum posts is not a strategy.

The margin scheme has exclusions including one where an associate transfers the property for Nil consideration but it doesn have some timing benefits. Its an anti-avidance rule to limit mischief. It can trap genuine cases sometimes and others may be perfectly fine.

There is also a sound reason why a former main residence shouldnt be used as a site for a development. Is there a mian reidence remaining to use the main residence exmeption ? No. Now some may arge a CGT event occuts to trigger this BUT when the former main reidence LAND is used for a new dev the issue is if its trading stock. Creatingtrading stock can trigger a CGT event. But a isolated profit making event doesnt.

I like the ATO plain english sumamry of this law. It helps show its not a final issue.

Sale between associates without payment
You can't use the margin scheme to sell a property if all of the following apply:

• You purchased the property from an associate who was registered or required to be registered for GST at the time of your purchase.
• The purchase of the property from your associate was without payment.
• The sale of the property to you by your associate was not a taxable sale.
• Your associate made the sale of the property to you in the course or furtherance of a business that your associate carried on. (ie No business)
• Your associate had purchased the entire property through a fully taxable sale and GST was worked out without using the margin scheme.

The emphasis in bold is that of the ATO website. I have used italics to indicate areas which may lead to the "all" condition not being met (seemingly). The final point is unknown but since the first is in italics the margin scheme may be available.

 

Thanks Paul

That makes sense. we may just keep the ownership as is,

The neighbour is interested in buying the land ( backyard) after we subdivide. We may just sell the land to him, and hopefully it is a mere realisation and no GST

 

Can you subdivide and NOT demo ? Thats is the best way to retain the GST concessions. No GST. etc. Sure they may need to demo but just compensate them. Its a cost you will have incurred. Can even be the very next day

 

Thanks Paul, Yes I believe we can do that. They seemingly will work with us to make sure its a mere realisation

thanks again for your help

 

Something to take specialist advice on then.

Why do you want to end up with 100% ownership?

 

Asset protection as my wife is starting a business.

i guess there would be an increase in cost base on the subsequent sub division

but thats merely coincidental

 

She is making an undermarket value transfer to you - look at s120 and s121 of the Bankruptcy act. S 37A of the conveyancing act nsw - not sure what the vic equivalent is but that will apply.

Basically as much protection is a wet paper bag.

 

Good example of a structure that considers risks of insolvency. And legal advice for knowledge to avoid personal loss through guarantees, director liability (eg penalty notices and unpaid super etc) and insolvent trading. And to understand how some insurance can also limit some risks. Arguably the value of the legal advice can be far higher value that trying to effect such a transfer