Property GST – Margin Scheme – Tug of War – Sellers & Buyers
The Margin Scheme came about so those in the business of selling real property only paid GST on the Buy / Sell Margin – if they weren’t able to claim GST when they purchased the real property now that they are on selling. The purchaser however cannot then claim any GST at all.
Sellers (if in business & GST Registered – will want to use the Margin Scheme)
Buyers (if in business & GST Registered – will want a GST Taxable Supply – Not the Margin Scheme) If however they are not in business , or it’s a non business purchase they won’t be disadvantaged by the Margin Scheme if used (as they cannot claim the GST on purchase anyway).
Simple Example – John & Mary sell their home to Mr Developer for $300,000, Mr Developer wants to build a strip of shops on a busy road. As John & Mary are not in business they didn’t charge GST on the Sale to Mr Developer.
Mr Developer now wants to build 5 shops to sell as following –
Sale Price of each Shop $350,000 or a total of $1,750,000
The Development cost were $110,000 per Shop (including GST)
Total Buy Price Net of GST = $300,000 + 5@ ($100,000 – $10,000 GST) = $800,000
The Profit Margin in simple terms would be $1,750,000 – $800,000 = $950,000 or $190,000 each shop
However the GST Margin under the margin scheme would be $1,750,000 - $300,000 = $1,450,000 or $290,000 each shop
The GST Claimed on all development costs during the project are claimed as incurred regardless if the GST Margin Scheme is used on not. It it is only the GST declared on the sale that differs.
Prospective Purchaser Mr Butcher Shop is happy to pay $350,000, however wants a Tax Invoice so he can claim the GST on the Purchase $350,000/11 = $31,818.18
Mr Developer wants to use the margin Scheme, states so in the sales contract, and will not provide a tax invoice, Mr Developer’s GST collected will be calculated under the margins scheme
The Margin per shop for the Margin Scheme is -
($1750, 000 – $300,000) / 5 = $290,000 per shop
The GST on the Margin Scheme is –
$290,000 / 11 = $26,363.64
If Mr Developer uses the Margin Scheme he pays the ATO $26,363.36, if not he pays the ATO $31,818.18, in doing so will deny Mr Butcher Shop any right to a GST Claim on the puchase. Mr Developer saves $31,818.18 - $26,363.36) = $5,454.82 in GST, however Mr Butcher Shop losses the right to claim a GST credit of $31,818.18.
The higher the price paid for the land under the margin scheme, the greater the incentive for Mr Developer to want to use the GST Margin Scheme, however if the buyer is GST Registered and buying as part of their business, the sell price may be impacted adversely by the GST treament.
The market price for the shops is $350,000 may or may not be independent of any GST Consideration, Mr Butcher Shop, may inadvently purchase the shop on the assumption a GST credit can be claim, only to discover the GST Margin Scheme has denied any GST Claim.
If Mr Butcher Shop had the appropriate due diligence conducted by this solicitor and accountant, he may have been in a better position to negotiate a better price if he was fully aware of the GST implications.
As such Mr Developer will pay more GST, and reduce his net profit margin if he doesn’t use the Margin Scheme $5,454.82 per shop.
Mr Butcher Shop will not be able to claim any GST back so in effect will not be getting the $31,818.18 GST refund or discount so to speak on the purchase of his new shop.
In summary – the GST Margin Scheme was created to be fair for the seller / buyer , but as you can see by the simple example if both are in business and registered for GST – it will be a financial Tug of War