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.
Seller
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.
Buyer
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.
Market Price
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
The margin concept in your example is wrong. It should not include the development cost .
Hi Han
Your right, thanks for taking the time to read my blog and to care to advise of the error, much appreciated. I’ve now update the blog. Thankyou Regards Garry 🙂
what about CGT/Income Tax.
How is that calculated
Hi Matthew
You’ll need to make an appointment to discuss further.
is the capital gain per unit
350000 – GST ($26363) – purchase ($60000 1/5 land) – development ($100000)
=$163637
or
318181 (exclusive of GST) – purchase ($60000 1/5 land) – development ($100000)
=$158181????
Hi Matthew
You’ll need to make an appointment to discuss further.
What happens if the property is purchased for or on behalf of a SMSF? Can they use the Margin scheme?
Please Advise
Hi Jane
You’ll need to make an appointment to discuss further.
Hi, do you know how I could make an appointment to discuss further?
Or do I need to make an appointment for to discuss further?
Hi Thanks for your interest, if you would like to discuss further, please call the office on 07 304 00 304, to book either a Skype or in person meeting, please note all appointments are $220 upfront, prior to the meeting. All the best Garry
We are developer, if we did signed the GST Annuxure with Margin Scheme section when we purchase the land, can you still do Margin Scheme by end of the day after we sold all of development properties?
Hi Lily
Provide you entered intp a contract to purchase the land stating the margin scheme is applicable, then you can apply the margin scheme when you on sell the developed properties to the others. You can only use the margin scheme if it was stated in the original purchase and the subsequent sale.
From 29 June 2005, the supplier and the recipient of a taxable supply of real property need to agree in writing to apply the margin scheme.
The written agreement must be made:
on or before the making of the supply (usually settlement); or
within such further period as the Commissioner allows
No written agreement between the seller and purchaser is needed if the sale was made either:
before 29 June 2005
on or after 29 June 2005 but you entered into a contract or granted rights or options over the property you are selling before 29 June 2005.
We have purchased a residential home for personal use and eventually an investment property. The seller has come back with an amendment to the contract after we closed so they can use this scheme. Should we sign this? It says there will be no cost to us.
Hi Bec
The margins scheme won’t disadvantage you, the seller won’t be able to use it, unless you agree. The seller will have to give the ATO 1/11th of the sale price to the ATO, which would most likely be much move than if the margin was subject to GST (ie) – Difference between what the paid for it, and the sale price to you.
I personal would look for a discount of $1,000, plus any legal cost, as a gesture of goodwill to accept the changes, you have the seller over a barrel :).
All the best
Garry