GST Margin Scheme for Property
Under the margin scheme, GST is calculated on the sale as 1/11th of the margin. The margin is the GST inclusive sale price less the original purchase price, whereby previously GST was not able to be claimed.
The Margin Scheme is provide for under Div. 75 of the New Tax System (Goods and Service Tax) Act 1999 (GST Act).
Margin Scheme is available on the sale (taxable supply) of real property by –
* selling freehold interest in land
* selling stratum titled units
* granting or selling a long term lease 50 years +
There must be a written agreement between the seller (vendor) and the purchaser for the margin scheme to apply.
The written agreement must be made –
- On or before settlement
Ineligible sales for the Margin Scheme
- Whereby previous purchase of the property included GST which was calculated without previously applying the margin scheme
Bob the property developer registered for GST, bought the land from Ann. Ann charged GST on the land sale to Bob. Bob therefore cannot use the margin scheme when on-selling the land and or the house and land package.
Eligible Sale for the Margin Scheme
The Margin Scheme can only be used where property sales were -
- From a vendor who used the margin scheme to sell to you
- From individuals / entities that was not registered or required to be registered for GST (i.e.) mum & dad selling the family home to a developer.
- The sale is a GST – Free
- Sale of the property development under the GST going concern concessions, provide all previous sales where eligible for the margin scheme (see 4 town houses on a block – GST Trap)
Peter purchased land from Mary with the intention to build a block of units on. Mary is registered for GST, and there was not written agreement to use the margin scheme on the sale of the land to Peter. As such Peter cannot use the margins scheme on the sale of the units.
Are Tax Invoices required under the GST Margin Scheme?
The Vendor / Seller is not required to issue a tax invoice where a written agreement to apply the margin scheme is stated in the contract of sale.
Written Agreement Requirement
From 29th June 2005, the written agreement must be made –
- On or before settlement
- ATO ID 2010/83 – the agreement to apply the margin scheme cannot be revoked after settlement.
Margin on Property held prior to start of GST, 1st July 2000.
- Market Valuation as at the 1st July 2000 is used as the starting point for the margin scheme.
Bob a GST registered property developer on the 1st March bought house and land for $500,000 from a mum & dad couple. Later Bob decided not to precede with his development plans for the site, and subsequently sold the property for $600,000. Bob applied the Margin Scheme to the sale.
Under the Margin Scheme, the margin was $100,000 ($600,000 - $500,000). The GST Payable on the margin scheme being $9,010.91 (1/11 of $100,000).
Note the GST Margin Scheme is not –
- The normal accounting profit on the project, the margin for GST does not allow costs incurred for construction or subdividing land and all associated costs.
- Is not the same as calculating the capital gains. It is possible for there to be GST Payable under the margin scheme when there is a not capital gain for income taxes. (i.e.) sale of a commercial building (converted house to medical clinic) without a lease as a going concern, sold after extensive renovations for less than the cost base, however still subject to GST.
Costs not include in the Margin Scheme
All cost after the initial purchase of the property are not include
- All cost associated with the purchase of the development, such as legal fees, stamp duty, registration fees, transfer cost, related to the purchase
- Development costs – construction work, subdivision work, however GST can be claim separately during the development on each Business Activity Statement.
Bob the GST Registered Builder purchased a property on the 1st November for $500,000 from a mum and dad couple selling the family home (not registered or required to be registered for GST).
Bob spend development cost of
- $3,300 conveyance fees, $15,000 stamp duty.
- $55,000 Development Application & Associated Consultants(assume all council fees subject to GST)
- $660,000 construction costs to build units
- $44,000 Selling & Marketing.
Bob at the completion of the development sales the unit’s complex for $1,540,000, Bob wants to use the margin scheme to reduce the GST on the sales.
What is the Margin for the GST Margin Scheme – ($1,540,000 - $500,000) = $1,040,000
What is the GST Payable under the Margin Scheme - $94,545.45 (1/11th of $1,040,000?)
What GST tax credits can be claimed during the development?
- Nil on the land purchase
- $300 on conveyance
- $5,000 Development Application Costs
- $60,000 building costs
- $4,000 selling costs
- Total GST Claimable during the development $69,300 (on each BAS)
Property Adjustment on Settlement
On the settlement of a property it is not usual that there be certain adjustments between the seller & purchase in relation to various council rates, water rates, etc.
Bob the builder sells a house and land package for $550,000, on settlement there are adjustments for various rates paid by Bob, which the purchaser needs to compensate Bob. Assume there were $1000 in rates paid by Bob that cover the period beyond settlement. The Margin in this case would therefore be ($550,000 + $1,000) = $556,000 less the Bobs purchase price for the land.
What if the purchase price of the property is equal or less than the ultimate sale price?
- There is no margin, therefore no GST payable on the sale, however if the margin scheme is used, the purchaser can still able to use the margin scheme on any subsequent sales of the property.
Applying the Margin Scheme to subdivided land or stratum title units.
GSTR 2006/8 Para 58, allows any reasonable method of apportionment of the underlying land value to be used to calculate the margin.
Lynne a GST registered property developer buys a 2000 square metre block for $300,000. It was decided that the value was uniform per square metre across the overall block of land.
Lynne decides to subdivide the block into 2 lots, 2@ 600m2, and 1@ 800m2.
The land value for the margin scheme has been attributed on a uniform area basis as following:-
- 600m2 lots = (600/2000 * $300,000) = $90,000 @2 = $180,000
- 800m2 lot = (800/2000 * $300,000) = $120,000
Lynne at the completion of the development sells each lot as a house and land package as following:-
- 600m2 = $550,000 each
- $800m2 = $770,000
- Total Sales $1,870,000
Lynne’s GST payable under the Margin Scheme would be on each sale:-
- 600m2 = ($550,000 - $90,000)*1/11th = $41,818.18 each
- 800m2 = ($770,000 - $120,000) * 1/11th = $59,090.91