GST Margin Scheme

The GST margin scheme is not a loophole. It is a method the Australian Taxation Office describes as a way of working out the GST you must pay when you sell property as part of your business, and it is subject to eligibility. Under the ordinary rule, the GST on a property sale is one eleventh of the total sale price. Under the margin scheme, it is one eleventh of the margin, which is generally the difference between the sale price and either what you paid for the property or the value of the property in an approved valuation. GST is still paid. What changes is the base it is calculated on, and for a developer who bought land from a vendor who was not registered for GST, that base can be most of the sale price. This page sets out how the scheme works, why eligibility travels with the land, what the written agreement must contain, the two methods for calculating the margin, the valuation rules that catch people out, and how to carry the result in a feasibility.

This page is general information, not legal, tax or financial advice. Whether the scheme applies to your sale is a question about your contract of sale and the history of the title, and it belongs with your accountant or tax adviser before the number goes into a feasibility, not after.

How does the GST margin scheme work?

The ATO's description is short. The amount of GST normally paid on a property sale is equal to one eleventh of the total sale price. When using the margin scheme, the amount of GST on a property sale is equal to one eleventh of the margin. The margin is generally the difference between the sale price and either the amount you paid for the property, if you are using the consideration method, or the value of the property in an approved valuation, if you are using the valuation method. In the ATO's current worked example, a GST-registered builder buys land for $500,000 from a vendor who is not registered for GST, builds a house on it and sells the house and land for $900,000 using the margin scheme. The margin is $400,000. The ATO reports the whole-dollar GST amount as $36,363, calculated as one eleventh of that margin. The builder still claims GST credits on the construction purchases and on the conveyancing fee, because those are ordinary business purchases with tax invoices, but claims nothing on stamp duty, because stamp duty carries no GST. That example shows the mechanism exactly: the scheme changes the base for the GST on the sale, and nothing about the credits on the costs of getting there. It also shows the trade on the other side. The ATO records that a purchaser buying property where the margin scheme was used cannot claim a GST credit for the GST included in the purchase price, even if the purchase was for business purposes.

Why does eligibility travel with the land?

Whether you can use the scheme is mostly a fact about the title, not a choice you make at the point of sale. The ATO states that if you were charged the full rate of GST when you originally purchased a property, the margin scheme cannot be used when you sell it, because you would have claimed that GST back as part of your business. The eligibility page puts the same rule first in its list of when you cannot use the scheme: if you purchased the property as fully taxable and the margin scheme was not used. The same list says you cannot use it if you were not registered or required to be registered for GST at the time of your sale. Then the chain extends back a link. For property purchased or contracted for purchase on or after 9 December 2008, you cannot use the scheme where the entity you bought from was not eligible for it and your purchase was as part of a going concern, as GST-free farmland, or from an associate for no payment. The ATO's general statement is that if the previous owner of the property was not eligible to use the margin scheme, you will not be able to use it. Its worked example makes the consequence plain: a commercial property sold as a fully taxable sale leaves the buyer ineligible, and when that buyer later sells the property as part of a going concern, the next owner cannot apply the scheme either. A separate set of rules, for sales on or after 17 March 2005, covers property inherited from a person who was not eligible, property obtained from a fellow member of a GST group, and property obtained through a GST joint venture. What this means for a developer looking at a site is that the cheapest-looking site can carry the most expensive GST position, and the only way to know is to read the vendor's position before you exchange. If the position is unclear, the ATO's own suggestion is that you can apply for a private ruling.

What does the written agreement have to say?

For sales on or after 29 June 2005, there must be a written agreement to use the margin scheme before settlement. The ATO says there is no set format, but the agreement must be signed by both seller and purchaser and must clearly identify the property being sold, and it can be included in the sales contract. The eligibility page adds that most contracts have a tick box stating whether the sale is subject to the margin scheme, and that for GST purposes the settlement date is the date you purchase the property. Miss the agreement and the sale is fully taxable. You can ask the ATO for permission to extend the time to obtain the agreement in writing, under the practice statement the page cites, but the ATO is explicit that it has no discretion to apply the margin scheme where the parties do not agree that it applies. The tick box, in other words, is doing real work, and it has to be ticked by both sides before settlement on the sale you are making, not remembered afterwards.

Which method do you use to calculate the margin?

The method depends on when you bought the property. For property you originally purchased or held an interest in after 1 July 2000, you must use the consideration method. For property purchased or held before 1 July 2000, you can use either the valuation method or the consideration method. Under the consideration method, the margin is the sale price minus the purchase price. The sale price must include any settlement adjustments in the sales contract, and the purchase price is the purchase price only: the ATO lists costs for developing the property, legal fees, any options you purchased, stamp duty and any other related purchase expenses as things you do not include. That exclusion is the one most developers get wrong on the back of an envelope. The margin is not your profit. Construction, consultants, duty and holding costs do not reduce it, so the GST under the scheme is higher than the GST on your development margin would be. For subdivided land or strata units, the ATO allows any reasonable method of apportionment of the purchase price to each lot, and its example uses area: a 2,000 square metre block bought for $240,000 and split into two 600 square metre lots and one 800 square metre lot carries $96,000 of purchase price into the 800 square metre lot, so a sale of that lot at $140,000 produces a margin of $44,000 and GST of $4,000.

What valuation rules must you check?

Where the valuation method is available, you must use an approved valuation method. The ATO lists three methods: a valuation by an approved valuer; one based on the payment under a sale contract entered into before the valuation date; and a state or territory valuation for rating or taxing purposes. Their conditions differ, so ask your tax adviser which is available rather than assuming any valuation will do. For property partly completed at the valuation date, the ATO requires a written value from a professional valuer. A professional valuation must provide the market value at the applicable date, include a signed certificate and be provided as a written report. The ATO defines a professional valuer as a person registered or licensed to carry out real property valuations under a Commonwealth, state or territory law, a person who runs a business as a valuer in a state or territory where licensing is not required, or an accredited member of the Australian Property Institute, the Royal Institution of Chartered Surveyors or the Australian Valuers Institute. The valuation date is generally 1 July 2000 if you held the property before that date and were registered for GST then, or the date you were registered or required to be registered for GST if that came later. The property must be valued as it was at the valuation date, but the valuation does not have to be done on that date. There is a deadline, and it bites. You must have the property valued before the due date for your activity statement for the tax period in which you sell, meaning settle, the property. The ATO says it may allow a short period for an oversight in exceptional circumstances, and nothing more. Once you hold an approved valuation by that due date and work out the margin on it, you cannot later change to another valuation, a different method of valuation or the consideration method. Done after the fact, done late or done by the wrong person, the valuation fails and the margin falls back to whatever the consideration method produces, if that method is available to you at all.

What happens to GST at settlement?

Since 1 July 2018, most purchasers of new residential premises or potential residential land pay the withheld GST directly to the ATO at settlement, and pay the balance of the price to the seller. The ATO records the withholding as one eleventh of the contract price for fully taxable supplies and 7% of the contract price for margin scheme supplies. The seller still lodges the activity statement and reports the GST on the sale, and the withheld amount is offset against it. In the ATO's example, a builder sells a new house for $800,000 under the scheme on land acquired for $228,000, the purchaser's conveyancer withholds $56,000 at settlement, the GST on the margin of $572,000 is $52,000, and the builder receives a $4,000 refund once the activity statement is processed. For cashflow, the point is that the withholding is on the contract price, not the margin, so a margin scheme sale of new residential premises can have more GST leave settlement than is ultimately payable, with the difference coming back through the activity statement rather than at the settlement table.

How should you treat the margin scheme in a feasibility?

Whether you qualify is a fact about the title. Whether it helps is arithmetic, and the arithmetic comes after the fact is settled. Take an illustrative example, using Bayside Townhouses (demo), a scenario built for this page rather than a real site or a real sale. Assume land bought for $2,000,000 from a vendor who was not registered for GST, six townhouses sold for $6,600,000 in total, and a written agreement to use the scheme on every sale. Fully taxable, the GST on the sales is one eleventh of $6,600,000, which is $600,000. Under the margin scheme, the margin is $4,600,000 and the GST is one eleventh of that, which is roughly $418,182. The difference of roughly $181,818 is the whole case for the scheme on that assumed deal, and every figure in it is an assumption chosen for the illustration. Now assume instead that the vendor had bought the site as a fully taxable sale and the scheme was never used. The margin scheme is unavailable, the GST is $600,000, and the site that looked cheaper by $150,000 at the land line was dearer once the GST line was right. Carry GST as its own line, run it both ways until eligibility is confirmed in writing, remember that the margin excludes construction, consultants and duty, and time the cash: a margin scheme sale of new residential premises withholds 7% of the contract price at settlement, which is the figure that leaves the settlement statement in the month the sale lands. Then test the deal on margin on cost with the GST line in, and if the rest of the model is not built yet, what a feasibility study covers sets out the structure. If the site is being subdivided, subdivision feasibility covers the apportionment questions that sit beside this one.