GST Margin Scheme For Property
How does the GST Margin Scheme work for property developments?
Under the GST margin scheme, GST is calculated on the sale as 1/11th of the margin. The margin is the sale price less the original purchase price, whereby previously GST was not able to be claimed.
The GST Margin Scheme for proptery development is provided 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 +
Two important points for eligibility:
There must be a written agreement between the seller (vendor) and the purchaser for the margin scheme to apply AND the written agreement must be made on or before settlement.
If the previous purchase of the property included GST AND had also already applied the margin scheme.
The GST Margin Scheme for property development 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)
Let’s look at some examples of the GST Margin Scheme
Bob is a property developer who is registered for GST and purchased a block of land from Ann. Ann is also registered for GST and charged GST on the land sale to Bob without applying the margin scheme.
Bob is not able apply the GST margin scheme when on-selling the land and or the house and land package.
Peter purchased land from Mary with the intention to build a block of units on. Mary is registered for GST, and there was NO written agreement to use the margin scheme on the sale of the land to Peter.
As such Peter cannot use the GST margin scheme on the sale of the units.
Bob (a GST registered property developer) 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 are not included in the Margin Scheme
All cost after the initial purchase of the property are not included:
- 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? $1,040,000 ($1,540,000 – $500,000)
What is the GST Payable under the Margin Scheme? – $94,545.45 ( 1/11th of $1,040,000)
Do you have more questions about the GST Margin Scheme for property development?
Talk to an expert who explain the best options for your situation
Applying the GST 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
Frequently Asked Questions
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.
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)
What is the 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.
How do you calculate the margin on property held prior to the start of GST (1 July 2000)?
Market Valuation as at the 1st July 2000 is used as the starting point for the margin scheme
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.
Can you make adjustments of the property 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.