If you are considering undertaking any form of property development, it is crucial to understand the operation of the margin scheme before entering into any contract (either to buy the land or when selling all or part of the subject land). This is particularly the case as the Buyer and Seller must agree in writing before settlement that the margin scheme will be applied to the supply of the property if the margin scheme is intended to be applied (and the supply of the property is a taxable supply).
The margin scheme is a method of calculating GST on the sale of property and which can be used in certain circumstances. The main reason the margin scheme is adopted is to minimise the GST a person (eg. a developer) is required to remit to the ATO. The GST that is normally paid on a taxable supply (ie. – not using the margin scheme) is one-eleventh of the total sale price.
Broadly speaking, the margin scheme calculates the GST payable on the sale of property on the margin (essentially the difference between the sale price and the acquisition cost) rather than on the total price for the property. NB – in some circumstances, it is calculated on the difference between the sale price and the value of the property as at 1 July 2000.
However, there are important factors which determine whether the margin scheme is able to be used. Generally it can be used where:
1. The property being sold was purchased before 1 July 2000
2. The property was purchased after 1 July 2000 and either :
- The seller was not registered or required to be registered for GST
- The property sold is existing residential property
- The property was sold as the supply of a going concern (however there are limitationsin this regard as explained below)
- The property was sold using the margin scheme.
There are numerous requirements and factors which determine whether or not the margin scheme is able to be used and these factors may differ depending on the date that the property is acquired. By way of example, the margin scheme is not able to be used where:
1. When the property was purchased, there was GST paid on the acquisition which was not calculated using the margin scheme; or
2. The property is purchased as a going concern however the seller paid GST on the acquisition when it acquired the property and the GST was not calculated using the margin scheme.
Importantly, a person purchasing property under the margin scheme is not entitled to claim an input tax credit for the GST paid in respect of the property purchased.
The treatment of GST in any property transaction (such as in respect of commercial property or a development site) is extremely important and can have a substantial impact on the feasibility of a project. Many aspects of the GST legislation, including the application of the margin scheme, can be particularly complex and it is imperative to obtain appropriate GST advice before entering into a contract.
Matthew WeaverSpecial Counsel
Matthew practices in all areas of property and conveyance law with particular interest in off plan residential and mixed use community titled projects, management rights and Body Corporate matters. Matthew enjoys working closely with clients to maximise value from each transaction.