Margin scheme and GST
The margin scheme is a way of working out the GST one must pay while selling a property as part of a business. The margin scheme can only be applied if the sale of the property is a taxable supply.
Margin Scheme Details
Whether you can use the margin scheme depends on how and when you first purchased your property. For GST purposes, the settlement date will be the date that you have purchased the property.
You would be able to use the margin scheme if you purchased the property before 1 July 2000 (the start of GST) or purchased property after 1 July 2000 from someone that either:
- was not registered or required to be registered for GST;
- sold the existing residential premises to you;
- sold the property to you as part of the GST-Free going concern or farmland;
- sold you the property using the margin scheme;
You cannot use the margin scheme if you purchased the property that sell to you was fully taxable and the margin scheme was not used. In this case the amount of GST included in the price you paid and would have claimed is one-eleventh of the full purchase price.
Generally, the GST amount you must pay on property sales is on-eleventh of the sale price. GST is calculated differently under the margin scheme. It is calculated on the margin of the sale instead of the total sale proceeds.
The margin is generally the difference between the sale price and your initial purchase price of the property, or the property’s market value on 1 July 2000 if it was purchased before the date. Margin is not the accounting profit margin. Therefore, the costs incurred to develop the new property or land subdivision should not be taken into account for the sales margin. The incidental costs incurred for the acquisition of the property should also be excluded from the sales margin calculation. The incidental costs include stamp duty, legal fees, accounting fees, broker fees, borrowing expenses. More importantly, in recent court case, the ATO commissioner advised that the options or nomination right you purchased.
Under the current law, the GST included in the property purchase price is remitted to the ATO by the developer once they lodged their business activity statements. The Treasurer had made a proposal in the 2017-18 federal budgets to strengthen compliance with the GST law. From 1 July 2018, it requests the purchasers of newly constructed residential properties or new subdivisions to remit the GST directly to the ATO as part of settlement of the property. In other words, the conveyance lawyer needs to liaise with the property developer and accountant to include the accurate GST amount in the relevant legal documents.
Here at the Quinn Group we can assist with any questions regarding Margin scheme and GST. Contact us on (02) 9223 9166 to discuss with one of our team of tax accountants or tax lawyers or fill out an online enquiry.