GST Margin Scheme Explained: How to Use It| Fehily Advisory

The GST margin scheme can reduce the GST payable on certain taxable property sales. However, there are specific rules around eligibility, documentation, and calculation, so it is important to understand how the scheme applies before entering into a property transaction.

This GST margin scheme guide explains the key requirements, calculation method, and common issues property developers and other businesses should understand before giving this scheme a try.

What Is the GST Margin Scheme?

So, what is the GST margin scheme? Instead of calculating GST on the full sale price of an eligible property, the margin scheme generally calculates GST on the difference between the property's sale price and purchase price.

For example, if a property was purchased for $500,000 and sold for $800,000, the margin would be $300,000. GST is generally one-eleventh of this amount.

The GST margin scheme explained simply is that GST is calculated on the property's margin rather than its full selling price. However, the margin is not the same as the seller's overall profit. Costs such as construction, professional fees, and financing charges can't be deducted from the margin.

The scheme can apply to different types of real property, but eligibility depends on the circumstances surrounding the property and its original purchase.

Who Can Use the GST Margin Scheme?

Who can use the GST margin scheme depends on the property's GST history and how it was acquired. The scheme can apply to certain taxable supplies of freehold interests in land, stratum units, and long-term leases, provided the relevant requirements are met.

The way the property was originally acquired is particularly important. Not every property acquired without GST can automatically be sold using the margin scheme. There are specific restrictions depending on the GST treatment of the original transaction.

For developers, this means the GST margin scheme should be considered from the point of purchase rather than only when the property is being prepared for sale.

If you are unsure about eligibility, a GST property specialist can review the property's history before the sale proceeds.

When Must the Margin Scheme Be Agreed in Writing?

The seller and purchaser generally need to agree in writing that the margin scheme will apply before the sale is completed. This can be included in the sale contract or documented separately.

These margin scheme written agreement requirements should be dealt with before the process is completed. Leaving the issue until afterwards can create problems if the seller has already calculated GST on the assumption that the margin scheme applies.

The contract should clearly establish the GST treatment of the sale, giving both parties certainty about how the transaction is being treated.

How Is GST Calculated Under the Margin Scheme?

For those asking how to calculate GST using the margin scheme, the basic calculation is:

Sale price – purchase price = margin

Margin ÷ 11 = GST payable

For example, a property purchased for $600,000 and sold for $900,000 produces a $300,000 margin. GST would therefore be $27,272.73.

We know that this GST margin scheme worked example is simplistic, and that actual transactions can be more complicated, but it illustrates how the scheme can work in the real world.

A common question is can construction costs be deducted from the GST margin? As we touched upon earlier, the answer is generally that it can't. Construction costs are not deducted from the sale price when calculating the margin. GST on eligible construction expenses may instead be dealt with separately through input tax credits, but not as part of this margin scheme calculation.

Where land has been subdivided, the original purchase price generally needs to be apportioned between the lots using a fair and reasonable method. The method used should be supported by appropriate records. For more complex transactions, a GST margin scheme calculation should be checked carefully before the sale.

Common GST Margin Scheme Errors to Avoid

There are several common GST margin scheme mistakes that can lead to an incorrect GST outcome.

One is assuming the scheme applies simply because no GST was paid when the property was acquired. The property's purchase history needs to be considered against the GST rules.

Another common error is failing to obtain the required written agreement with the purchaser. The agreement needs to be in place at the time of completion, rather than being added on afterwards.

It is also important not to confuse the GST margin with the property's overall profit. Development, construction, and other business costs can't be deducted from the margin, but can be accounted for, in a sense, separately.

For an eligible margin scheme sale subject to the property settlement withholding rules, the purchaser generally withholds 7% of the contract price and pays it to the ATO. This amount is credited against the seller's account but is not necessarily the seller's final GST liability.

As you can see, understanding margin scheme GST withholding vs GST payable is important when reviewing the final GST position. The seller still needs to report the transaction and account for the actual GST through its business statements.

What Records Should You Keep?

Businesses using the margin scheme should keep records supporting the property's purchase and sale. These can include the original purchase contract, settlement documents, sale contract, and the written margin scheme agreement.

Keeping complete records is particularly useful if the transaction is later reviewed. It also gives your accountant or financial adviser the information needed to check the GST estimate before the sale is completed.

If you are unsure how the GST margin scheme works for your circumstances, a GST consultant can help assess the transaction. For those seeking advice on whether the margin scheme applies to your transaction, contact Ken Fehily — Australia's Independent GST Expert & Consultant before finalising the sale.