GST Margin Scheme: A Guide for Property Developers

Navigating the intricacies of property development in Australia requires a comprehensive understanding of taxation laws, particularly in relation to the Goods and Services Tax (GST). One essential provision within this framework is the GST Margin Scheme, governed by regulations set forth by the Australian Taxation Office (ATO). This article aims to provide an in-depth exploration of the GST Margin Scheme, outlining its fundamental principles, eligibility criteria, operational mechanics, and its relevance to property developers and builders.

What is the GST Margin Scheme?

The GST Margin Scheme is a taxation mechanism allowing property developers and sellers to calculate GST based on the margin of the sale price rather than the full consideration. This provision is particularly pertinent in transactions involving the sale of real estate where the property’s value appreciates over time without significant improvements.

Eligibility Criteria for GST Margin Scheme

To qualify for the GST Margin Scheme, specific eligibility criteria must be met in accordance with ATO regulations. These include:

1. 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.
2. 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 were 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

Example: GST Margin Scheme for Land

Understanding the operational mechanics of the GST Margin Scheme is crucial for property developers and builders. Let’s explore this through real-life examples presented:

In Example 1, a property developer purchases a property for $550,000 (including GST) and later sells it for $770,000 (including GST). The margin, which represents the difference between the sale price and the purchase price, amounts to $220,000. Applying the GST rate of 10% to the margin, the GST payable totals $20,000.

In Example 2, another developer acquires a property for $1,100,000 (including GST) and sells it for $1,650,000 (including GST). With a margin of $550,000, the GST payable at a rate of 10% on the margin amounts to $50,000.

These examples vividly illustrate how the GST Margin Scheme functions in real-life property transactions. By calculating GST based on the margin between the sale and purchase prices, developers can potentially reduce tax liabilities while ensuring compliance with ATO regulations.

GST Margin Scheme: Continued

To illustrate the tangible benefits of the GST Margin Scheme in land purchases, let’s delve into a real-life example:

Example: John’s Land Investment

John, a property developer, recently acquired a parcel of vacant land in a suburban area for $1,100,000 (including GST). As time progresses, the value of the land appreciates, prompting John to consider selling it for $1,650,000 (including GST). Notably, John hasn’t significantly developed the land during his ownership tenure.In opting to utilize the GST Margin Scheme for the sale, John calculates the GST payable based on the margin between the sale and purchase prices:Sale price: $1,650,000

Purchase price: $1,100,000

Margin: $550,000

By leveraging the Margin Scheme, John effectively pays GST solely on this margin, rather than the full selling price. This strategic approach potentially leads to substantial tax savings, enabling John to optimize his financial outcomes while ensuring compliance with ATO regulations.

In this scenario, John’s utilization of the GST Margin Scheme showcases its practical applicability in land transactions, empowering property developers to navigate taxation complexities and protect cash flow in their ventures.

Example: GST Margin Scheme for Subdivided Lots

In scenarios where land is subdivided into multiple lots and sold individually, the GST Margin Scheme offers flexibility in taxation calculations. Let’s explore a real-life example to illustrate this:

Example:

Under GSTR 2006/8 Para 58, it’s permissible to use any sensible approach to allocate the base value of land for calculating the margin in transactions.

Example

Emma, a GST-registered real estate developer, acquires a 3000 square meter parcel of land for $450,000. She assesses that the land’s value is consistently distributed across the entire area.

Emma opts to divide the land into three parcels: two parcels of 900m2 each, and one larger parcel of 1200m2.

She calculates the land value for each under the margin scheme based on their proportional area:

• 900m2 parcels = (900/3000 * $450,000) = $135,000 each, making $270,000 for both.
• The 1200m2 parcel = (1200/3000 * $450,000) = $180,000.

Upon completing her project, Emma sells the parcels with constructed homes as follows:

• Each 900m2 parcel for $650,000.

• The 1200m2 parcel for $900,000.

• This brings her total sales to $2,200,000.

Emma’s GST obligation under the Margin Scheme for each sale would be:

• For the 900m2 parcels: ($650,000 – $135,000) * 1/11th = $46,818.18 each.
• For the 1200m2 parcel: ($900,000 – $180,000) * 1/11th = $65,454.55.

Costs not included in margin scheme

Example

Alice, a GST-registered developer, acquired a plot on July 15th for $600,000 from a retired couple who were not obligated to register for GST, as they were selling their longtime residence.

Alice incurred various development expenses:

• $4,000 in legal fees for property transfer,
• $18,000 in land transfer tax,
• $70,000 for planning permissions and consulting fees (assuming all local government charges are GST-inclusive),
• $800,000 in construction expenses for developing a residential complex,
• $50,000 in expenses related to advertising and sales efforts.

Upon completing the project, Alice sold the residential complex for $2,000,000 and chose to apply the margin scheme to lessen the GST impact on the sales.

The GST Margin Scheme’s margin is calculated as $1,400,000 ($2,000,000 sale price minus the $600,000 purchase cost).

Under the Margin Scheme, the GST owed by Alice is $127,272.73, which is 1/11th of the $1,400,000 margin.

Key Takeaways: GST Margin Scheme

• The GST Margin Scheme allows property developers and sellers to calculate GST based on the margin of the sale price.
• Eligibility criteria, as outlined by the ATO, must be met to qualify for the Margin Scheme.
• Other development costs are not included in the margin scheme calculation

FAQs on GST Margin Scheme

Q: Can the Margin Scheme be applied to all property transactions?

A: No, the GST Margin Scheme is applicable only to transactions meeting specific eligibility criteria outlined by the ATO.

Q: What documentation is required to apply the Margin Scheme?

A: Property developers and sellers must maintain accurate records of transactions, including purchase and sale contracts, to comply with ATO regulations.