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GST Margin Scheme

Those registered for GST and making taxable supplies can reduce their GST liability by choosing to calculate GST on the margin of real property supply.  Under the margin scheme, GST is calculated on the supply as 1/11 of the margin on the sale.

The margin scheme is available on a taxable supply of real property made by:

  • selling a freehold interest in land
  • selling a stratum unit, or
  • granting or selling a long-term lease (generally more than 50 years).

Generally, the margin is the tax inclusive sale price less the original purchase price.  However, if the property was held at 1 July 2000, the margin is the GST inclusive sale price less the value of the property at 1 July 2000 (a valuation of the property at that date is necessary).

Example

Don, a property developer, is registered for GST. This year on 1 February, he bought land for $200,000. The supply of the land to him was not a taxable supply.

He sold the land six months later for $288,000. He chose to apply the margin scheme to his sale of the land.

Under the margin scheme, the margin for the supply of the land is $88,000 = $288,000 – $200,000. The GST payable on the margin is $8,000 = 1/11 of $88,000.

Restriction on use of the margin scheme

The margin scheme cannot be used if the entire freehold interest, stratum unit or long-term lease was acquired through a supply that was ineligible for the margin scheme.

“Ineligible for the margin scheme” means a taxable supply on which the GST was worked out without applying the margin scheme – section 75-5(3) A New Tax System (Goods and Services Tax) Act 1999 (the GST Act).

This requirement means that generally the margin scheme can only be used where no GST was charged when the real property was acquired, i.e. when the property was:

  • acquired from a supplier who used the margin scheme
  • acquired from an entity that was not registered or required to be registered
  • supplied in a GST-free supply
  • supplied in an input taxed supply; or
  • acquired through inheritance and certain conditions are satisfied.

Note also that with effect from 9 December 2008, the rules:

  • ensure that a supply that is ineligible for the margin scheme continues to be ineligible for the margin scheme after it is supplied as part of a GST-free sale of a going concern, as GST-free farmland, or it is supplied to a registered associate for no consideration. This is achieved by specifying that a supply is ineligible for the margin scheme if the previous supplier acquired the entire interest through a taxable supply on which the GST was worked out without applying the margin scheme
  • provide that where real property is acquired GST-free as part of a going concern, GST-free farmland, or from a registered associate for no consideration, the calculation of GST on the subsequent sale of that property under the margin scheme should also account for the value added by the previous owner.

Need for agreement in writing

The supplier and the recipient of a taxable supply of real property need to agree in writing to apply the margin scheme.

The written agreement must be made:

  • on or before the making of the supply (usually settlement); or
  • within such further period as the Commissioner allows

Practice Statement PS LA 2005/15 considers when the Commissioner will exercise his discretion to extend the time in which the agreement in writing must be made.

Broadly this will be where all the other requirements to apply the margin scheme have been met and there is no arrangement which would have the effect of producing an outcome contrary to the legislative policy of the margin scheme.

Impact of margin scheme on purchasers

Purchasers of real property and premises where GST on the supply was calculated on the margin cannot claim input tax credits on the acquisition – section 75-20 GST Act.

Selling using the margin scheme would suit private buyers who will be paying less if the price is reduced by the vendor to reflect less GST payable and will not be able to claim input tax credits in any case.

Calculating the margin

The margin for the supply is not:

  • the profit margin. Unlike an accounting profit margin, the margin for the supply for GST purposes does not take into account costs incurred in constructing a building or subdividing land, or
  • calculated in the same manner as a capital gain under the Income Tax Assessment Act 1997.

The consideration for the acquisition does not include:

  • costs incurred by the supplier in developing the real property
  • legal fees, stamp duty, registration fees and transfer costs or any other related purchase expenses (instead, the supplier will be entitled to input tax credits if the acquisitions relating to improvements (such as subcontractors’ charges) and the acquisition of legal services are creditable acquisitions. There is no entitlement to input tax credits on stamp duty).

The AAT held in The Trustee for the Whitby Trust and FCT [2017] AATA 343 that option fees are not included in determining the margin

Example

Bob is a builder who is registered for GST. On 1 December, Bob purchased a block of land for $300,000 from a vendor, who was not registered or required to be registered for GST purposes. He paid $3300 in conveyancing fees and $15,000 stamp duty on the purchase of the land.

Bob later constructs a house on that land and sells the house and land for $740,000.

When he was building the house, Bob incurred $220,000 for creditable acquisitions, for which he has tax invoices.

Bob chooses to use the margin scheme.

The margin will be $740,000 – $300,000 = $440,000

The GST payable will be 1/11 x $440,000 = $40,000.

Bob will be able to claim input tax credits of $300 and $20,000 on his creditable acquisitions.

Do you take adjustments on property settlements into account when you calculate the consideration for the acquisition and supply of real property?

On settlement of property transactions, it is usual that certain adjustments be made between the seller and the purchaser in relation to such matters as rates and land tax. These adjustments are usually made in accordance with the provisions of the contract.

GST Determination GSTD 2006/3 provides that an entity (e.g. a property developer) that has purchased property, can include an amount charged to it by the vendor for land tax and council rates incurred by the vendor prior to settlement as part of the consideration for the acquisition of the interest when it subsequently sells that property and chooses to apply the margin scheme.

Where it is the vendor that is using the margin scheme, rates may also be assessed to and paid by the vendor before the date of settlement. In such a scenario, the contract will usually require the purchaser to pay an extra amount to the vendor on settlement in respect of the balance of the period to which the rates relate, corresponding to the purchaser’s period of ownership. In this case the vendor is receiving, and the purchaser is paying extra consideration for the sale and purchase of the land.

Example

If a house and land package is sold for $400,000 but the contract requires the purchaser to pay the supplier $330 for rates in respect of the balance of the period to which the rates relate, the margin for the supply of the house and land package is $400,330 less the acquisition cost.

What is the consideration for the acquisition of subdivided land or stratum title units?

Where an entity purchases land, subdivides it or builds stratum title units on it, and later applies the margin scheme in selling the subdivided land or units, the consideration for the acquisition of the subdivided land or the stratum title unit is the corresponding proportion of the consideration for the land acquired.

To ascertain the proportion of the purchase price that relates to the subdivided allotment or stratum title unit, GST Ruling GSTR 2006/8 para 58 states that any reasonable method of apportionment may be used.

Example from GSTR 2006/8 para 62

Josine is a property developer who is registered for GST. She acquired a block of land of 2,000 square metres for $240,000. The block was of uniform value per square metre. She subdivided the block into two allotments of 600 square metres each and one allotment of 800 square metres.

Josine decides to use an area basis to ascertain the consideration for the acquisition of the subdivided allotments.

The consideration for the acquisition for each of the 600 square metre allotments is $72,000 (600/2,000 x $240,000), whilst the consideration for the acquisition of the 800 square metre allotment is $96,000 (800/2,000 x $240,000).

If Josine sells the 800 square metre allotment for $140,000, the margin for the supply is $44,000 ($140,000 – $96,000) and the GST payable on the supply is $4,000.

Amalgamated land

The margin scheme can be applied in respect of amalgamated property even if some of the property was not purchased under the margin scheme or as a GST-free, input taxed or non-taxable acquisition.

However, if an entity chooses to use the margin scheme on such sales it will have an increasing adjustment to recover any input tax credits that have been claimed. This adjustment is equal to the previously attributed input tax credit amount.

What is the margin on property held at 1 July 2000?

If the property was held at 1 July 2000, the margin is generally the GST inclusive sale price less the value of the property at 1 July 2000.

If the property was held at 1 July 2000, but the supplier did not become registered until after 1 July 2000, the margin is the tax inclusive sale price less the value of the property at the date of application for registration – section 75-10(3) Item 2 GST Act.

A valuation must be obtained of the value of the property at this time made by a registered valuer.

For property held at 1 July 2000, any improvements made since 1 July 2000 should not be included when calculating the original purchase price.

Valuation at 1 July 2000

A valuation must be obtained of the value of the property at 1 July 2000 – section 75-10 GST Act.  However, the valuation of the property at 1 July 2000 can be done in the tax period when GST is payable on the supply (i.e. for supplies of real property under a standard land contract, this will be the tax period in which settlement occurs – para 62 of GST Ruling GSTR 2006/7).

Valuation methods for property held/acquired 1 July 2000

There are 3 main valuation methods available – GSTR 2006/7:

  1. Method 1 – Market valuation – The market value of the property determined in writing by a professional valuer and which complies with the criteria listed at para 24 of the ruling. Reference should be made to GST Margin Scheme Valuation Requirements Determination MSV 2009/1 which specifies the requirements for making valuations. The requirements apply to valuations for taxable supplies of real property made on or after 1 March 2010.

A professional valuer is:

  • a person registered or licensed to carry out property valuations under a Commonwealth, State or Territory law;
  • a person who carries on business as a valuer in a State or Territory where that person is not required to be licensed or registered to carry on a business as a valuer; or
  • a member of the Australian Property Institute and is accredited as a Certified Practising Valuer.

An in-house employee who is a professional valuer may be used. The valuer needs to provide a signed certificate which specifies:

  • a full description of the property being valued;
  • the valuation date;
  • the date the valuer provides the valuation to the supplier;
  • the market value of the property including the valuation approach and the valuation calculation; and
  • the qualifications of the valuer.

The ATO has published a Valuation Issues paper that identifies several issues important to the ATO in accepting that a valuation is valid.

It is important to meet the ATO requirements as the ATO will challenge a valuation it considers invalid – see Brady King Pty Ltd v FCT [2008] FCAFC 118.

  1. Method 2 – The value of the consideration provided by a purchaser in a contract for the sale and purchase of real property executed or exchanged prior to 1 July 2000 by parties dealing at arm’s length; or
  2. Method 3 – The value as determined by the State Government or Territory Government department as the unimproved value, the site value, or the capital value of the land.

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This article is for general information purposes only and has not been prepared with reference to the circumstances of any particular person. You should seek your own independent financial, legal and taxation advice before making any decision in relation to the material in this article.