For property developers, GST payable on the sale of properties can greatly eat in the profit. However, GST can be potentially reduced when using the margin scheme.
A. What is the margin scheme
Margin scheme is a way of working out the GST you must pay when you sell property as part of your business and you are registered for GST.
The GST you must pay is normally equal to 1/11 of the sale price.
Using the margin scheme, on the other hand the GST you must pay equals to 1/11 of the Margin, being the difference between the sale price and one of the following:
Consideration method: the original purchase price of the property
Valuation method: value of the property as at 1 July 2000 (for a property purchased before 1 July 2000)
This effectively reduces GST payable by 1/11 of the purchase cost of the property.
Bear in mind though, when the margin scheme is used in a sale, the purchaser cannot claim GST credit in the purchase.
For sales made on or after 29 June 2005, it is required to have a written agreement between the seller and purchaser to use the margin scheme.
B. When Can You Use The Margin Scheme
You are eligible to use the margin scheme under the following circumstances:
If you purchased the property before 1 July 2000 (start of GST), or
If you purchased the property after 1 July 2000 from someone:
That was not registered or required to be registered for GST
Who sold you existing residential premises
Who sold the property to you as part of a GST free going concern (the eligibility may change if property was purchased after 9 December 2008), or
Who sold you the property using the margin scheme
C. When Can’t You Use The Margin Scheme
You are not eligible to use the margin scheme under the following circumstances:
If when you purchased the property the sale to you was fully taxable and the margin scheme was not used
You inherited the property from a person who could not use the margin scheme
Obtained the property from a member of the same GST group who could not use the margin scheme
Obtained the property, as a participant in a GST joint venture, from the joint venture operator who could not use the margin scheme, or
If you purchased the property on or after 9 December 2008 from someone who was not eligible to use the margin scheme and the property was purchased:
As part of a GST free going concern
As GST free farm land
From an associate for no consideration
D. How to Calculate the Margin
a. Consideration Method
You can use the consideration method regardless of when you purchase.
The sale price must include any settlement adjustments contained within the sales contract.
Do not include the following costs in the purchase price:
Costs of developing the property
Stamp duty
Legal costs
Any other related purchase expenses
b. Valuation Method
You can only use valuation method if the property was purchased before 1 July 2000.
You must hold an approved valuation including:
In writing by a professional valuer
A contract entered into before 1 July 2000 by parties dealing at arm’s length
Value set by a state or territory government department for rating or land tax purposes
You can change how you calculate the margin up until the due date for lodgement of your activity statement for the relevant tax period. If you have more than one approved valuation by the activity statement due date, you must choose one of these by the due date.
E. Changes from 1 July 2018
From 1 July 2018, for the sale of new residential premises or potential residential land, instead of paying the full contract price to the GST-registered supplier (for example, vendors, sellers, property developers) at settlement, a purchaser is now required to withhold an amount from the contract price and pay that amount directly to the ATO.
The amount a purchaser must withhold and remit to ATO is:
For full taxable supplies, 1/11th of the contract price
For margin scheme supplies, 7% of the contract price
For supplies between associates for a price less than GST inclusive market value, 10% of GST exclusive market value of the supply
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