Property
Margin scheme
The margin scheme is a way of calculating GST on certain property sales so GST is one-eleventh of the margin (the profit element) rather than one-eleventh of the full sale price.
The margin scheme is an optional method for working out GST on the sale of some real property. Instead of paying GST of one-eleventh of the whole sale price, the seller pays one-eleventh of the margin, which is generally the difference between the sale price and the price the seller originally paid. For a property that has increased in value only modestly, this can reduce the GST payable by a large amount.
Not every sale can use it. The seller must be registered for GST, and the sale must be a taxable sale of real property. The scheme is generally not available if the property was acquired through a GST-free sale of a going concern or a GST-free farmland sale, or if the seller acquired it in a way that gave them a right to claim a full input tax credit, subject to detailed exceptions. There are special rules for property acquired before the start of GST in July 2000, where a valuation is often used.
The seller and buyer must agree in writing to use the scheme, and the agreement is generally needed on or before the day of settlement, or the day the consideration is first paid if earlier. This is typically recorded in the contract of sale. Without a valid written agreement, the seller cannot use the margin scheme, so contracts for development land and commercial property need careful drafting.
There is an important consequence for the buyer. Because the seller charges GST only on the margin, the buyer cannot generally claim an input tax credit for GST on the purchase, even if they are registered and will use the property in a taxable business. So for a buyer, a margin scheme price may cost more overall than a normal taxable sale where credits are claimed, which affects negotiation.
The margin scheme is especially common in property development, where land is bought, subdivided or built on, and sold. The potential residential land and new residential premises rules often interact with it. Where a purchaser is required to withhold GST at settlement, the amount withheld under a margin scheme sale is calculated differently, and your conveyancer should handle that process.
Common mistakes include assuming the scheme is automatic, forgetting the written agreement, or not realising that the buyer loses the credit. Another is working out the margin incorrectly, for example failing to use the right acquisition cost or valuation. Because the calculation depends on how the seller originally acquired the property, records of the purchase are essential.
This is general information only. Because property GST rules are technical, confirm your position with the ATO or a registered tax professional before relying on the scheme.
Worked example
A registered developer bought a block of land for $400,000 and sells it for $600,000 under the margin scheme with a written agreement. The margin is $600,000 minus $400,000, which is $200,000. GST is one-eleventh of the margin, which is $200,000 divided by 11, or $18,181.82. Without the scheme, GST would be $600,000 divided by 11, which is $54,545.45.
Practical tips
- Put the margin scheme agreement in writing in the contract before settlement, otherwise it may not be available.
- Keep the original purchase contract and settlement records, since the margin depends on what you paid.
- Buyers should check whether the sale is under the margin scheme, because they cannot claim credits on it.