The Impact of GST Margin Scheme and Subdivided Land
If you’re a property developer or property investor, it’s important to identify whether or not your property transactions are considered a profit making enterprise or business activities. If they are, and your turnover is more than $75,000, you’ll be required to meet certain GST requirements.
Even with a one-off property transaction, you may still be required to register for GST because carrying out the transaction may mean you’re conducting a profit-making enterprise. In other words, you’ll have to pay GST on the sale of your property.
Thankfully, however, the Australian Tax Office allows property investors (or developers) to use the GST margin scheme to calculate their GST. Essentially, this reduces your GST obligations to one-eleventh of the margin for your sale.
But how does the margin scheme impact the sale of subdivided land?
Here’s what you need to know about the GST margin scheme and subdivided land.
When is Goods and Services Tax (GST) Payable on Property Sales?
Before delving into calculating GST using the margin scheme on the sale of subdivided land, it’s worth noting exactly when you’re required to pay GST and how the margin scheme works.
Briefly, if you’re in the business of property development or buying and selling property, the ATO requires you to register for GST if your business’ turnover exceeds the $75,000 GST threshold.
Should you sell a new residential property or vacant land, that transaction will trigger GST liability.
For more on what is considered new residential property, make sure to check out our blog post on why all property investors need to know about the GST margin scheme.
What Does Your GST Liability Entail?
If you plan to sell property (either new residential premises or vacant land), you’ll typically be liable to charge GST of 10% on the sale and remit this amount to the ATO. You should therefore allow for GST in the price of your property, but you are generally limited by the market price.
How Does the GST Margin Scheme Work?
According to the ATO’s margin scheme, investors are liable to pay one-eleventh of the margin for their property sale, where the sales margin is the selling price less the amount you originally purchased the property for.
In other words, if the margin scheme applies, you’ll only have to pay GST on one-eleventh of the profit you generate from the sale instead of on the resale price. So, your GST liability is significantly reduced.
The eligibility criteria to use the margin scheme on the taxable supply is dependent on:
- when the property was originally purchased (For property purchased after 1 July 2000, you must use the Consideration method. For property purchased before 1 July 2000, you can use either the Valuation method or the Consideration method), and
- how GST was applied at the time of the initial purchase.
There are also certain circumstances in which property investors or property developers can’t use the margin scheme, include where:
- you paid GST on the property purchase and was, as a result, entitled to a claim GST credits,
- you inherited the property from someone who did not meet the margin scheme eligibility criteria,
- you acquired the property from the operator of a joint venture (in which you were a participant) who bought the property without access to the margin scheme, and
- you acquired the property as a GST-free supply of a going concern (i.e. the business conducted on the property continues to operate as it did before the sale)
How Do You Calculate GST on Subdivided Land Using the Margin Scheme?
Once you’ve navigated the eligibility criteria, calculating your GST liability using the margin scheme is pretty straightforward. You simply subtract the original purchase price from your selling price to establish the profit on your sale. You’ll then calculate one-eleventh of that amount to determine your GST payable.
When calculating GST on the sale of subdivided land, the calculation becomes a little less straightforward.
According to the ATO, to calculate the portion of the purchase price for a subdivided allotment or you may use any reasonable method of apportionment.
And if you purchase land and subdivide it yourself, the margin is the selling price less the original price you paid for the portion of the property.
Parker carries out business as a property developer and has therefore registered for GST. As part of one of his latest development projects, he purchases a 1,800 square metre block of land for $216,000 from a seller who isn’t required to be GST registered.
After Parker purchased the block of land, he decided to subdivide it into three lots: two at 450 square metres and one at 900 square metres.
Because the block is of equal value per square metre, Parker used an area basis to calculate the purchase price of each subdivided lot:
- 450 square metre lots at $54,000 each (450 ÷ 1,800 x $216,000)
- 900 square metre lot at $108,000 (900 ÷ 1,800 x $216,000)
If Parker sells the 900 square metres subdivided allotment for $156,000, his GST liability is calculated as follows:
($156,000 – $108,000) x (1 ÷ 11) = $4,363.64
So, under the margin scheme, Parker is liable to pay $4,363.64 in GST.
For comparison purposes, if Parker didn’t use the GST margin scheme, he would have to pay 10% on the $156,000, which amounts to $15,600. So, the margin scheme reduces the amount of GST that would generally be payable on sales of a new property.
It’s important to note that
If your business activities involve dealing with property such as buying, selling or developing, you’ll have to consider whether or not you should be registered for GST. A determining factor would be your turnover amount. If your turnover from these activities exceeds the $75,000 threshold, you’ll need to register.
However, if you meet the GST margin scheme criteria, you can significantly reduce your GST liability.
Should you decide to subdivide the land you pay and apply the margin scheme on the sale of those subdivided allotments, you’ll need to determine a reasonable method to calculate the apportionment of the purchase price and then apply the margin scheme to the sale profit of the specific lot.
However, navigating the margin scheme eligibility requirements and calculating your GST liability on subdivided land can get complex. So, if you’re unsure whether you qualify or how to reasonably apportion the purchase price of the subdivided lots, you should consult a property tax specialist.
The team at Property Tax Specialists have been helping investors, and developers navigate the GST rules and margin scheme process for decades so that they comply with the ATO’s tax requirements and reporting obligations.
To discuss any matter relating to the margin scheme and subdivided land or to arrange asset protection and tax-efficient structures for your investments, get in touch today.
Please note that every effort has been made to ensure that the information provided in this guide is accurate. You should note, however, that the information is intended as a guide only, providing an overview of general information available to property buyers and investors. This guide is not intended to be an exhaustive source of information and should not be seen to constitute legal, tax or investment advice. You should, where necessary, seek your own advice for any legal, tax or investment issues raised in your affairs.