Property, GST & Margin Scheme– Basics

Definitions

Legislation and ATO view property with the following definitions

Residential premises

Premises such as a house, apartment or unit occupied or intended and capable of being occupied as a residence or for residential accommodation.

Vacant land

Land upon which there are no buildings or land where any previously existing buildings have since been degraded or demolished.

New residential premises

Premises that have not previously been sold as residential premises, including premises substantially renovated or built to replace demolished premises other than premises that have been rented out as residences for a period of at least five years

 

When does GST apply to a property transaction?

In most property transactions there is a

  • vendor (seller) and

If either is registered or required to be registered for GST, there will be GST consequences

GST Definitions – https://www.ato.gov.au/business/gst/in-detail/definitions/

Should You Register for GST

Many people are actually carrying on an enterprise/business when making property transactions, but do not register for goods and services tax (GST) when they are required to do so.

  • Even with a one-off transaction, you may still be required to register for GST because your activity, or activities, in carrying out this one-off property transaction may constitute an enterprise.

If you are dealing with property – for example, you buy, sell, lease or develop – you may be considered to be conducting an enterprise/business.

If this is the case and your turnover from these activities is more than the GST registration threshold ($75k) , you will be required to register for GST.

What is the Margin Scheme

The margin scheme is an alternative way of working out the GST you must pay when you sell property.
Under the margin scheme the amount of GST payable on your property sale is one-eleventh of the margin for your sale.

The margin scheme is a way of working out the GST you must pay when you sell property as part of your business .. so you must be carrying on an enterprise or a business of e.g. buying & selling property

You can only apply the margin scheme if the sale is taxable.

The margin is generally the difference between the sale price and the amount you paid to purchase the property

When Can the Margin Scheme Be Used

Whether you can use the margin scheme depends on how and when you purchased your property.

  • If you have purchased property that was sold to you under the margin scheme, you cannot claim GST credits on this purchase .. because they did not claim credits when they bought it

  • To work out if you can use the margin scheme on the sale of your property, refer to GST and the margin scheme and the GST property tool below

When you cannot use the margin scheme

If you were charged the full rate of GST when you originally purchased the property, the margin scheme can’t be used. GST would be payable on sale

Generally, if you were charged the full rate of GST when you purchased a property as part of your business you would have claimed the GST back

Deciding when to use the margin scheme and the written agreement

  1. Both the buyer and seller must agree in writing to apply the margin scheme if the contract for sale was made on or after 29 June 2005.
    1. The agreement to use the margin scheme must be reached by the time the property is supplied, usually at settlement.

There is no set format for a written agreement, but there must be a

  • written statement which makes it clear that you and the purchaser have agreed to use the margin scheme on the sale, and
  • clearly identifies the property being sold.
  • This statement may form part of the sale contract, or it may be a separate document.

If the purchaser agrees to allow the seller of the property the absolute discretion to apply the margin scheme, the seller must confirm in writing that the margin scheme has been applied on or before the settlement date

Pros and cons of margin scheme

The upside of the margin scheme is, of course, that the GST is reduced.

The downside is that the purchaser cannot claim an input tax credit (s 75-20). This means that the margin scheme will be particularly relevant where the purchaser may not have been entitled to an input tax credit in any event, for example where

  • a developer sells new residential units,
  • a project builder sells house and land packages, or
  • land is sold to an unregistered purchaser.

It also means that a developer could consider using the margin scheme on sales to

purchasers who cannot claim input tax credits in any event — for example

  • unregistered purchasers (mums & dads) — and
  • using the normal method of calculating GST on sales to registered purchasers who can claim the GST back as an input tax credit

When can you Not Use the Margin Scheme

You cannot apply the margin scheme to a supply that you make if you had acquired the property in any of the following circumstances:

  • you acquired it under a taxable supply on which the GST was worked out without using the margin scheme.
    The rationale for this exclusion is that in such a case, you would have been entitled to an input tax credit on the purchase, and should therefore not be entitled to any further relief by way of the margin scheme
  • you acquired it by inheritance, if the deceased person had acquired it through a supply that was not eligible for the margin scheme
  • you acquired it from the operator of a joint venture in which you were a participant, and the operator had acquired it through a supply that was ineligible for the margin scheme
  • you acquired it as a GST-free supply of a going concern, a farm or subdivided farm land, from an entity that was registered or required to be, and that entity had acquired it through a taxable supply on which GST was worked out without applying the margin scheme. For other rules applying where there are GST-free supplies