Do you qualify to use the Goods and Services Tax (GST) margin scheme when you sell property?

While it’s generally not likely that GST is payable on the sale of your private residence, for many Australian property investors, buying and selling property is their business. 

So, as a property investor, not only will you have to consider stamp duty, land tax, and income tax implications, but you’ll have to consider your GST implications too. 

Fortunately, the ATO allows investors in certain instances to use the margin scheme as an alternative way of calculating the GST they’re liable to pay when they sell their investment property. 

Here’s why all property investors should know the GST basics. 

Definitions

Legislation and the Australian Taxation Office (ATO) view property with the following definitions:

Term	Definition
Residential premises	These are premises like houses, apartments, or units that are occupied, intended, or capable of being occupied as a residence or for residential accommodation.
Vacant land	This refers to land with no buildings or land where any previously existing buildings have been degraded or demolished.
New residential premises	These are premises that haven’t been sold as residential premises before. This includes premises that have been substantially renovated or built to replace demolished ones, excluding those rented out as residences for at least five years.

When Does Goods and Services Tax (GST) Apply to a Property Transaction? 

In most property transactions, there’s a vendor (seller). If the vendor or the buyer is registered or is required to be registered for GST, there will be GST consequences.

Should You Register for GST? 

Many individuals, while making property transactions, are essentially running a business but don’t register for the Goods and Services Tax (GST) when they should. Even a single transaction might necessitate GST registration if it’s considered an enterprise. 

If you’re involved in property dealings like buying, selling, leasing, or developing, you might be seen as running a business. And if your turnover from these activities exceeds the GST registration threshold ($75,000), GST registration is mandatory.

What is the Margin Scheme? 

The margin scheme offers an alternative method to calculate the GST payable when selling property. Under this scheme, the GST on your property sale is one-eleventh of the sale’s margin. This scheme is applicable when selling property as part of your business operations. 

Note: The sale must be taxable, and the margin is typically the difference between the sale price and the property’s purchase price.

Example

Lucy purchased a new residential property for $830,000 (GST exclusive) and completed substantial renovations before reselling it for $1.6 million (GST exclusive). 

If she doesn’t apply the margin scheme, she would have to pay 10% on the $1.6 million, which is $160,000. 

Under the GST margin scheme, however, Lucy will pay one-eleventh of the $770,000 in profit ($1.6 million–$900,000), which amounts to $70,000. 

When Can the Margin Scheme Be Used? 

The applicability of the margin scheme depends on the property’s purchase details. If the property was bought under the margin scheme, you can’t claim GST credits on this purchase because the previous owner didn’t claim credits when purchasing it. 

To determine if you can use the margin scheme for your property sale, refer to the GST and margin scheme guidelines and the GST property tool.

Deciding When to Use the Margin Scheme and the Written Agreement 

For sales contracts made on or after June 29, 2005, both the buyer and seller must agree in writing to use the margin scheme. This agreement should be finalised by the time the property is supplied, which is usually at settlement. 

The written agreement should clearly state the agreement to use the margin scheme and identify the property being sold. 

Note: This can be part of the sale contract or a separate document.

Pros and Cons of the Margin Scheme 

The primary advantage of the margin scheme is the reduced GST. However, the buyer can’t claim an input tax credit. This makes the margin scheme especially relevant when the buyer wouldn’t be entitled to a GST credit, such as when a developer sells new residential units or land to an unregistered buyer.

When Can’t You Use the Margin Scheme? 

The margin scheme can’t be applied in certain situations, including:

• If the property was acquired under a taxable supply without using the margin scheme.
• If it was inherited and the deceased had acquired it through an ineligible supply.
• If it was acquired from a joint venture operator who had bought it through an ineligible supply.
• If it was acquired as a GST-free supply of a going concern, farm, or subdivided farmland from a registered entity that had purchased it without applying the margin scheme.

What is a GST-Free Going Concern?

‘Going concern’ for the purposes of GST refers to an enterprise’s ability to continue functioning after the date of sale. 

So, if you sell farmland, for example, and the farm continues to operate as it did before the sale, then the sale of that farm is deemed to be the supply of a ‘going concern’, and the sale would be exempt from GST

Other GST Margin Scheme Considerations: Purchase Price

On July 1, 2018, the ATO introduced some changes to the margin scheme laws. 

Previously, the GST-registered seller (or property developer) would include the GST payment in the original purchase price, and the purchaser pays the GST to the seller at settlement. The seller would then be responsible for transferring the GST to the ATO. 

Now, however, the purchaser is required to withhold an amount from the contract price and pay that amount directly to the ATO. The amount that the purchaser must withhold is 7% of the contract price.

Key Takeaways 

According to the ATO, If you are dealing with property (for example, if you buy, sell, lease, or develop it), you may be considered to be conducting an enterprise or business.

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

The GST margin scheme is a way of working out the GST payable when you pay for the taxable supply of property as part of your business. 

The property sale margin is the difference between the sale price and the amount you paid to purchase the property. If you’re eligible to claim the margin scheme, then you would calculate your GST liability based on that difference. 

The GST margin scheme eligibility requirements can be tricky, so if you’re unsure whether you’re required to pay GST or qualify for the margin scheme, you should consult a property tax specialist. 

At Property Tax Specialists, we have decades of experience navigating the GST rules inside and out, so you don’t have to. We make sure your investment property portfolio complies with regulations and meets the necessary reporting obligations.

To discuss any matter relating to GST or to arrange your affairs for asset protection and minimum tax, get in touch today.

Disclaimer: This guide aims to provide accurate information. However, it’s intended as a general overview for property buyers and investors and shouldn’t be seen as exhaustive or as legal, tax, or investment advice. Always consult professionals for any legal, tax, or investment concerns.