Saving GST by using the margin scheme
If you’re in the business of selling property and paying less GST sounds good from a cash flow point of view, then the margin scheme might be right for you. The use of the margin scheme means that instead of paying GST equal to 1/11th of the sale price (i.e. the usual 10% GST), you’re able to pay GST equal to 1/11th of the difference between the sale price and the purchase price (or an approved valuation) – the “margin” – of the property.
Reducing GST on your property sales
With the property market booming despite low wage growth and the after effects of the pandemic, many developers are getting back into the market. If you’re in the business of selling property, you may be able reduce the amount of GST payable on sales of new property by using the margin scheme if certain eligibility requirements are met and a written choice to use the margin scheme is made.
The amount of GST normally payable on a property sale is equal to 1/11th of the total sale price, that is, the usual 10% GST. However, if you’re eligible to use the margin scheme on your sale of property, the amount of GST is equal to 1/11th of the margin. The margin is either the difference between the sale price and an approved valuation or the sale price less the purchase price (depending on which method is used).
How does the margin scheme work?
As an example, let’s say you sell an apartment for $500,000 including GST.
The GST you would have to pay on the sale would be $45,454 (i.e. 1/11th of $500,000).
However, if you are eligible to use the margin scheme, and your original apportioned purchase price for the apartment was $250,000 then the GST you would have to pay would only be $22,727 (i.e. 1/11th on the margin, being the difference between $500,000 – $250,000).
Note that costs for developing the property and other expenses are not included and must be claimed separately on business activity statements and tax returns.
Are you eligible to use the margin scheme?
Eligibility to use the margin scheme largely depends on when you bought the property and from who you bought it. If you inherited the property, purchased it from an associate (with or without payment), purchased it from a fellow GST group member or participant in a GST joint venture, or it was a GST-free sale where the seller was not eligible to use the margin scheme, eligibility to use the margin scheme will be affected.
If the above does not apply, you can use the margin scheme if you:
- purchased the property before 1 July 2000;
- purchased the property after 1 July 2000 and one of the following applies to the seller:
- they were not registered or required to be registered for GST;
- they sold you existing residential premises;
- they sold the property to you as part of a GST-free going concern of GST-free farmland and were eligible to use the margin scheme; or
- they sold you the property using the margin scheme.
You must agree in writing with the purchaser to use the margin scheme
Even if you’re eligible to use the margin scheme, you need to agree with the purchaser to use the margin scheme before the settlement date to be able to use it. This written agreement to use the margin scheme could be included in the sale contract. There needs to be an agreement to use the margin scheme because if it is applied, the purchaser of the property cannot claim an input tax credit for the GST included in the purchase, even if the purchase was for business purposes.
In circumstances where the seller and purchaser don’t have a written agreement to use the margin scheme when the sale was made, the seller can request more time from the ATO to extend the time to have the agreement made in writing. To get an extension, the following conditions must be satisfied:
- the margin scheme wasn’t applied at settlement due to a mistake;
- all the other requirements of the margin scheme are satisfied;
- the purchaser hasn’t claimed a GST input tax credit or a decreasing adjustment for the purchase;
- the seller and purchaser didn’t agree on a price that included GST; and
- the seller is not making the agreement to avoid paying GST.
The ATO does not have discretion to apply the margin scheme where both parties don’t agree to use it.
Want to use the margin scheme?
If you’re in the business of selling property and would like to reduce the amount of GST payable on sales, we can help you work out whether you’re eligible to use the margin scheme.
If you’ve previously made a sale and would like more time to use the margin scheme, we can also help. Contact us today.
For expert advice and assistance in dealing with your Business Goods and Services Tax in Australia, please contact Mathews Tax Lawyers on 1800 685 829
Disclaimer: The information on this page is for general information purposes only and is not specific to any particular person or situation. There are many factors that may affect your particular circumstances. We advise that you contact Mathews Tax Lawyers before making any decisions.