Understanding the Margin Scheme for GST: A Practical Guide for Property Owners and Developers
What is the Margin Scheme, and Why Does It Matter?
If you’re in the business of buying and selling property, GST is a key consideration. Without proper planning, GST can significantly impact your costs and profits. The Margin Scheme is a special GST calculation method that can help reduce the GST payable on the sale of certain properties. Instead of calculating GST on the full sale price, the Margin Scheme allows you to pay GST only on the difference between the sale price and the original purchase price (or a pre-GST valuation, depending on the situation).
Using the Margin Scheme correctly can save you thousands in GST—but it’s important to understand when it applies and how to use it effectively.
When Should You Use the Margin Scheme?
The Margin Scheme only applies to taxable sales of real property—meaning the sale is subject to GST. It’s particularly beneficial for property developers and investors looking to reduce GST costs. Here’s when using the Margin Scheme makes sense:
✅ Reducing GST on property sales – If you bought land under the Margin Scheme or from an unregistered seller, you may be able to apply it when you sell, reducing your GST payable.
✅ Selling to buyers who can’t claim GST credits – If your buyer (e.g., a homebuyer or investor) can’t claim GST credits anyway, the Margin Scheme won’t disadvantage them. They wouldn’t have been entitled to an input tax credit regardless.
✅ Developers selling new residential properties – While you won’t get a GST credit for the land, you still claim GST on development costs while paying GST only on the margin.
However, if you’re selling to another business that can claim full GST credits, they may prefer a fully taxable sale instead, so they can reclaim the GST. This is often the case with commercial properties.
Who Can Use the Margin Scheme?
Not all property sales qualify for the Margin Scheme. You can only use it if:
- The property sale is subject to GST.
- You and the buyer agree in writing to use the Margin Scheme.
- The property was not previously purchased in a fully taxable sale where the Margin Scheme wasn’t applied.
- The property was not acquired as a GST-free going concern or as GST-free farmland.
If any of the above conditions aren’t met, you cannot use the Margin Scheme and must apply GST to the full sale price instead.
How Property History Affects Eligibility
A property’s purchase history determines whether you can apply the Margin Scheme. Here’s when it cannot be used:
❌ If you bought the property with GST fully applied and the Margin Scheme wasn’t used. ❌ If the property was part of a GST-free going concern sale (e.g., purchased as part of a business sale). ❌ If it was acquired as GST-free farmland. ❌ If it was transferred from an associate without payment.
Example:
- A property developer buys land from a registered seller who applied the Margin Scheme → The developer can use the Margin Scheme when selling.
- A developer buys a commercial property as part of a GST-free going concern → The Margin Scheme cannot be used.
It’s crucial to review the history of a property’s GST treatment before buying or selling to determine eligibility for the Margin Scheme.
How to Calculate GST Using the Margin Scheme
There are two main methods to determine the margin (the amount GST is applied to):
- The Consideration Method (for properties bought after 1 July 2000)
Under this method:
- Margin = Sale Price – Purchase Price
- GST Payable = 1/11 of the Margin
- Purchase price excludes legal fees, stamp duty, development costs, etc.
✅ This method is required if you bought the property after 1 July 2000.
- The Valuation Method (for properties bought before 1 July 2000)
If you purchased the property before GST was introduced, you can use a professional valuation (as at 1 July 2000) instead of the original purchase price to calculate the margin. This often results in a lower GST liability.
✅ This method can provide a better tax outcome for pre-GST purchases.
How to Calculate GST on Subdivided Land
When land is subdivided before sale, special GST rules apply. The original purchase cost must be apportioned between the subdivided lots using a fair and reasonable method. This can be based on:
- Land area (dividing the cost proportionally by square meters)
- Projected sale prices (allocating costs based on expected revenue from each lot)
Example: GST Calculation for Subdivided Land
XYZ Developers purchased a 10-hectare block for $1,000,000 under the Margin Scheme. They subdivide it into 10 equal 1-hectare lots and sell each for $300,000.
Using the Consideration Method:
- Original cost per lot: $1,000,000 ÷ 10 = $100,000 per lot
- Margin per lot: $300,000 – $100,000 = $200,000
- GST Payable per lot: $200,000 ÷ 11 = $18,181
For all 10 lots:
- Total GST Payable: $181,810
If the full sale price had been subject to GST:
- GST Payable per lot: $300,000 ÷ 11 = $27,273
- Total GST Payable: $272,730
By using the Margin Scheme, XYZ Developers saves $90,920 in GST.
How to Deal with Amalgamated Land
If you purchase multiple properties and combine them into a single property before selling, GST calculations can become complex. The Margin Scheme may apply only to the eligible portion of the land.
Example: Applying the Margin Scheme to Amalgamated Land
Chris buys two separate lots:
- Lot A was acquired under the Margin Scheme.
- Lot B was acquired through a fully taxable supply (GST applied in full).
Chris amalgamates the lots and sells the combined property. Since Lot B was originally acquired ineligible for the Margin Scheme, GST on that portion must be calculated under the full taxable supply rules. However, Lot A remains eligible for the Margin Scheme, meaning GST only applies to its margin.
By apportioning the land appropriately, developers can minimise GST liabilities while remaining compliant.
What Happens if You Sell a Mixed-Use Property?
If a property has both taxable and GST-free components (e.g., a building with both residential and commercial spaces), the Margin Scheme can apply only to the taxable portion. The GST calculation needs to be apportioned fairly.
For example, if a property is 70% residential (taxable) and 30% GST-free (going concern), then GST under the Margin Scheme applies only to 70% of the margin.
Need Help?
If you’re buying or selling property and need guidance on whether the Margin Scheme is right for you, let’s discuss your options. I’ll help you determine the best tax strategy to maximize your profit while staying compliant with GST rules
