The margin scheme is a way of working out the GST you must pay when selling a property that is a part of your business.
Where the margin scheme does not apply (in most cases), you would calculate the GST as one-eleventh of the sale price. Where the margin scheme does apply, you calculate the GST as one-eleventh of the ‘margin’.
The margin is the difference between the sale price and the purchase price of the property. For property purchased prior to 1 July 2000, you have the choice to use the original purchase price or an approved valuation as of 1 July 2000.
It is important to note that the margin is not the profit you make on the property sale, as it does not take into account costs to develop the property or costs to subdivide the land.
If the property is sold as part of the business and is registered for GST, you may be able to use the margin scheme to work out how much GST you must pay. For example, if you purchased your property for $500,000 and sold it for $830,000 and the margin scheme applied, the total GST would be $30,000 (one-eleventh of the margin of $330,000), rather than $75,454 (which would be based on the sale price without the margin, or one-eleventh of $830,000).
Whether you can use the margin scheme depends on how and when you first purchased your property. You can use the margin scheme if you purchased the property before 1 July 2000 or if it is purchased after 1 July 2000 from someone who:
Was not registered or required to be registered for GST
Who sold you an existing residential premises
Who sold the property to you as part of a GST-free going concern
Who sold you the property using the margin scheme.
You cannot use the margin scheme if, when you first purchased the property, the sale was fully taxable and the margin scheme was not used. In this case, the amount of GST included in the price you paid is one-eleventh of the full purchase price.
The rules regarding the application of the margin scheme to a sale by you, as the developer, are very useful to understand. They provide mainly for situations in which your acquisition of the property to be developed makes the subsequent sale ineligible for the margin scheme.
The most common of these situations is where the entire interest in the property is acquired as fully taxable income on which GST is calculated without using the margin scheme (as detailed earlier).
Another common situation is where the entire interest in the property was acquired as a going concern from a vendor who had acquired the property as a fully taxable supply on which GST was calculated without using the margin scheme.
Where you acquire a property as a going concern from a vendor who was entitled to use the margin scheme (but didn’t), you calculate the margin by deducting the vendor’s purchase price (or the market value when the vendor purchased the property) from the sale price.
For example, you purchased a property from a vendor as a going concern for $500,000. The vendor originally purchased the property for $400,000. You sell the property three years later for $600,000. You are able to calculate the margin on the vendor’s original purchase price of $400,000. Therefore, your margin would be $200,000 and you would pay GST of one-eleventh of $200,000, being $18,182. If you do not apply the margin scheme, you would pay GST on the $600,000 sale price, being $54,545.
The best outcome for you is to purchase a property that is either an existing residence (on which no GST is payable) or a non-taxable supply (such as a commercial property sold by a vendor who is neither registered nor required to be). You then deduct the entire purchase price when calculating the taxable margin.
As a property developer, acquiring property as a going concern or as farm land is more attractive than acquiring it as a fully taxable supply, on which GST is worked out without applying the margin scheme. As long as you are eligible to use the margin scheme, you will save GST payable on the sale of the developed properties – generally one-eleventh of the acquisition value that can be used to calculate the taxable margin.
If you need some advice around the margin scheme and any property you are wanting to acquire or recently have, please get in touch. We are here to help.
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Tony has 33 years’ experience as an accountant, and 13 years’ experience as a CPA. His first 18 years’ experience involved financial, management and operational accounting roles at a senior management level, in the security, transport, and forensic accounting industries