GST margin scheme explained for property

What the margin scheme is

When a business that is registered for GST sells real property as part of its enterprise, GST is normally worked out on the full price the buyer pays. The margin scheme is an alternative method in the A New Tax System (Goods and Services Tax) Act 1999. It lets an eligible seller calculate GST on the margin instead, which is broadly the gap between what the seller receives and what it paid for the property, or in some cases a valuation.

Under the scheme, the GST payable is the margin divided by 11^[1]. On an ordinary taxable sale, the same fraction is applied to the whole GST-inclusive price. Because the margin is usually much smaller than the price, the scheme can noticeably reduce the GST a seller pays to the ATO.

People most often meet the margin scheme in residential development, which is why it comes up when people search for GST on new residential property. A developer buys a site, builds townhouses or apartments and sells them as new residential premises. Sales of new residential premises are generally taxable, whereas resales of established homes are generally input taxed, so GST is a real cost for developers and something their buyers see in contract clauses. Sales of commercial property are also commonly taxable, unless a concession such as the supply of a going concern applies.

When the margin scheme may apply

The ATO sets out the conditions in its margin scheme guidance. In general terms:

• The seller is registered, or required to be registered, for GST and is selling the property in the course of its enterprise.
• The seller and the buyer agree in writing that the margin scheme will be used. The ATO generally expects this agreement to be made by settlement, unless it allows a longer period.
• The seller did not acquire the property in a fully taxable sale, meaning a purchase where GST was worked out on the whole price without the margin scheme. Property bought that way generally cannot be resold under the scheme.

Special rules apply where the seller acquired the land as a going concern, from an associate, as GST-free farm land or from a government body. Those situations need specific advice rather than a general reading of the rules.

Most contracts for new residential property and vacant land contain a GST clause that says whether the margin scheme applies. That clause is usually where the written agreement sits, so read it closely and ask your conveyancer what it means for you.

Two ways to work out the margin

The consideration method

Under the consideration method, the margin is generally the sale price less the amount the seller paid to acquire the property. Development spending such as construction, consultant fees, council charges and interest is not subtracted. A registered developer generally claims GST credits on those costs separately through its activity statements, so the two calculations sit side by side rather than being netted together.

The valuation method

Where the seller held the property before GST began, or in certain other situations the ATO describes, the margin may be worked out from a valuation at a specified date instead of the original purchase price. The valuation has to meet the ATO's requirements for an approved valuation, which generally means a professional valuer following the method the ATO sets.

Which method produces a smaller margin depends entirely on the facts, and the seller cannot always choose.

A worked description in words

Picture a hypothetical developer that buys a site from a private owner who is not registered for GST. That purchase is not a taxable sale, so the developer can later use the margin scheme if the other conditions are met. The developer builds a small row of townhouses and includes a margin scheme clause in each sale contract.

For each townhouse, the developer allocates part of the original land price to that lot on a reasonable basis, subtracts it from the townhouse's sale price, and divides the result by 11^[1] to arrive at the GST on that sale. Building costs play no part in that sum; the developer has already claimed credits for the GST it paid to its builder.

Now change one fact. Suppose the developer had instead bought the site from a GST-registered seller in a fully taxable sale. The margin scheme would generally not be available, and GST on each townhouse would be worked out on the full price. That single difference can change a project's net revenue considerably.

To see the effect with your own numbers, enter a sale price and acquisition price in the GST margin scheme calculator, which compares the margin scheme result with GST on the full price. The feasibility calculator then shows how net sale revenue flows through to the project as a whole.

What it means for buyers

• No GST credit. A buyer who purchases under the margin scheme generally cannot claim a GST credit for the purchase, even if the buyer is registered. Developers buying sites and businesses buying commercial premises often assume they can recover GST, so this deserves checking before exchange.
• The price is the price. A home buyer who is not registered for GST pays the agreed price whichever method the seller uses. The scheme may influence how the seller sets prices, but it does not add a separate charge for the buyer.
• Selling later. A buyer who acquired property under the margin scheme may be able to use the scheme again when selling, provided the other conditions are met at that time.

GST at settlement withholding

Buyers of new residential premises and potential residential land generally must withhold part of the purchase price and pay it directly to the ATO at or before settlement. The seller must give the buyer written notice saying whether withholding is required and how much. The ATO publishes a different withholding proportion for sales under the margin scheme than for sales taxed on the full price. The ATO's page on GST at settlement explains the online forms involved, which conveyancers usually lodge.

For a home buyer, withholding usually changes who receives part of the settlement money rather than the total paid. For a developer, it means less cash arrives from each sale, with the withheld amount credited against its GST obligations. Lenders financing a project generally look at net sale proceeds after withholding when they assess how the loan will be repaid.

Why lenders care

Development lenders size loans partly on expected sales revenue net of GST. Whether the margin scheme is available can therefore change the net revenue figure, the loan amount a lender is comfortable with and the equity a developer needs. Some lenders ask for written tax advice confirming the GST treatment before they commit. The construction finance pillar explains how lenders assess projects, and the cost overrun and GST funding page covers facilities some developers use to manage GST timing. The glossary entry for the GST margin scheme gives a short definition.

Common mistakes

• Assuming the margin scheme applies because the property is new, without a written agreement in the contract.
• Leaving the agreement until after settlement and hoping it can be added later.
• Subtracting building costs from the margin instead of claiming credits on them separately.
• A registered buyer budgeting for a GST credit on a purchase made under the scheme.
• Relying on a valuation that does not meet the ATO's requirements for the valuation method.
• Overlooking the seller's withholding notice and arriving at settlement with the wrong figures.

What to ask a tax adviser or conveyancer

1. Am I eligible to use the margin scheme, given how and when I acquired this property?
2. Which method is open to me, consideration or valuation, and how would each work here?
3. Does my contract contain a valid written margin scheme agreement?
4. As a buyer, will I lose a GST credit I was expecting to claim?
5. Does GST at settlement withholding apply, and what amount does the seller's notice show?
6. How should GST be shown in my project feasibility and loan application?

Duty is a separate tax from GST and is often charged on a GST-inclusive price; the lesson on stamp duty and land tax by state explains how it works.