GST Margin Scheme
What Is the GST Margin Scheme?
GST is levied on taxable supplies (including the supply of new residential remises).
Ordinarily, GST is calculated on the total value of the supply, however, where the GST margin scheme applies, GST payable is calculated on the ‘margin’ rather than the total value of the supply which can lead to significant savings.
What is the purpose of the GST margin scheme?
The purpose of the GST margin scheme is to ensure that the value embedded in a taxable supply of real property that accrued:
- before introduction of GST (i.e., 1 July 2000); or
- otherwise outside the GST net (e.g., in the hands of an individual that held the property as their main residence),
remains outside the GST net.
What is the margin in the GST margin scheme?
Generally, the margin is the difference between:
- the consideration for the supply (i.e., the sale price); and
- the consideration for the acquisition of the land (i.e., the vendor’s original acquisition cost of the land excluding related costs such as stamp duty and legal fees on the purchase).
There are, however, various other ways to calculate the margin, depending on the particular circumstances of the GST margin scheme. For example:
- if you purchased the land prior to 1 July 2000 and were registered or required to be registered for GST on that date – the margin is determined using the market value of the land on 1 July 2000; and
- if you purchased the land prior to 1 July 2000 but you were not registered or required to be registered for GST until a later date – the margin is determined using the market value of the land as at that later date.
Special valuation rules apply in these circumstances.
What is the GST payable under the GST margin scheme?
Ordinarily, GST is 10% of the value of the taxable supply, however, where the GST margin scheme applies the GST is calculated as 1/11th of the margin for the taxable supply.
Developer acquires a large suburban block with an old house on it for $2,000,000.
The vendor used the property as their main residence and the sale to Developer was outside the GST net.
Developer constructed four townhouses on the property with total construction costs of $2,200,000 (of which Developer claimed back $200,000 in GST input tax credits).
Developer subdivides and sells each townhouse for $1,750,000 ($7,000,000 in total).
The Developer’s GST liability under the ordinary rules versus the GST margin scheme are outlined below:
|Ordinary GST Rules||GST Margin Scheme|
|Total Land Cost||$2,000,000||$2,000,000 (A)|
|Apportioned Land Cost Per Townhouse||$500,000||$500,000 (B)|
|Gross Total Construction Costs||$2,200,000||$2,200,000|
|Gross Apportioned Construction Costs Per Townhouse||$550,000||$550,000|
|Total GST Input Tax Credits||$200,000||$200,000|
|Apportioned GST Input Tax Credits Per Townhouse||$50,000||$50,000|
|Net Total Construction Costs||$2,000,000||$2,000,000|
|Net Apportioned Construction Costs Per Townhouse||$500,000||$500,000|
|Total Value of Taxable Supplies||$7,000,000||$7,000,000 (C)|
|Value of Taxable Supply Per Townhouse||$1,750,000||$1,750,000 (D)|
(C – A)
|Apportioned Margin Per Townhouse||–||$1,250,000|
(D – B)
|GST Payable||$159,090 (1/11 x $1,750,000)||$113,636 (1/11 x $1,250,000)|
In this example, the application of the GST margin scheme saves $45,454 per Townhouse.
In order to access the GST margin scheme, one of the conditions is that the supplier and the recipient have agreed in writing that the GST margin scheme applies on or before the making of the supply.
This is usually satisfied by ticking a box on the Contract of Sale or a special condition.
Supplies ineligible for GST margin scheme
The GST margin scheme does not apply if the supplier acquired the entire interest in the land through a supply that was ineligible for the GST margin scheme.
There are various supplies that are ineligible for the GST margin scheme, including a taxable supply on which GST was worked out without applying the GST margin scheme. This means that if you acquired land under a taxable supply but the GST margin scheme was not applied, you cannot apply the GST margin scheme when you redevelop and sell it.
Note, however, that this only applies where you acquired the land under a taxable supply, therefore, for example, if you acquired the land under:
- a supply that was outside the GST net (e.g., the acquisition of an individual’s main residence from an unregistered vendor outside the GST net);
- a GST-free supply (e.g., the supply of a going concern); or
- an input taxed supply (e.g., the acquisition of existing [not new] residential premises even if it was acquired from another developer),
- you did not acquire the land under a taxable supply; and
- you can choose to apply the GST margin scheme (subject to meeting the other conditions) when you redevelop and sell.
GST margin scheme and amalgamation of land
It is common for property developers to acquire multiple properties and amalgamate titles as a condition of development approval.
As outlined above, the GST margin scheme for property cannot apply where the supplier acquired the entire interest in the relevant land through a supply that was ineligible for the GST margin scheme, however, if any one or more of the original titles were acquired under:
- the GST margin scheme for property; or
- a supply that was not a taxable supply (e.g., it was outside the GST net or a GST-free or input taxed supply),
the GST margin scheme for property can still apply on the subsequent supply of the entire amalgamated title even where it is strata subdivided into multiple lots.
Assume the same facts as Example 1 except Developer acquired two smaller adjoining properties for $1,000,000 each, that is:
- Property 1 – an old house purchased from an unregistered vendor who used their property as their main residence (i.e., a supply outside the GST net); and
- Property 2 – a vacant parcel of land from another developer registered for GST (i.e., an ordinary taxable supply) and the margin scheme was not applied.
Developer claimed back the GST embedded in the purchase price of Property 2.
Developer is required to amalgamate Property 1 and Property 2 as part of the development approval for the townhouses prior to strata subdivision.
As the entire interest in the amalgamated land was not acquired through a supply that was ineligible for the margin scheme (only the interest represented by what was previously Property 2), when Developer strata subdivides the townhouses and sells them off:
- Developer can choose to apply the margin scheme in relation to the supply of all the townhouses (even those built on what was previously Property 2 notwithstanding that it was acquired through a supply that was ineligible for the margin scheme); and
- Developer is required to repay the GST input tax credits claimed in relation to the acquisition of Property 2 to the ATO.
If you or clients are property developers, you should confirm the future GST implications of a proposed acquisition as the nature of that acquisition can have a significant impact on the cash flow over the project period and the GST ultimately payable.
If you or clients need any assistance in relation to the margin scheme or GST generally, contact Mosaic Tax Legal on 1300 115 841 or firstname.lastname@example.org.