The GST Margin Scheme: How It Works for Property Sales

The Goods and Services Tax (GST) margin scheme provides an alternative method for calculating tax obligations on certain property sales. Its purpose is to address situations where a property is sold by a business, but the business was unable to claim tax credits on the original purchase. This often occurs when the property was acquired from an individual or entity not registered for GST, such as a private homeowner. In these cases, applying a standard tax rate to the full sale price could lead to taxing the property’s value more than once.

The margin scheme adjusts this by allowing the tax to be calculated only on the “margin” of the sale, which is the difference between the sale price and the original purchase price. This method is particularly relevant for property developers and investors who buy land or existing residences for development and resale. By taxing only the value added by the seller, the scheme creates a more equitable tax outcome on property transactions conducted as part of a business.

Eligibility for Using the Scheme

To utilize the margin scheme, both the seller and the property itself must meet specific conditions. The seller must be conducting a business and be registered for GST at the time of the sale. This ensures that the transaction is commercial, as the scheme is designed for business-related property sales, not private sales between individuals. The sale must also be a “taxable supply,” meaning it’s a transaction that would normally be subject to GST.

Property eligibility hinges on how it was originally acquired by the seller. The scheme can be used if the property was purchased from a seller who was not registered for GST, such as an individual selling their family home. It can also apply if the property was acquired from a seller who also used the margin scheme for that transaction, ensuring the tax concession can pass through subsequent eligible sales.

There are clear situations where the margin scheme cannot be applied. A primary exclusion is when the property was acquired through a fully taxable sale where the standard GST was calculated on the full price. In such a case, the purchaser would have been able to claim a GST credit on the acquisition, making the margin scheme inappropriate for the subsequent sale. The scheme is also unavailable if the property was acquired as a GST-free going concern or certain farmland.

Calculating the GST on the Margin

The principle of the margin scheme is that GST is calculated as 1/11th of the margin, not 1/11th of the total sale price. The margin itself is the value added by the seller. There are two distinct methods for determining this margin, and the appropriate method depends on when the property was acquired.

Consideration Method

The most common approach is the consideration method, used for properties acquired on or after the implementation of the GST system. The margin is calculated by subtracting the original purchase price from the current sale price. For example, if a developer buys land for $500,000 from an unregistered individual and later sells the developed property for $900,000, the margin is $400,000 ($900,000 – $500,000).

The GST payable would then be 1/11th of this margin, which amounts to $36,363. The purchase price in this calculation is the amount paid for the property itself. Other costs incurred by the seller, such as construction or legal fees, are not included when calculating the margin, though tax credits may be available for the GST paid on those expenses separately.

Valuation Method

The valuation method is used for properties that were acquired before the introduction of GST on July 1, 2000. In this scenario, the margin is the difference between the sale price and an approved valuation of the property as of a specific date, typically July 1, 2000. For instance, if a property owned before July 1, 2000, had an approved valuation of $300,000 at that date and is later sold for $850,000, the margin would be $550,000.

The GST payable would be 1/11th of $550,000. This method requires a formal, written valuation conducted by a professional valuer. An informal appraisal from a real estate agent is not sufficient, and the valuation must specifically assess the property’s market value as of the required date.

Requirements for Applying the Scheme

Successfully applying the margin scheme involves more than just meeting eligibility criteria; it requires specific administrative actions. These steps are centered on formal agreements and diligent record-keeping. Failure to adhere to these requirements can invalidate the use of the scheme.

Written Agreement

A requirement is that the seller and the buyer must agree in writing to apply the margin scheme to the transaction. This agreement must be finalized on or before the date of settlement, which is the point at which ownership of the property is transferred. There is no officially mandated format, but it must clearly state the intention of both parties to use the margin scheme and identify the property.

This written agreement is often incorporated directly into the contract of sale, where a specific clause indicates that the margin scheme will be applied. Having this agreement in writing is a strict requirement for sales made after June 29, 2005. Without this mutual, documented consent, the seller cannot apply the margin scheme, even if all other eligibility conditions are met.

Record-Keeping

Sellers using the margin scheme must maintain thorough records to support their tax calculation and serve as proof of eligibility. Documents include the original contract of sale for the property’s acquisition, which establishes the initial purchase price for the consideration method. The seller must also retain a copy of the written agreement with the buyer and the professional valuation report if the valuation method is used.

Reporting and Remitting the GST

After a property sale under the margin scheme is completed, the seller has specific obligations for reporting the transaction and paying the tax. This process is handled through the Business Activity Statement (BAS), the standard form used by businesses to report and pay their tax obligations. The reporting must be done in the period in which the property settlement occurred.

When completing the BAS, the seller does not report the full sale price of the property. Instead, at label G1 (Total Sales), the seller reports only the amount of the margin. For example, if a property was sold for $900,000 with a margin of $400,000, the amount reported at G1 would be $400,000. If the margin is zero or negative, no amount is reported at G1.

The GST payable on the margin is then reported at label 1A (GST on Sales). Following the previous example, the $36,363 of GST calculated on the $400,000 margin would be included at this label. It is important to distinguish this from any withholding amount paid by the purchaser directly to the tax authority. The final remittance is the net amount of GST owed after accounting for any tax credits on other business purchases for that period.