When someone develops land to sell it for a profit, the Australian Taxation Office (ATO) may view them as in the business of developing property, obligating them to register for Goods and Services Tax (GST). The margin scheme enables GST to be calculated on a concessional basis.
On the surface level, a GST-registered entity is obligated to charge an additional ten per cent of the property’s sale price. This is based on the GST concept of taxing the added value on an item, which in this case is an improvement on the property. In some cases, you may not be able to claim GST on the purchase, because the vendor is not registered GST. However, you have to pay 1/11 of GST on your full sale price in an ordinary GST regulation. Therefore the GST margin scheme comes in and it could make you pay less GST by reducing the sale price by the purchase price. There must be a written agreement to say the sale of the property is using the margin scheme before the settlement date.
Should You Register or Pay GST When Selling a Property?
When determining whether you or your entity must register for GST when selling land developed for sale, the ATO will look at the following considerations:
- Was the land development undertaken with ‘the aim of making a profit’?
- Did the land have ‘the essential characteristics of a property development’?
- Did the property development result in a ‘profit’?
In addition to the abovementioned considerations, the ATO will also look at the following factors when deciding whether you are in the business of developing property:
- Consistently buying, renovating, and selling properties to make a gain
- How long you have held the land
- Whether it was your family home
- Whether the land has previously been developed
- What your intention was when the land was first purchased
How the GST Margin Scheme Works
The margin scheme exists to reduce the taxable portion of your sale. This is an alternative method for calculating the portion of the sale amount that applies to the property improvement. Under the margin scheme, the taxable part of your sale is one-eleventh of the margin for your sale.
There are two methods you can use depending on when you bought the property.
Valuation method
Use the valuation method to work out the margin if you originally purchased your property before 1 July 2000. You can only use the valuation method if you hold an approved valuation.
Using the valuation method, the margin is the difference between the selling price and the value of the property (usually as at 1 July 2000).
Consideration method
You can use the consideration method to calculate the GST payable under the margin scheme regardless of when you purchased the property you’re selling.
Using the consideration method:
- the margin is the difference between the property’s selling price and the original purchase price, which is sale price minus purchase price equals the margin
- the sale price must include any settlement adjustments in the sales contract
- don’t include any of the following as part of the purchase price
- costs for developing the property
- legal fees
- any options you purchased
- stamp duty
- any other related purchase expenses.
Calculating with the GST Margin Scheme
To gain a better understanding of how to calculate with the GST margin scheme, here is an example:
Mr Wyatt bought a property for $600,000, intending to develop it and registered GST. He has claimed GST credits on all materials, trades, and other related expenses throughout the development process.
At the point of sale, he sold the property for $1.43 million, agreeing with the buyer in the contract of sale that it is being sold using the GST margin scheme. Considering the figures, Mr Wyatt added the value of $830,000 to the developed property.
The GST on the value-added component takes 1/11th of the amount. By applying the GST margin scheme, he would only need to remit to the ATO $75,454 in GST collected instead of $130,000, which would be the case if the GST was charged on the total sale amount and did not use the GST margin scheme. This effectively saves them $54,546.
Because Mr Wyatt chose to apply the margin scheme, the buyer can’t claim a GST credit on the purchase.
When you can’t use the margin scheme
You can’t use the margin scheme:
- if you purchased the property as fully taxable and the margin scheme wasn’t used
- if you weren’t registered or required to be registered for GST at the time of your sale
- for sales on or after 17 March 2005, if you
- purchased the property as fully taxable and the margin scheme wasn’t used
- inherited the property from a person who wasn’t eligible to use the margin scheme
- obtained the property from a fellow member of a GST group who wasn’t eligible and they purchased it from an entity that wasn’t a member of the GST group
- were a participant in a GST joint venture and obtained the property from the joint venture operator who purchased the property through an ineligible sale.
- if you’re selling property originally purchased, or entered into a contract to purchase, on or after 9 December 2008 and the
- entity you bought the property from wasn’t eligible
- property was purchased as part of a going concern
- property was purchased as GST-free farmland
- property was purchased from an associate for no consideration (no payment).
Conclusion
Developing a property and navigating the GST margin scheme can be complex. Still, it is beneficial to many property developers and buyers. As you delve into property development and sale, it is best to engage a tax professional early on to assist with structuring decisions, advise on potential tax implications and other areas. This way, you can rest assured that your best interests are prioritised.
At M1 Accounting & Taxation, we specialise in tax preparation and business advisory on the Gold Coast, helping individuals and business clients within a wide range of industries and scales. When it comes to property development and sales, our trusted accountants with 15 years of experience will take care of your needs. If you need tax compliance services on the Gold Coast, we’ve got you covered! Get in touch with us today and let us know how we can help!
No responses yet