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GST Margin Scheme and Property

GST Margin Scheme – Property Sales

Property development in the suburbs is more common than ever, with owners/investors subdividing blocks in 1,2,3 even more lots, with the goal of making a good profit. Often these sales are subject to 10% Goods and Services Tax (GST) when you sell the lots, which of course reduces how much cash in hand you have at the end of the day.

This is where the GST margin scheme can potentially save you paying a lot more GST and keeping more money in your pocket. 

What is the GST margin Scheme ?

The margin scheme is a way of working out the GST you must pay when you sell property as part of your business (enterprise). Without going into to much detail the ATO considers buying property with the intention of immediate resale at a profit or developing property to sell, to be running an enterprise, which is likely subject to GST.

The margin scheme allows you to only pay GST on the margin between the purchase price and sale price, instead of paying GST on the entire sale price and this can mean significant savings .

Why is this important ? 

Because this can potentially save you tens of thousands of dollars GST you will have to pay to the ATO.  Unfortunately I have seen clients miss out , because they didn’t know or didn’t correctly apply the rules which is why I recommended you speak to an accountant first about such matters, the savings can be significant and you can avoid a potential headache.

Eligibility:

  1. There was a taxable supply (The sale of the property should be subject to GST) (GST Act s 9-5)
  2. You must have a written agreement between the parties to use the margin scheme before settlement GST Act s 75-5(1), this is easily incorporated into the O & A/settlement documents . 
  3. The seller is not ineligible for the margin scheme (expanded below)

When you can’t use the margin scheme:

There are a number of circumstances that make you ineligible for 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)

As you can see there are a number of considerations to make sure you are eligible, so seeking advice can help provide confidence your making the right choice given the potential savings.

Main Points 

  1. GST – If there’s GST on the property sale CHECK your eligibility for the GST margin scheme before you settle the property.
  2. Agreement – Assuming you are eligible ensure your you have written agreement between you and the buyer prior to settlement
  3. Timing – Make sure you look at this before you settle the property, while it’s not impossible to implement after settlement in certain circumstances it can be difficult and in some cases the opportunity is unfortunately lost.

If you have any questions regarding the GST Margin Scheme please free to Contact us to discuss, obligation free.