GST Margin scheme
The GST margin scheme is a way of working out the GST one must pay while selling a property as part of a business.
The margin scheme can only be applied if the sale of the property is taxable.
If property is purchased where the margin scheme was applied to the sale, GST credit for the GST included in the purchase price of the property cannot be claimed. The margin scheme cannot be used on property sold if the property was originally purchased as fully taxable and the margin scheme was not used. In this situation one can claim the GST included in the purchase price if the property is going to be used in the business.
Using the GST margin scheme
The amount of GST normally paid on a property sale is equal to one-eleventh of the total sale price. When the terms of the purchase are made, requirements vary depending on whether the property is purchased before 1st July 2000 or after 1st July or after 9 December 2008. In terms of the sale made, the requirements vary depending on whether the sale was made on or after 17th March 2005 or on or after 29th June 2005.
In the margin scheme, the amount of GST paid on a property sale is equal to one-eleventh of the margin.
Margin can generally be referred to as the difference between the sale price and the amount paid for the property or the value of the property provided in an approved valuation of the property as at 1 July 2000.
Margin is not the profit margin, unlike an accounting profit margin, the margin on the sale does not take into account costs incurred to develop the new property or subdivide the land, the selling price minus a valuation of the property for a property purchased after 1 July 2000 is worked out the same way as a capital gain, it is possible to pay GST under the margin scheme when there are no capital gains for income tax purposes.
If the property is sold as part of the business and is registered for GST, you may be able to use the margin scheme to work out how much GST you must pay. Whether you can use the margin scheme depends on how and when you first purchased your property. For GST purposes the date when settlement occurs will be the date that you have purchased the property. You can use the margin scheme if you purchased the property before 1 July 2000 (the start of GST), or if it is purchased after 1 July 2000 from someone that:
- Was not registered or required to be registered for GST
- Who sold you an existing residential premises
- Who sold the property to you as part of a GST-free going concern
- Who sold you the property using the margin scheme.
You cannot use the margin scheme if when you first purchased the property the sale to you was fully taxable and the margin scheme was not used. In this case the amount of GST included in the price you paid is one-eleventh of the full purchase price. There are two methods you can use to work out the margin:
- The consideration method
- The valuation method.
What method you can use will depend on when you originally purchased the property you are selling. In case of the consideration method you can use the consideration method regardless of when you purchased the property you are selling. Using the consideration method, the margin is the difference between the properties’ selling price and the original purchase price.
That is, the sale price less the purchase price equals the ‘margin’. When working out the margin using the consideration method, do not 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.
You can generally only use the valuation method to work out the margin if you originally purchased your property before 1 July 2000. Using this method, the margin is the difference between the selling price and the value of the property (usually as at 1 July 2000). That is, the sale price less the value of the property (usually as at 1 July 2000) equals the ‘margin’. You can only use the valuation method if you hold an approved valuation.
When you cannot use the GST margin scheme
If you were charged the full rate of GST when you originally purchased the property, the margin scheme can’t be used. Generally, if you were charged the full rate of GST when you purchased a property as part of your business you would have claimed the GST back.
Both the buyer and seller must agree in writing to apply the margin scheme if the contract for sale was made on or after 29 June 2005. The agreement to use the margin scheme must be reached by the time the property is supplied, usually at settlement.
No written agreement between the seller and purchaser is needed if the sale was made either:
- before 29 June 2005
- on or after 29 June 2005 but you entered into a contract or granted rights or options over the property you are selling before 29 June 2005.
There is no set format for a written agreement, but there must be a written statement which makes it clear that you and the purchaser have agreed to use the margin scheme on the sale, and clearly identifies the property being sold. This statement may form part of the sale contract, or it may be a separate document.
If the purchaser agrees to allow the seller of the property the absolute discretion to apply the margin scheme, the seller must confirm in writing that the margin scheme has been applied on or before the settlement date.
Completing your activity statement
You may use either the calculation worksheet method or the accounts method to complete the relevant boxes on your activity statement for the reporting period. The amounts you report on your activity statement will depend on the accounting basis you have chosen, or are required to use. You can account on a cash basis or a non-cash basis.
Account for GST when using the margin scheme
- If you sell property and have chosen to use the margin scheme, you only report the amount of the ‘margin’ on your sale at G1 (total sales). Do not report the full amount of payment you receive.
- If the margin is nil (or a negative amount), do not report any amount at G1 (total sales).
- If you are using the accounts method, report the amount of GST on your margin at 1A (GST on sales).
- If you are using the calculation worksheet method, use the worksheet to calculate the amount of GST to report at 1A (GST on sales).
If you buy property and the GST included in the price you paid was worked out using the margin scheme, you are not entitled to a GST credit for the purchase. Do not report the amount of your payment for the purchase at G10 (capital purchases) or G11 (non-capital purchases). Do not report any GST credit for the purchase at 1B (GST on purchases).
In addition to your normal GST record keeping obligations we recommend you keep:
- accounting records for the transaction
- evidence of the original purchase price of the property
- records showing how you have applied the margin scheme and identifying the particular property that you have sold using the margin scheme
- records showing your agreement with the purchaser to use the margin scheme
- if you used the valuation method, the valuations or other documents showing how you arrived at the value of the property.
We can help…
If you require any advice or assistance with your properties, reach out to us. We may be based in Queensland but we offer assistance to anyone in Australia. Let’s start the conversation by calling 1800773643, chatting to us on our website or via our free app, reaching out via social media or visiting our CONTACT US page for more options to connect, including text messaging.