When can the margin scheme be used?
Both parties must agree in writing before settlement to use the margin scheme. This agreement should be signed by both the seller and buyer and identify the property being sold. In NSW, it is formalised in the Contract of Sale with a tick box indicating that the sale is subject to the margin scheme. A property lawyer can help ensure this contract is accurate and legally binding and prepare all necessary paperwork.
Who is eligible for the margin scheme?
The margin scheme eligibility is primarily for vendors who sell property as part of a business. Sellers must meet certain conditions to access the margin scheme. Not all property sales can apply the scheme. Businesses must check their eligibility before proceeding.
Individuals or entities that have acquired property whereby the margin scheme was applied or are not required to be registered for GST may also be eligible under certain conditions.
Potential applicants can consult a Sydney property lawyer to understand eligibility criteria and ensure compliance with ATO and legal obligations. Your accountant will need to advise on the GST payable if you do use the scheme.
What properties can the margin scheme be used for?
The margin scheme can be used for selling commercial, residential, or empty land that, under standard conditions, would include GST on the full sale price.
It does not apply to your primary residence. Even if you’re registered for GST due to business activities, selling your home does not have a GST component, so the margin scheme is irrelevant. For investment properties and land intended for resale, the margin scheme can reduce the GST you must pay when selling.
How is GST calculated under the margin scheme?
There are two methods to calculate GST under the margin scheme: the valuation method and the consideration method. For properties bought before 1 July 2000, the margin can be calculated using either the valuation or the consideration method. For properties bought after 1 July 2000, only the consideration method can be used. You cannot use the margin scheme if the previous seller was GST-registered and calculated GST on the total property sale price.
Consideration method
This method can be used for properties bought before or after July 1, 2000. The margin is calculated using this formula:
Margin = Sale price – purchase price
The sale price is the amount specified in the Contract of Sale, excluding any adjustments made for settlement. The purchase price is the amount originally paid for the property, again excluding any additional settlement costs such as legal fees and stamp duty. The consideration method is straightforward and does not consider other factors, such as valuations. The GST payable is then 10% of the calculated margin.
Valuation method
This is another way to calculate GST under the margin scheme, but can only be used for properties purchased before July 1, 2000. It can be calculated using the formula:
Margin = Sale price – property value on July 1, 2000
To be able to use this calculation method, you must get:
- A written valuation report that confirms the property’s market value as of 1 July 2000. A professional property valuer must do this.
- The property’s purchase price in the last contract of sale occurred before 1 July 2000.
- A state or territory government-issued assessment of the property value for land tax or rating purposes, which was current as of 1 July 2000.
This method has a provision for using property valuations rather than only referring to original purchase documentation. It is an alternative way to calculate GST on properties acquired before the tax came into effect.
How does the margin scheme work for subdivided land?
One of the primary benefits of using the Margin Scheme is the potential reduction in GST payable on the sale of property.
Developers selling subdivided land frequently use the margin scheme, as they often purchase residential property from vendors who are not registered for GST.
For subdivided land, the Australian Taxation Office (ATO) permits using any reasonable method to apportion the purchase price across the subdivided allotments. If you buy land, subdivide it, or construct strata title units and then decide to use the margin scheme, the margin is calculated by subtracting the cost you incurred for that portion from the selling price.
Situations where you cannot use the margin scheme
There are certain situations where you cannot apply the margin scheme.
- If the property was purchased as fully taxable previously and this scheme was not used.
- If you are not registered for GST at the time of selling.
There are several other exclusions for using the scheme which a property lawyer or accountant may be able to advise you on.
As a general guide, you won’t be either if the previous owner was not eligible for the margin scheme.
What happens during a property transaction if the margin scheme is used?
The GST applicable using the correct calculation method is payable to the ATO at the time of settlement. The GST amount should be detailed in the contract of sale.
An experienced property lawyer who understands the margin scheme
The margin scheme is complex and requires a good understanding of property and law and tax implications. Consulting with an experienced Sydney property lawyer, such as RS Law Group, can help determine whether you can use the margin scheme for your transaction and work with your accountant to determine GST payable at the time of settlement.
