The margin scheme is a way of working out the GST you must pay when you sell property as part of your business. The margin scheme is subject to eligibility.

The margin scheme enables GST to be calculated on a concessional basis. Rules depend on when a property was first purchased.

You can only apply the margin scheme if the sale of a property is taxable.

Generally, the GST is based on the difference between:

·       the price the you paid for the property when you first purchased it, and

·       the subsequent sale price of the property.

There must be a written agreement to say the sale of the property is using the margin scheme before the settlement date.

If you purchase a property where the margin scheme is applied to the sale, you can't claim a GST credit for the GST included in the price.

If you charged the full rate of GST when purchasing a property as part of your business, generally you can claim the GST back. However, you can’t apply the margin scheme on subsequent sales.

Eligibility to use the margin scheme

If you sell property as part of your business and you're registered for GST, you may use the margin scheme to work out how much GST you must pay.

If you use the margin scheme the parties must have a written agreement to use the margin scheme before settlement. For GST purposes, the settlement date is the date you purchase the property. Most contracts have a tick box stating if the sale is subject to the margin scheme.

When 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  

w  entity you bought the property from wasn't eligible

w  property was purchased as part of a going concern

w  property was purchased as GST-free farmland

w  property was purchased from an associate for no consideration (no payment).

Must be a written agreement for sales on or after 29 June 2005

There must be a written agreement to use the margin scheme before settlement for sales on or after 29 June 2005.

There is no set format for a written agreement. An agreement must:

·      be signed by both seller and purchaser

·      clearly identify the property being sold.

The agreement could be included in the sales contract.

If you don't have a written agreement when the sale was made, you may ask us for permission to extend the time to obtain the agreement in writing. We don't have discretion to apply the margin scheme where parties don't agree that it applies.

Sales before 29 June 2005

You don't need a written agreement between the seller and purchaser 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.

 

For sales made or entered into before 29 June 2005, if you didn't apply the margin scheme when the sale was made, you may ask to account for GST on the sale as if the margin scheme applied.

 

You must show that:

·       you didn't choose to apply the margin scheme at settlement because of a mistake

·       you satisfy all other requirements under the margin scheme

·       the purchaser hasn't claimed a GST credit or a decreasing adjustment for the purchase

·       you and the purchaser didn't agree on a price that included GST

·       you aren't making the agreement to avoid paying GST.

Methods to calculate the margin

Method depends on purchase date

When selling property using the margin scheme that you originally purchased or held an interest in:

·       after 1 July 2000 – you must use the Consideration method

·       before 1 July 2000 – you can use either the Valuation method or the Consideration method.

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  

w  costs for developing the property

w  legal fees

w  any options you purchased

w  stamp duty

w  any other related purchase expenses.

 

Chang Accounting Advisory Pty Ltd, we are CPA practice and tax agent. If you or your families or friends need our services, please feel free to contact our team for any assistance. 

 

This article is for informational purposes only and does not form part of our advice. This article is based on guidance from Australian Taxation Office. Please contact our team if you need any assistance.

Claire Chang, 0497 131 419, claire.chang@changadvisory.com.au, wechat: clairechang26

Michelle Cui, 0433 539 870, michelle.cui@changadvisory.com.au, wechat: michellejc