26 Feb GST and the Margin Scheme
What is the margin scheme?
GST can be a hidden trap for property developers. This is because (unsurprising) the rules around GST on a property can be very confusing! In very general terms if you are selling a property that is considered “new” by the ATO, then it is most likely that GST will apply to the sale.
A new property can occur in the following situations; if a new house has been built on land, if land has been subdivided or if a property has had a “major” renovation. The second requirement is that this transaction was done with the intention of making a profit this way from the start (i.e., you are running a business).
The margin scheme is one way (and quite often the best) to calculate GST payable on the sale. The first condition must be that when you purchased this property, the seller did not use the margin scheme or include GST on the sale so think “mum & dad” sale. The next condition is that your business must be registered for GST. The last and most definitely the most missed condition is that there must be a written agreement between purchaser & seller that the margin scheme will apply; this can be done in the contract and most standard contracts have now included this option.
While working out whether GST & the margin scheme applies the actual calculation is quite simple. Let’s look at an example:
Buy a vacant block of land on the 1st March 2020 and the purchase price (note this does NOT include legal fees, stamp duty or any other costs) is $300 000. A house is then built, costing around $250,000.
This property is then sold on the 15th March 2020 for $750,000
The GST payable on the sale would be:
$750,000
Less $300,000
= $450,000
Divide 11
= $40,909
The ATO as of 1/7/18 now requires all purchasers to withhold the GST component of the purchase price from settlement and pay this direct to the ATO. If you are using the margin scheme, the purchaser must withhold 7% of the sale price (in our example this would be $750,000 x 7% = $52,500.
The purchaser would then lodge their BAS for the quarter and report they need to pay $40,909 which the ATO will offset against the $52,500 they are holding and refund the balance. There however could be a timing difference, e.g. you settle on the 1st April but only lodge quarterly, so your BAS isn’t lodged until 1/7/19 – that’s 3 months the ATO has your spare $11,591. This timing difference can have ramifications for cashflow and also loan payouts.