Eligibility, Calculation and Whether it is Worth it
The margin scheme for property developers is often talked about and rarely understood. Let’s take an old house on a wide Nedlands block. The plan is to demolish it, subdivide into four lots and build a townhouse on each, and every likely buyer is an owner occupier who cannot claim GST. Somebody in the first meeting says the obvious thing. We will use the margin scheme.
The margin scheme is not simply an election to pay less GST. Your acquisition history decides whether it is available at all. The applicable rule decides where the margin starts. And the commercial comparison must include prices, credits and funding before anyone knows whether it is the cheaper answer.
How it works
The margin scheme applies GST to the margin rather than the full price, at one eleventh of the margin. Because the saving is large, the ATO has named incorrect use of the scheme as a compliance focus, and margin scheme sales are examined closely in audits of developers.
First question: can you use it at all?
You cannot use the margin scheme if you acquired the whole interest through a supply that was ineligible. The common cases:
- A fully taxable purchase where the margin scheme was not applied
- A GST free going concern or farmland purchase from a vendor who had itself bought fully taxable
- Certain transfers from an associate for no consideration, where the associate had bought fully taxable
Property transferred within a family group needs particular care. The GST result can depend on how an earlier owner acquired the land, not only on the contract under which you bought it. The associate rule has five cumulative conditions, including the associate’s registration at the time you acquired from it, and every one of them must be tested against the actual transfer.
The first rule dates from the start of GST. The going concern, farmland and associate rules apply from 9 December 2008. Where only part of your land came from an ineligible supply, the scheme is still available, but an increasing adjustment arises, based on credit entitlement through the chain rather than on what you personally claimed.
Second question: where does the margin start?
Eligibility and calculation are different questions. A going concern, farmland or associate acquisition can leave you eligible but change the starting figure, bringing in value added while an earlier owner held the property.
Subdivision changes the arithmetic too. The Nedlands block becomes four lots, and the acquisition cost or valuation must be apportioned across them on a fair and reasonable basis. Eligibility is then tested lot by lot.
A commercial transaction shows the starting figure problem more clearly than a house block can.
A commercial building acquired as a going concern, where the rule takes the predecessor’s price: you paid $6 million, the previous owner paid $4 million, the finished apartments sell for $15 million. The margin is $11 million, not $9 million. GST is $1 million rather than about $818,000.
Third question: is the margin scheme cheaper?
Two decisions tend to get run together. How you buy is one. How you sell is the other, and the second does not touch your construction credits. The table assumes the margin scheme is available on the right hand side, which the first question decides.
Where the execution fails
The written agreement
The vendor and the purchaser must agree in writing to use the margin scheme on or before the supply. A contract that is silent can be fixed by a separate agreement made in time. After the deadline you are relying on the Commissioner’s discretion, and a backdated agreement is a worse problem than a missed one.
The GST liability is the vendor’s. Who gets the benefit depends on the price. A conditional margin scheme clause manages uncertainty but affects the buyer’s credit, and a recovery clause protects the vendor. Each side should understand which clause serves whom before signing.
The arithmetic
Stamp duty, legal fees, development costs and any option fee do not increase factor into your margin scheme calculations. Settlement adjustments for rates, land tax and rent do form part of the calculation either. The two are easy to get the wrong way round, and the second one is the one that changes the margin.
Land bought for $100,000, sold for $210,000: margin $110,000, GST $10,000. Add $10,000 to net $210,000 and you have a $220,000 price, GST of $10,909 and $209,091 in hand. To keep $210,000 the price has to be $221,000.
The valuation
Where the margin uses a valuation, it must be an approved valuation under the current determination, MSV 2020/1, made by the due date of the activity statement for the period the GST is attributable to. That is usually settlement, but not always. A figure without the calculation behind it does not comply. If the timing slips, the Commissioner can allow more time for good reason, so a late valuation is worth raising rather than abandoning.
Withholding is not your GST
On a taxable sale of the townhouses the buyer pays 7 per cent of the contract price to the Commissioner where the margin scheme applies. On a thin margin that exceeds the GST you owe, and you receive the credit only when you lodge. The withholding uses the contract price without settlement adjustments. Your margin uses the adjusted figure. Two numbers come out of one settlement.
You must notify the buyer in writing before the supply. Missing it is a strict liability offence, so it belongs in the sales process.
Before you agree to the margin scheme, confirm
- How the vendor acquired the land, and whether any part is ineligible
- Where the margin starts: your price, the predecessor's price, or a valuation
- That a written agreement is made by the deadline
- That any valuation is compliant and on time
- Whether your buyers can claim a credit, and how long the project runs
- The cashflow effect of withholding at each settlement
Questions we are asked
Usually, if both parties sign a written agreement before the supply. Leaving it to the day relies on the other side still being willing. After that it is a discretion.
Not necessarily. Eligibility depends on how this land was acquired, by you and sometimes by the owner before you, lot by lot.
Only if the valuation complies with the determination and is made in time. One that leaves out the GST on the sales, the holding costs or the calculation can be rejected outright.
Margin scheme model
You receive the eligibility analysis for your acquisition, a lot by lot comparison of the two routes on stated assumptions about sale values and timing, and a settlement cashflow schedule including withholding.
To start, tell us the site and the stage you are at.
The scope and fee are agreed first and depend on the decision you need to make and the information already available. A focused eligibility answer is sometimes all that is needed.
Already contracted? Tell us what has been signed and when you expect to sell, and we will identify the decisions still open
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