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Margin Scheme

What is the margin scheme and when will it apply?

The margin scheme provides an alternative way of working out the GST payable on a taxable supply of real property. It is available where a vendor is selling a freehold interest or strata unit. Where the parties agree in writing to apply the margin scheme, GST represents 1/11th of the margin on the sale which is the difference between:

• (if the property was held at 1 July 2000) the value of the property at 1 July 2000 or the date of the vendor's GST registration (whichever is later) and the sale price (including GST calculated using the margin scheme); and

• (if the property was acquired on or after 1 July 2000) the purchase price (including GST calculated using the margin scheme if the supply to the vendor was a taxable supply) and the sale price (including GST calculated using the margin scheme), provided the difference is a positive amount.

Note that S.75-11 sets out special rules for the application of the margin scheme to the supply of real property acquired from deceased estates, from fellow members of the same GST Group, acquired as a going concern, and in other specified circumstances.

The vendor cannot apply the margin scheme to a sale if the acquisition of the property was made on a full GST basis (refer to s.75-5(3) for other circumstances in which a supply will be ineligible for the application of the margin scheme). Where the margin scheme is applied, the purchaser is not entitled to an input tax credit. The scheme is therefore attractive when selling to domestic consumers (who would not be entitled to an input tax credit anyway) as the cost of entry into the property is reduced.

The vendor is not required to provide a tax invoice for a supply to which the margin scheme is applied.

 
A subdivider of residential land sells a number of lots to a builder who intends to construct houses on the lots and on sell to domestic consumers. Can the margin scheme be applied in these circumstances?

Yes.  Where land is sold to a builder who intends to resell to private individuals for residential purposes, the builder will need to buy on the margin scheme if intending to sell on the margin scheme. The ultimate purchaser will then only pay GST on the excess of the total sale consideration over the cost of land to the builder.

Can a vendor or purchaser reserve the right to elect to apply the margin scheme?

No; since 29 June 2005, the parties must have agreed in writing to apply the margin scheme. The ATO considers that this agreement must be in place by the date of supply.

In what sort of circumstances would a vendor wish to apply the margin scheme?

If the conditions for a taxable supply exist:

• the purchaser is a domestic purchaser and will not be entitled to an input tax credit;

• the purchaser will be a re-supplier (e.g. a builder) to a domestic purchaser and will need to buy on the margin scheme in order to sell on the margin scheme;

• the purchaser prefers to limit the amount of GST as far as possible for cash flow reasons rather than pay the full amount and obtain an input tax credit; and

• the purchaser wishes to pay the least amount of GST so as to avoid having to pay the additional stamp duty that would be payable if the margin scheme were not applied.

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