I. Margin Scheme
The margin scheme is a vital mechanism within Australia’s Goods and Services Tax (GST) framework, specifically aimed at residential property transactions. Introduced under Division 75 of the GST Act, it provides a fair and practical approach to calculating GST, particularly for property developers and suppliers who might otherwise face disproportionately high tax burdens. By applying GST only to the margin—the increase in value of a property since its acquisition—the scheme ensures that tax is levied on the value-added component rather than the full sale price.
This system reflects the government’s intent to balance taxation with fairness. It acknowledges circumstances where suppliers cannot claim input tax credits, such as when purchasing property from unregistered entities, and offers relief by reducing the GST payable. Despite its complexities, the margin scheme remains a cornerstone of Australia’s GST policy for real estate transactions, providing both clarity and equity for suppliers and purchasers alike.
Eligibility rules for the application of margin scheme require a written agreement between supplier and buyer before the supply is made. The margin scheme cannot be used if the supplier acquired the property through a taxable supply on which GST was worked out without applying the margin scheme
If eligible for margin scheme, GST is calculated at 1/11th of the margin.
For properties bought before 1 July 2000, the margin is the sales consideration minus the land’s valuation as at 1 July 2000 or the supplier’s GST registration date. The method of valuation must be an ‘approved valuation’ according to the ATO rulings.
The margin scheme also restricts buyers from claiming input tax credits for property purchases under the margin scheme, while suppliers can claim credits for expenses during construction.
Calculation Example
- With the Margin Scheme:
- Alice purchases the property for $400,000.
- She develops it and sells it for $600,000.
- The margin is: $600,000 – $400,000 = $200,000.
- GST payable is: 1/11th of $200,000 = $18,182.
- Without the Margin Scheme:
- GST is calculated on the full sale price of $600,000.
- GST payable would be: 1/11th of $600,000 = $54,545.
As you can see, the margin scheme significantly reduces the GST burden for Alice.
The margin scheme is a crucial tool for property developers, balancing GST obligations without overburdening businesses when input tax credits can’t be claimed at the initial purchase. It requires strict adherence to eligibility rules and valuation standards, ensuring transparency and fairness.
II. GST Withholding rules for New residential properties
Moving on, we will explore the most recent update in relation to the collection of Goods & Services Tax (GST) on supplies of new residential premises.
Subdivision 14-E in Schedule 1 to the Tax Administration Act 1953 requires the purchasers of a ‘new residential premise’ or a ‘potential residential land’ supplied on or after 1 July 2018 to withhold an amount for GST purposes and remit the Tax Office.
This new subdivision imposes the requirements for vendors to provide purchasers of residential premises with a notice to withhold GST on sales. Failure by a vendor to provide the purchaser with the GST withholding notice is a strict liability offence and can result in an administrative penalty.
If the purchaser fails to withhold the amount, they become liable to pay a penalty equivalent to the withholding amount. To comply with this withholding requirement, the purchaser is not required to register for GST if they aren’t otherwise required to register.
Under the basis GST rules for fully taxable supplies, the withholding amount is one-eleventh of the contract price. However, under the margin scheme supplies, the required withholding amount is adjusted to seven (7) percent of the contract price.
In the events where the supplies are between associates with consideration which is less than GST-inclusive market value, ten (10) percent of the GST-exclusive market value of the supply are required to be withheld.
The purchaser is required to remit the withheld amount on or before the settlement date. Withholding obligation can be fulfilled by making direct payment to the Commissioner or by giving the supplier a cheque made out to the Commissioner.
This new subdivision aims to strengthen the GST collecting mechanism and doesn’t change the character of GST liability which belongs to the vendor. Although the application of this new rule has a direct effect to new residential premises or new subdivisions of potential residential land, the notification requirement applies broadly to all vendors of residential premises who are not registered for GST or who supply input tax supplies of residential premises. The compliance of this requirement is quite simple with including a relevant clause in the contract.
