Join Australia's most dynamic and respected property investment community

Buying Land under Margin Scheme

Discussion in 'Development' started by Paul@PFI, 8th Apr, 2016.

  1. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

    Joined:
    18th Jun, 2015
    Posts:
    2,396
    Location:
    Sydney
    When undertaking a dev with a intention to sell the GST method for the land you acquire can affect the GST payable at the end which also affects profit. I will demonstrate with an example.

    Lets say Dad and Son Pty Ltd are proud old builders and decide to build two residential cottages on new land in a new developing suburb. One lot of land is acquired from the land developer and the neighbouring lot (identical size, value) is bought from Mr & Mrs Fink who bought from the developer but due to work issues they must relocate to Hong Kong and sell their land. Their lot is through a local agent. Each lot costs $600,000

    Dad and Sons Pty Ltd will construct a $240,000 building on each lot. Each will be sold for $1.1million

    The developer lot: This land was acquired under the margin scheme. Dad and Son Pty Ltd cannot claim GST on the land purchase and cannot use the margin scheme when they sell because they bought land under the margin scheme. The GST payable on the sale will be a net $78,182 and the profit on this lot will be $181,818

    The non-developer lot : The land was acquired without the margin scheme and the vendor is not registered for GST. Dad and cannot claim any GST on the land (as there was none) but when they sell they can use the margin scheme. The GST payable on the sale will be a net $23,636 and the profit on this lot will be $236,364

    So the margin scheme has made a massive 30% difference to profit.

    When buying land for a development avoid buying land under the margin scheme.
     
    Elives, sanj, teetotal and 1 other person like this.
  2. mrdobalina

    mrdobalina Well-Known Member

    Joined:
    22nd Jun, 2015
    Posts:
    990
    Location:
    On the ski slopes
    What determines which scenario applies?
     
  3. Nemo30

    Nemo30 Well-Known Member

    Joined:
    31st Dec, 2015
    Posts:
    438
    Location:
    Somewhere
    Thanks for this. Interesting how much tax is involved. It's not something that many beginner investors consider when crunching numbers, but is a massive component.
     
  4. Westminster

    Westminster Tigress at Tiger Developments Business Member

    Joined:
    13th Jun, 2015
    Posts:
    2,959
    Location:
    Perth
    @Paul@PFI can you clarify similar situation where you buy the land and pay full gst on it and then do development and you can then use the margin scheme. Is that right?
     
  5. tgan

    tgan Member

    Joined:
    4th Aug, 2015
    Posts:
    18
    Location:
    melbourne
    Can you please clarify, how did you get the " $78,182 " and how did you get the "$23,636" figures.

    Thanks
     
  6. Cactus

    Cactus Well-Known Member

    Joined:
    18th Jan, 2016
    Posts:
    994
    Location:
    Melbourne
    Don't they get to offset the GST at sale with the inputs for the land purchase and construction costs?
     
  7. alexm

    alexm Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    305
    Location:
    Sydney
    @Paul@PFI , thanks for posting up an interesting thread.

    Can I ask, if Dad and Son Pty Ltd purchased vacant land from a developer under the margin scheme, built a new home and then re-sold that home. Are there any other scenarios to reduce their GST bill if they cannot use the margin scheme?
     
  8. Connor

    Connor Well-Known Member

    Joined:
    31st Aug, 2015
    Posts:
    140
    Location:
    Melbourne
    Great post and explanation @Paul@PFI

    If say a company/trust purchased the land from the developer but without the intention to sell once completed. But say decided to sell due to circumstances a year later, would the GST still be payable on that scale? I'd assume that they weren't trading in RE so only CGT would apply?
     
  9. mrdobalina

    mrdobalina Well-Known Member

    Joined:
    22nd Jun, 2015
    Posts:
    990
    Location:
    On the ski slopes
    Hi @Paul@PFI, if you purchased a resi block that had an existing house on it, knocked it down, built units, and sold some immediately whilst keeping some, how would the margin scheme be applied in this scenario?
     
  10. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

    Joined:
    18th Jun, 2015
    Posts:
    2,396
    Location:
    Sydney
    Yes. It is similar in outcomes to the margin scheme example BUT the profit will be higher (hence more tax). There is an anomaly with the margin scheme and I was hoping someone would ask this.

    The cost used for the land factored into profit calcs is the GST exclusive value when the GST is paid and claimed. But with the margin scheme the cost is still the same cost even after GST gets factored into the margin scheme. Its like a double dip tax bonus and at a marginal tax rate of 32.5% it could be as much as 33% x the margin scheme savings !!
     
  11. datto

    datto Well-Known Member

    Joined:
    23rd Jun, 2015
    Posts:
    1,394
    Location:
    Mt Druuiitt
    Holy moly , the tax system is ripping us off. Unheard of.
     
  12. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

    Joined:
    18th Jun, 2015
    Posts:
    2,396
    Location:
    Sydney
    Thats how the margin scheme works. BUT - Only when / qty of units sold. Lets use a simple example.

    As a rule saving is 1/11th x cost of the land.
     
  13. sanj

    sanj Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    2,148
    Location:
    Perth
    do you mean sell 1 year after construction is completed or selling the vacant land a year later?

    if the former the gst would be payable as its still considered "new" by ATO. from their website:

    • New residential premises
      Residential premises are new whenany of the following apply:
      • they have not been sold as residential premises before
      • they have been created through substantial renovations
      • new buildings replace demolished buildings on the same land.
      Residential premises are no longer new residential premises if they have been continuously rented for five years after first becoming new residential premises. However, the premises may still be considered new residential premises, even if they have been rented out continuously for five years if at the same time they were being actively marketed for sale.
     
  14. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

    Joined:
    18th Jun, 2015
    Posts:
    2,396
    Location:
    Sydney
    Maybe not.
     
  15. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

    Joined:
    18th Jun, 2015
    Posts:
    2,396
    Location:
    Sydney
    Key word was land. Not build. Build on it and sell within 5 years its hard to argue there was not an enterprise. Personal advice is key if there are circumstances.
     
  16. sanj

    sanj Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    2,148
    Location:
    Perth
    Agreed but the word completed was used too, so intention was to build and hold but ended up selling, i wasn't sure if it meant selling once completed or just the land as is.
     
  17. Westminster

    Westminster Tigress at Tiger Developments Business Member

    Joined:
    13th Jun, 2015
    Posts:
    2,959
    Location:
    Perth
    Thanks @Paul@PFI oh wise one :)
    I thought it was very similar but I'm learning every day so always like to ask and learn.
     
  18. Connor

    Connor Well-Known Member

    Joined:
    31st Aug, 2015
    Posts:
    140
    Location:
    Melbourne
    @Paul@PFI @sandj

    Yes, to clarify I mean land was purchased and a home built. Then a year after the home was constructed a decision was made to sell, although that was not the intention while land purchase and build was being
     
  19. sanj

    sanj Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    2,148
    Location:
    Perth
    Im not the expert here but I'd lean towards gst and CGT being payable
     
  20. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

    Joined:
    18th Jun, 2015
    Posts:
    2,396
    Location:
    Sydney
    Needs personal advice. Likely GST and income tax (no CGT) payable.