GST - Margin Scheme

Discussion in 'Accounting & Tax' started by Starkey, 27th Jul, 2017.

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  1. Starkey

    Starkey Member

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    Hello,

    I'm just trying to get my head around something and check my understanding with the experienced folk here. I'm going to use a hypothetical as I believe it'll be clearer than words alone.

    If you were to purchase a block of land with existing dwelling for say $500,000
    Say you move into the existing dwelling and subdivide, creating a new vacant lot
    You sell existing dwelling within a year of initial purchase for say $480,000
    Just after a year you sell the vacant lot for say $300,000

    ATO judge you to be carrying on a business and therefore GST is applicable, margin scheme was written into purchase contract.

    I've calculated that the GST applicable would be total revenue - $480,000 + $300,000 = $780,000
    minus initial purchase - $500,000
    280,000 / 11 = $25,454.

    Now I don't think i'm right as the existing dwelling isn't new stock. How should my above logic be modified.

    Thank you for your time
     
  2. Mike A

    Mike A Well-Known Member

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    why is the dwelling you occupied as your principal place of residence subject to GST ?
     
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  3. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Trick question. Existing resi premises arent subject to GST if you are registsred or required to be registered. Land may be a taxable supply but only new residential premises are subject to GST. And the margin scheme may be used to reduce the GST. I dont see a reason why the margin scheme cannot be used.

    There would need to be a value determined at a specific date for the land. (for a valuer) That value would be used for determining the margin. It may be far less GST than you think. Valuation / apportioning is common in these instances

    Self assessing a complex tax issue is like self prescribing medication. It will do more harm than good.
     
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  4. Gomez

    Gomez Member

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    When is it best NOT to use the GST Margin Scheme and instead use the standard method by which you can claim GST credits for construction?

    It's hard to find an answer, but I calculated that if the development/construction cost is GREATER than the cost of acquiring the original property, then you may be better off NOT using the margin scheme and instead claiming the usual input credits against the GST on the sale.

    Eg. If a property costs $500,000 but you spend $2,000,000 building units on it, and then sell the whole thing for $3,000,000, then using a very simplified example:

    * Under GST Margin Scheme you pay 1/11th of the margin ($2,500,000) = $227,272
    * Under usual input method you pay 1/11th of the sale ($3,000,000) or $272,727 less 1/11th of the construction/development costs ($2,000,000) or $181,818 = $90,909

    A saving of $136,634 by NOT using the GST margin scheme.

    Do people agree with this understanding, or am I missing something?
     
  5. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    The MS is always chosen to reduce GST on sales from the seller perspective. It basically provides a tax credit adjustment to GST (saved) that equates to 1/11th of the cost of the land.

    The issue of claiming input tax credits is unrelated to the margin scheme. We are solely dealing with the GST on the sales. When the MS example above is used its incorrect since the GST on costs hasnt also been claimed. The correct example of using the margin scheme should be $227,272 - $181818 = $45,454 a $45K saving in GST. (ie 1/11th x land cost)

    The use of the margin scheme always is a benefit and there are rules regarding some acquisitions which limit games being played too (eg value may need to be revised and used) There can be reasons not to use it which are normally evident with commercial use properties. Buyers of the Commercial property will want to claim the GST they pay where resi buyers cant so the margin scheme doesnt affect them.

    eg Lets assume two neighbouring commercial properties. A is brand new and seller is using Margin Scheme. B is existing and normal GST method applies. Both have an identical market value of $1m.

    Assuming both buyers are registered for GST and use the premises in the course of their business (warehouse).

    A will pay $1m and cannot claim any GST. Cost of property is $1m as paid.
    B will pay $1m and access a tax credit of $90,909. Property has cost $909,091

    Of course in sale negotiation the buyer may seek a lesser cost for A for the GST issue being faced. The devloper in A likely has already accessed a tax benefit choosing the margin scheme so is better positioned to drop their price and their net cashflows may well be the same as B if they dropped the price to $909K. In reality the develop may find a sale price somewhere else and still benefit....The art of negotiated sales !!

    Its quite important when selling or buying commercial property to have the tax issues carefully reviewed PRIOR to sale or making a offer as the GST traps may not be evident.

    The standard method for GST may also suit related party sales etc in some cases.
     
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