Gst & Margin scheme

Hello all, i am just looking for some advice.
I have just signed a contract to buy an already subdivided block of land from a vendor that is not charging gst on the purchase price with no mention of margin scheme.
My plan is to build a house and rent for at least 5 years and then sell after the best depreciation is used and to progress the strategy.
I am under the impression that if i was to build the house and sell immediately i can use the margin scheme to reduce the gst as the original owners are not charging gst on the sale contract.
My question is if i hit a servicability wall and have to sell earlier than 5 years would i be better off claiming gst credits paid to the builder while under construction?
If i sell within 5 years and have not claimed these gst credits will they be lost?
Is it better to claim them as i am building and then do an adjustment years down the track once i sell?
Thanks,
Daniel

 

Don't worry they are not lost. You can claim the credits and debits at the same time

 

I am under the impression that if i was to build the house and sell immediately i can use the margin scheme to reduce the gst as the original owners are not charging gst on the sale contract.

This may or may not be the case.

What does your tax adviser say?

 

Hi Terry, sorry for late reply it has been hectic this weekend.
I have not spoken to a specific tax adviser yet.
I have just been doing a lot of reading on the ato website and past topics on somersoft and pc - there seems to be some conflicting info even on the ato website and it seems a lot more complicated than it needs to be!
Did i mention that i am a sole trader registered for gst already and i am also the director of a building company that i will be using to build the house myself.
My plan all along has been to hold for at least 5 years and so i was not overly concerned about the margin scheme but it is good to try and get a clearer understanding of it just in case.
Cheers

 

I believe Terry is correct, however it will change from 1st July this year when GST will be withheld from sale proceeds by conveyancer to remit to the ATO. Credits then claimed back afterwards, details tbc.
Please confirm details with your tax advisor.

 

Only a enterprise registered for GST can choose to use the margin scheme. And the choice of use of the margin scheme MUST be contained in the sale contract. Otherwise the margin scheme is lost ! Hence tax advice specific to the taxpayer needs to be considered. The margin scheme can be used unless the margin scheme is not permitted to be used eg where the land was acquired under the margin scheme. A lawyer needs to review the contract to give that legal advice.

GST credits dont remain available for 5 years !!

 

@Paul@PFI have you ever seen the case were margin scheme wasn't selected in error on a sale contract, but later approved and used.
GST and the margin scheme

"You must show that:

• you did not choose to apply the margin scheme on or before the date you sold the property because of a mistake
• you satisfy all other requirements under the margin scheme
• the purchaser cannot claim a GST credit or a decreasing adjustment for the purchase
• you and the purchaser did not agree on a price that included GST
• you are not making the agreement to avoid paying GST."

 

Yes. The ATO has very strict and difficult rules allowing this to be rectified later - Sometimes

Its easier to ensure your contract does specify the margin scheme and that diligent advice (legal and tax) are obtained. The issue then never arises.
I find that some attempts are just through an unwillingness to pay for advice and they build a DIY timebomb. Not my ideal client.

 

Advise was that it was to be w/ GST and margin scheme used.
Long story short contract wasn't prepared correctly, signed by both parties.
Vendors want margin scheme added, purchasers will sign addendum adding of margin scheme based on a lower purchase price (even though has zero impact on them)

 

You can seek to retrospectively apply the margin scheme.

I have done this for two clients recently and on both occassions was successful.

It does require some legal documentation to be prepared and an application made to the ato but there are provisions within the Act to allow it.

 

@Mike A when you have done this has it been based on the purchaser agreeing to a retrospective addendum?
Or was it just the vendors dealing with the ATO?

 

A common reason for seeking the Commissioners approval may be silence in a contract, defects in a contract (including conflicting contract elements) or uncertainty concerning the vendor and the capacity of both parties to use the margin scheme. Often one party says they can or ticks a contract box incorrectly and something isnt disclosed that makes it uncertain.

 

Brady the cases ive dealt with require finding the vendor and having them sign an addendum and then submitting to the ato for a decision.

 

The issue is particularly common with land. Unregistered vendors who should have been, developers who offload land when they change mind etc and property where the acquisition wasnt capable of residential occupation (ie house was demolished or even ready to demo) but sold as if it were. The Commissions exception also covers "should have been registered" issues. The side effect of this it potentially drops the vendor in with the ATO but gives the buyer clarity that the margin scheme is then capable of use. Just proceeding without this approval can be a high risk and reckless.

There are also many cases where its necessary to revert to the vendor later eg deceased estates and the like.

 

@Mike A @Paul@PFI appreciate feedback.
Concern is vendors made error didn't tick the box, provided addendum to purchases to amend and add margin scheme as it should have been.
Purchasers have realised it's saves the vendors GST, therefore purchasers only agree to sign based on lower purchase price, even though it has zero impact on them.

 

yep in the cases ive dealt with some form of "compensation" has been paid. and legal advice provided to them and paid for.

to be fair to the vendor it is your lawyer who must not have checked if they had ticked the box

 

Long story short, it was noticed during cooling off (SA 2 days) at that point request to amend contract expecting no issue as advise from REA was decent purchasers
Turns out the purchasers used this and turned pretty hostile.
Lesson learned should have been on there straight away OR even cancel the contract when there was a slight gap that allowed to do so.

 

My understanding is that applying the margin scheme then removes the opportunity for the purchasers to use it if they were to on-sell. So it is not totally a zero impact.

 

that isn't correct.

 

If the price changes it may not fly

The opposite. And there are other cases where the MS cant be used too.