Margin Scheme Confusion

Hi guys,

Sorry i am just very confused about margin schemes. We have a property that we bought from an old couple few years ago and they not registered for GST. The property is under our family trust with a corporate trustee and we are GST registered.

We are looking at developing the land and building 3 units and selling them. I just want to confirm that we will be able to use the margin scheme.

I saw the following paragraph from an accountant's website.

Eligibility

The margin scheme is only available for real property transactions which meet the eligibility criteria. In order to apply the margin scheme:

the supply needs to be a taxable supply;
the supply must not be an ineligible supply; and
the vendor and purchaser have agreed in writing on or before making the supply that margin scheme applies.

My question is when it says vendor and purchaser have agreed in writing, do they mean me and the original old couple? Or do they mean me and the potential buyer of my townhouses. I spoke to two accountants and they are telling me differently! One said use Margin Scheme will be better as lesser GST liable, the other said the opposite. What?

I kindly ask for some advise from you guys or some guidance. I might also go speak to a 3rd accountant. Thanks.

 

Not sure if this information from the ATO will help clarify things for you in your situation:

GST and the margin scheme | Australian Taxation Office

 

Using margin scheme means when you sell you will only have to remitt 1/11th of the margin to the ATO as GST.

To work out the margin you minus the amount paid for the property from its current value.

You could possibly use the margin scheme as you purchased the property from someone not registered (and not required to be registered).

You don't have to have entered into a written agreement with the sellers back then if they were not registered (or required) = no GST included in the sale price.

(assuming you purchased after july 2000)

There may be other rules if you purchased after 2005 - this is when you need a written agreement with the seller. Perhaps you fall into this category as you mention 'a few years'.

In this case you could not use the margin scheme when you sold as you did not enter into a written agreement when you purchased.

 

Thanks guys. This is not good. The property was purchased in 2013. This was what my solicitor said.

if it was a sale of "an existing residential property" from a person who has lived there then they are not registered for GST and you can use margin scheme.
It is only once full GST has been paid that you cant use margin scheme again for that property (or part of it)

In the contract of sale when we purchase the property, this was the only part in regards to the GST.

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Does this constitute written agreement? Thanks guys.

 

Read 13.6 of the contract

 

I guess I can't then. Disappointing this. Thanks Terry.

 

It may have been mentioned on the front page of the contract that the margin scheme applies - or a special condition.

 

Thanks Terry, i couldn't find anything in regards to Margin Scheme on the S32 at all. I didn't know we had to specifically mentioned it as a condition on the contract. I always thought as long as the vendor is not registered for GST. That is good enough. So I guess i will be up for a lot of GST for my development then.

 

By the way Terry, I saw this on natiowidebas website.

The margin scheme may be used if you are registered for GST (or required to be registered for GST) and if:

• you are selling property in the course of the enterprise and GST applies to the sale (ie, a taxable sale)
• you acquired the property before 1 July 2000, or
• you acquired the property after 1 July 2000 and the person who sold you the property met one of the following:
  • was not registered or required to be registered for GST
  • sold you old residential premises
  • sold you the property using the margin scheme
  • sold the property to you as part of a GST-free going concern
  • sold the property to you as GST-free farmland.

Do we just need to meet just one of the following conditions? In my case, i met the first one and second one and third one i assume. Am I right? Thanks for the help.

 

I've just had a look at the legislation which is s 75-5 GST Act
A NEW TAX SYSTEM (GOODS AND SERVICES TAX) ACT 1999 - SECT 75.5 Applying the margin scheme

I think when you sell you might be able to use the margin scheme if the purchaser agrees in writing.

There is a further section, 75-11 which you may have to consider
A NEW TAX SYSTEM (GOODS AND SERVICES TAX) ACT 1999 - SECT 75.11 Margins for supplies of real property in particular circumstances

I don't think my statement in the first post above it correct.

But you will have to seek specific advice.

 

Hmm thanks for the clarification Terry. It would be nice for me to be able to use the Margin Scheme. I will have a read at the links and speak to another account again.

Thanks.

 

I think you might be able to if the purchase agrees.

 

Thanks Terry, if I may, can I pick your brains one more time. In order to calculate my GST liable, is this what I do?

Purchase Price - $840k + 45k stamp duty
Consultant fees (permits, open space contributions, contingencies, lawyers etc...) - $100k GST Inc
Construction Cost - $1.0m GST Inc

Sales for 3 units - $2.8m GST included I assume?

Does that mean my GST liable will be ($2.8m - $840k) x 1/11 = $187272.72? Will I be able to claim back GST on my construction cost as well? Which is $90k?

Profits before taxes = $2.8m - $187272.72 - $990k - $890k?

Is this roughly the right idea? Sorry, I just want a clearer picture before talking to another accountant. Thanks Terry!

 

This is such a simple question and so many complicated answers.
Yes you can claim the margin scheme and the liability on sale is 1/11 of $2.8m less $840k if you sell everything and if you demolished any existing houses.
You can claim ALL the GST you pay out during the project.
You MUST specify in the sales contract that you are selling under the margin scheme.
You will ALWAYS be better off claiming the margin scheme with this type of deal.

 

Thanks John. I appreciate the advise. That is very good information. I would assume I will also be liable for a massive sum of CGT as well won't I? Do you know how CGT works in my case?

Since the value of the site will be increased substantially from $840k to $2.8m. I will be slugged with the CGT for the $1.96m increase in value? My accountants mentioned I am eligible to get the 50% discount but I am not that confident in them right now.

 

CGT and GST are mutually exclusive. The profit on the deal will be income tax assessable and there will be no 50% discount. Get a new accountant.

 

I should have added one thing to my previous post about taxation. This type of deal should always be done in a discretionary trust with a corporate trustee, not just for asset protection but as a tax minimisation strategy. A trust can distribute the profits to family members in a three generational circle who have little or no income or, as a last resort, to an associated company that will limit the tax liability to the company tax rate of 30%.

 

Thank you very much John. That is the type of structure that we have currently set up. Can I check something else with you, I have been trying out some feasibility spreadsheets (not the best I know but gives me an idea) Here are the ones that I used, done by some wonderful members of the old forum.

Development Feasibility Spreadsheet Template
Quick Development Feasibility (Excel)

I am confused with one part of the spreadsheet, how is that they are able to factor in GST for the purchase of the land and be able to claim it back? Thanks.

 

I don't know either of these spreadsheets. I use my own and I know it works. Have a look at Real Estate Investing Software and https://drive.google.com/file/d/0B-vEWrt-d9lsUDZGYVh3TlFicFk/view?usp=sharing
I certainly don't understand the GST calculation.