Margin Scheme (from a prospective investor POV)

Discussion in 'Accounting & Tax' started by David Trinh, 18th May, 2017.

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  1. David Trinh

    David Trinh Member

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    Hi All,

    I was looking at a sale contract and saw that there were the words, "margin scheme".

    I understand that this is particularly important with developers wanting to buy and sell property.

    However, from a prospective investor wanting to buy their first investment property, what are the implications of this? Does it make a difference for me?

    Your help is greatly appreciated!

    David
     
  2. Paul@PAS

    [email protected] Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    It means if you propose to develop the land and then sell the new property (or resell the vacant land !!) then you cannot also use the margin scheme. The MS would reduce the GST when YOU sell but when you buy land under the MS you lose that option. It will deeply affect your return if thats the issue.

    If your plan was to build and rent it out for the forseeable long term future then it may have zero impact as your intentions mean your sale may not be subject to GST.
     
  3. David Trinh

    David Trinh Member

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    Thanks for the clarification. It is an existing dwelling and I intend to rent it out for the foreseeable long term future. There would then be zero impact in this case.
     
  4. Rob G

    Rob G Well-Known Member

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    If you are purchasing an IP from a developer who is charging GST then it is most likely in your interest to agree to apply the margin scheme.

    This usually results in less GST payable (and by you in the contract) and consequently less expense for your input taxed acquisition to hold as a residential IP.

    This occurs where, for example, the developer originally purchased the land from another person who was not carrying on an enterprise. In this case any GST on the margin is usually less than GST on the value of the supply.

    Check your numbers.
     
  5. David Trinh

    David Trinh Member

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    So for example:

    If I agree with the margin scheme and I put down an offer of 385k and I do sell at say 550k in 5 years time - would it still be 165k (550 - 385) or 165k including GST?
     
  6. Paul@PAS

    [email protected] Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    If you sold as part of an enterprise for $550k the GST would be $50K but if sold under MS it would be $15K. So seems IF that occurs the $15K option isnt available.

    Tax advice would be suggested
     
  7. Rob G

    Rob G Well-Known Member

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    If you acquired an IP as a residential property and used it as such without substantial development then you will not be liable for GST on the sale.