Tax Tip 269: GST and the Margin Scheme

Discussion in 'Accounting & Tax' started by Terry_w, 28th Jan, 2020.

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  1. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Where property is a ‘taxable supply’ GST applies to the sale or transfer. GST is worked out by multiplying the sale price by 1/11th.

    This mainly applies to non-residential property, but it can apply to new residential property too in some instances


    Example
    Bart builds a house and is conducting an enterprise and builds a duplex to sell. The market value of the duplexes is $400,000 each. Bart must remit $36,363 to the ATO.


    This might not be too fair where Bart had to purchase the original property without GST as his sale price basically applies GST to the whole property. This is why the ‘margin scheme’ was introduced.

    Where the margin scheme can apply the situation will be different as the GST can be worked out on the margin.


    Example
    Bart sold the second duplex and agreed with the buyer than the margin scheme would apply. Bart paid $100,000 for the land so the margin is only $300,000 and the GST on this would be $27,272.


    There are many conditions for using the margin scheme and tax advice should be sought before buying any property and before selling any property – as well as legal advice.

    Relevant Legislation:
    See s 75-10 GST Act
    http://www.austlii.edu.au/cgi-bin/viewdoc/au/legis/cth/consol_act/antsasta1999402/s75.5.html
     
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  2. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Generally residential property is sold with GST inclusive. Never seen one worded +GST
     
  3. Mike A

    Mike A Accountant

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    Can also apply where substantial renovations have been made to residential property

    Can also apply to vacant land
     
  4. Paul@PAS

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

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    Its more likely to apply to vacant land or land that does not contain a habitable dwelling making the site eligible to be treated as containing residential premises. But not always.
     
  5. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    The margin scheme can apply in situations where someone purchases an established residential premises that is not new. When purchased like this GST doesn't apply to the purchase but when that property is developed and sold GST will apply. This is when the margin scheme is implemented.

    It doesn't really change anything if the sale price is advertised as the price plus GST or the GST inclusive price. The GST is still the same as is the margin.
     
  6. Paul@PAS

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

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    The ACCC doesnt permit an advertised consumer price to be quoted as $X plus GST. A weird exception only applies to business to business dealings.

    For resi premises it doesnt matter if the price has or hasnt got GST in its cost. GST on residential acquisitions are input taxed meaning nobody can claim the GST. For new builds that have GST in the cost you can ask for a tax invoice and the vendor can legally refuse to issue it since its not needed for a GST claim. A sale using the margin scheme will have a unknown value of GST incorporated into the cost. It could be $0 or 1/11th. The buyer cant ask or find out.
     
  7. thesuperman

    thesuperman Well-Known Member

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    What happens in the situation where a tradie comes and does work on your commercial investment property and they do issue a tax invoice but they don't break down the cost to include a GST component, eg. the invoice just says $1k. You as the client are GST registered so you just go ahead and claim 1/11th of $1k at tax time without any problems as you have the tax invoice?
     
  8. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    They are not registered for GST in that case.
     
  9. Archaon

    Archaon Well-Known Member

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    What about the GST you pay on building materials to construct the property?

    If land cost 110000, and the property cost 220000 and the sale price is 400k, how much GST is owed?
     
  10. Paul@PAS

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

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    If the owner is reg for GST and you hold a valid tax invoice the GST may be creditable v's the rental income that is taxed
     
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  11. Paul@PAS

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

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    Who knows. Depends on many factors.
    Commercial v resi
    Build to keep or sell
    Tax invoices
    Margin scheme entitlement

    Refer our developer toolkit
     

    Attached Files:

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  12. Elives

    Elives Well-Known Member

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    i read the below article is it as simple as it says just paying gst on the profit margin?

    so bought vacant resi land/ house 1mil develop duplex sell total 2.4m

    gst payable on the 400k profit? this is for resi only no commercial

    upload_2022-3-13_12-15-35.png
     
  13. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    It depends on how you define 'profit margin' I guess. But very roughly yes.
     
  14. Elives

    Elives Well-Known Member

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    how does it work when you're buying vacant land (older suburbs) and you develop it and then sell is there any difference with gst? i read somewhere that if you're selling vacant land gst applies?
     
  15. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Yes, if you sell vacant residential land GST could apply/
     
  16. Paul@PAS

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

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    That article is not very poorly worded and may misrepresent how a GST margin is determined. It is possible to make a loss and still pay substantial GST. It is NOT based on profit margin etc. Notice their example didnt mention any other costs being incurred and seems to reflect a very profitable developmnet that has no costs. Thats so wrong. "The Margin" is a specific calculation based on land cost or its value at another date to determine the GST on the sale. Then further calcs etc need to occur for creditable GST and also profit subject to tax. . All build and acqusition costs are ignored at the GST margin point I have seen loads of people also disregard basic requyirements to determine IF the margin scheme can even be used. And then it should be nominated by the vendor in the sale contract.

    Another thread provides a example
    Margin Scheme Tax vs GST
     
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  17. Mike A

    Mike A Accountant

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  18. Elives

    Elives Well-Known Member

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    if you buy the development site and it has a house currently on it, is it the purchase price or land value at the time for this calculation? and yes thanks for the link! very helpful did however find the photos hard to read though.
     
  19. Paul@PAS

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

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    If you buy a house and land and demo the house, the land value is what you paid in full (excepting duty, legals etc) for the purposes of the margin scheme (the consideration basis).
     

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