Tax Tip 366: GST and Comparing Using Margin Scheme to Not Using

Homer buys some land from Ned who sold it to him as an input taxed supply – no GST. Price was $400,000

Homer spends $800,000 constructing, including GST and Sells for $1mil.

Homer is conducting an enterprise and is registered for GST.

What’s the difference between Homer using the Margin Scheme on Sale and Not Using it?

Not Using the Margin Scheme

Homer spends $400,000 on construction and this includes GST which would be approx. $35,364.

Homer can claim this back from the ATO.

When Homer sells for $1mil he must remit 1/11th of this sale price to the ATO. Which would be $90,909.

So Homer’s net GST bill is $90,909 less $35,364 = $55,545


Using the Margin Scheme

Similar to the above, but Homer only needs to pay the ATO the GST on $600,000 – the sale price less the land basically. This would be $54,545

Homer could still claim $35,364 in GST on the construction costs

Therefore, Homer’s net GST bill is $54,545 less $35,364 which would be $19,181


By using the Margin Scheme Homer has saved $36,364

Note that these are simplified figures and don’t count other costs such as buying and selling costs. I have also probably got the maths wrong too but hopefully you will get the idea.


On this deal it would be about 3.6% extra profit.

Note that these are very rough and basic figures

 

However, note that each $1 of GST saved using the margin scheme will add $1 to profit, subject to income tax.
Tip : When selling for a loss the margin scheme can be a signifcant saving as the tax consequence is removed.