The margin scheme is essential in property dealings, specifically for businesses registered for GST (Goods and Services Tax). This scheme offers a method to calculate GST on property sales based on the ‘margin’ between the selling price and the purchase price or valuation rather than the total selling price. It presents an alternative to significantly reducing the GST payable on such transactions.
However, knowing the eligibility criteria and the instances where the margin scheme cannot be applied is crucial for compliance.
You may hire an accountant Melbourne to help you with the margin scheme, but it’s essential to understand its basics to optimise financial outcomes in property transactions.
Eligibility Criteria for the Margin Scheme
To be eligible to apply the margin scheme when selling properties, several conditions must be met. Firstly, this option is typically available only if you’re selling property as part of your business and are registered for GST.
Additionally, before the settlement occurs, the parties must have a written agreement to use the margin scheme. This is often included in the contract of sale, where either party can mark whether the margin scheme is applicable.
Specific Scenarios Where the Margin Scheme Cannot be Applied
There are specific scenarios where the margin scheme cannot be applied regardless of other considerations.
For instance, if the property was not subject to the margin scheme at its prior purchase or the seller was not required or registered for GST at that point, then the margin scheme cannot be used. This includes properties acquired as fully taxable sales, parts of going concern sales, or GST-free sales like farmland.
Moreover, suppose the property was inherited or obtained from a non-eligible member within a GST group or a joint venture where previous transactions didn’t meet margin scheme criteria. In that case, it’s ineligible for the margin scheme.
Additionally, the margin scheme is not applicable if the current seller had acquired the property from an associate without payment under conditions that weren’t taxable and where the margin scheme wasn’t previously applied.
Checking Eligibility: The Role of Previous Owners and Property Types
The eligibility for using the margin scheme is significantly influenced by the property’s history, particularly its previous owner and the terms under which it was acquired. If a property was purchased as part of a going concern, or if any GST-free stipulations (like for farmland) apply, the seller must verify whether the previous owner was eligible to use the margin scheme.
If not, the current seller cannot apply the margin scheme subsequently. It is essential to examine the chain of ownership and the conditions of each transaction thoroughly. Consulting with a tax professional or applying for a private ruling can provide clarity and compliance assurance.
Different Calculation Methods for the Margin Scheme
Calculating margins uses two different methods: 1. Consideration method and 2. Valuation method.
If you purchased the property before 1 July 2000, you can choose the most suitable method. However, if you purchased it after 1 July 2000, you must choose the consideration method.
Here is a detailed explanation of both methods with examples:
1. Consideration Method
The consideration method is a common approach to calculating GST under the margin scheme. This method considers the margin as the difference between the selling price and the property’s original purchase price. Importantly, the purchase price excludes any costs related to property development, legal fees, stamp duty, and other incidental expenses tied to the acquisition.
For instance, if a property were bought for $150,000 and later sold for $515,000, the margin calculated would be $365,000. The property seller would then pay GST based on this margin.
2. Valuation Method
The valuation method only applies to properties purchased before 1 July 2000. It requires an approved valuation of the property as of 1 July 2000, and the GST is calculated on the margin, which is the difference between this valuation and the selling price.
For example, if a property valued at $1 million was sold for $1.44 million, the margin would be $440,000, and the GST payable would be calculated based on this amount.
This method provides a way to establish a fair GST amount when historical purchase prices may no longer reflect the property’s market value.
Practical Examples of Each Calculation Method
Example of the Consideration Method:
- Scenario: A GST-registered builder purchased a block of land for $150,000, which did not incur GST since the vendor wasn’t registered for GST. After developing the property by constructing a house, the total selling price was $515,000.
- Calculation: The GST is calculated on the margin of $365,000 (selling price of $515,000 minus purchase price of $150,000), resulting in a GST payable of $33,181.
Example of the Valuation Method:
- Scenario: A property development firm purchased land in 1965, and on 1 July 2000, the land was professionally valued at $1 million. The land was sold in 2020 for $1.44 million.
- Calculation: The GST is calculated on a margin of $440,000 (the selling price of $1.44 million minus the valuation at $1 million), leading to a GST payable of $40,000.
These examples will help you understand the differences in calculation methods and the importance of proper documentation and adherence to regulatory requirements when using the margin scheme.
Conclusion
Understanding and applying the margin scheme in real estate transactions can significantly affect the cost implications of buying and selling property. As discussed, the eligibility to use the margin scheme is not automatic and depends on various criteria related to the history of the property and the seller’s GST registration status.
Real estate professionals and business owners should consider these criteria before applying the margin scheme to property transactions. Incorrect application can lead to financial discrepancies and potential audits by tax authorities.
Consulting with an accountant Melbourne can provide clarity and compliance assurance to navigate these complex rules. This proactive approach will ensure you maximise your benefits under the margin scheme without violating legal requirements.
At Roger Boghani, we are dedicated to helping businesses get the most out of their tax filings and financial transactions. As a leading accountant, we can help you calculate the margin scheme when selling a property and also ensure legal compliance. Call us today and see how we can be your perfect tax partner!
