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The Margin Scheme do’s and don’ts
So many get this wrong. Or assume they are eligible. Or calculate wrong. And there’s no simple & straightforward explanation online. So, this should help.
As you probably know already, the margin scheme helps reduce GST owed on property sales. This option applies only if the seller qualifies to use it. Sellers must check their eligibility before applying the scheme.
Under normal rules, GST on property sales equals one-eleventh of the sale price. If the margin scheme applies, GST is instead one-eleventh of the margin. Buyers cannot claim GST credits if the seller used the margin scheme.
This guide explains the key details. And also how to avoid common mistakes.
Eligibility Requirements
Sellers using the margin scheme must meet specific conditions. They should assess their project’s eligibility before listing a property. Key factors may include:
- The date the property was bought.
- How GST applied at the time of purchase.
- Whether the previous owner used the margin scheme.
To make things slightly more confusing, certain situations limit the margin scheme’s use. These include:
- Inherited property.
- Properties held by GST group members.*
- Properties acquired GST-free, such as farmland or a going concern.
Sellers should check all rules carefully to avoid errors. Or even better, contact an accountant that has experience with property in general.
Agreement Before Settlement
For the margin scheme to apply, both parties must agree before settlement. This agreement must appear in the sales contract. Without such agreement, standard GST rules will apply.
New residential properties and vacant land often attract GST. Sellers must confirm the margin scheme agreement early to ensure compliance.
Buyers and sellers should both review the contract terms. This ensures no disputes or misunderstandings occur during settlement.
Calculating the Margin
The margin is usually calculated using two methods. The method chosen depends on when the property was purchased.
- Valuation Method:
- Used for properties bought before July 1, 2000.
- The margin equals the sale price minus the property’s value as of July 1, 2000.
- Consideration Method:
- Applies to properties bought before or after July 1, 2000.
- The margin equals the sale price minus the purchase price.
- Development and other costs are excluded and claimed separately.
Sellers must choose the correct method based on the purchase date. Miscalculations can lead to costly revisions and/or fines too!
Reporting the Transaction
Sellers must correctly report margin scheme transactions on their GST activity statements. Key labels include:
- Label G1 Total sales: Enter the margin amount.
- Label 1A GST on sales: Enter one-eleventh of the margin.
If mistakes occur, earlier activity statements may need revision. Accurate reporting prevents compliance issues and penalties. The ATO is quite fond of back-charging interest these days.
Avoiding Common Mistakes
Sellers often overlook key steps in applying the margin scheme. Common errors include:
- Failing to check eligibility before sale.
- Forgetting to include the margin scheme agreement in the contract.
- Using the wrong calculation method.
- Incorrectly reporting the transaction on activity statements.
To avoid these issues, consult the Australian Taxation Office (ATO) guidelines. Sellers should also seek professional advice if uncertain.
Examples and Scenarios
Example 1:
A developer purchased vacant land in 1999. An approved valuation as of July 1, 2000, shows the property’s value at $300,000. The property sells in 2024 for $800,000. Using the valuation method:
- Margin = Sale price – Valuation.
- Margin = $800,000 – $300,000 = $500,000.
- GST payable = One-eleventh of $500,000 = $45,454.55.
Example 2:
A property bought in 2005 for $400,000 sells in 2024 for $700,000. Using the consideration method:
- Margin = Sale price – Purchase price.
- Margin = $700,000 – $400,000 = $300,000.
- GST payable = One-eleventh of $300,000 = $27,272.73.
These examples highlight how different methods can apply – simply based on purchase dates.
Understanding Exemptions
Some property transactions are exempt from the margin scheme. For instance:
- Inherited properties: GST does not apply as they are not purchased.
- GST-free acquisitions: These include going concerns and farmland.
- GST group transactions: Members of the same GST group cannot use the scheme.
Sellers must understand these exemptions to avoid screwing up. (The ATO does provide detailed guidance on exempt scenarios – if you have a more fiddly one)
Importance of Documentation
Accurate documentation is essential when applying the margin scheme. Sellers should maintain records of:
- Purchase agreements.
- Sales contracts.
- Valuation reports (for pre-2000 properties).
- Development costs and other expenses.
Proper documentation supports calculations and ensures compliance with ATO requirements. It also simplifies audits and dispute resolution.
Consulting Professionals
Navigating GST rules can be complex. Sellers should consult accountants or tax professionals when:
- Unsure of eligibility.
- Calculating the margin.
- Preparing activity statements.
Professionals can identify potential issues early and provide tailored advice. This reduces the risk of errors and penalties.
As a summary think of it this way. The margin scheme offers significant GST savings for eligible sellers. However, careful planning and compliance are necessary. Sellers must:
- Confirm eligibility before sale.
- Ensure agreements are in place before settlement.
- Use the correct calculation method.
- Accurately report transactions on activity statements.
By following these steps, sellers can avoid common errors and maximize benefits. Professional advice and thorough documentation will help you a long way. Sadly, there is much more to it than this blog post (or any other you will find online). It’s tricky. Best get yourself a good accountant – like us.
1 800 672 670.
Call, don’t be a stranger.
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*GST group members are related entities, such as companies or trusts, that form a GST group to simplify their GST obligations. In a GST group, one member, known as the representative member, manages all GST reporting and payments for the group by lodging a single Business Activity Statement (BAS). Transactions between group members are excluded from GST, meaning no GST is charged on these internal dealings, and input tax credits are centrally claimed by the representative member.
To qualify, all members must meet strict criteria, including being registered for GST, having an Australian Business Number (ABN), and maintaining a close ownership relationship, such as one entity owning at least 90% of another. Members must also use the same accounting period and GST accounting method. While grouping simplifies reporting, it also makes all members jointly liable for the GST debts of the entire group.
The rules around GST groups are detailed and include some limitations, such as the inability to use the margin scheme on property sales. GST groups offer significant benefits, but eligibility and compliance require careful management. For more details, entities should consult the Australian Taxation Office or seek professional advice to ensure correct implementation and adherence to the rules.
References
Australian Taxation Office. “Margin Scheme.” ato.gov.au, Australian Government, 2024, www.ato.gov.au/Business/GST/In-detail/Your-industry/Property/Margin-scheme/. Accessed 16 Dec. 2024.
Chartered Accountants Australia and New Zealand. “GST and the Margin Scheme.” charteredaccountantsanz.com, Chartered Accountants ANZ, 2024, www.charteredaccountantsanz.com/news-and-analysis/gst-margin-scheme. Accessed 16 Dec. 2024.
Institute of Public Accountants. “Understanding the Margin Scheme.” publicaccountants.org.au, IPA, 2024, www.publicaccountants.org.au/margin-scheme. Accessed 16 Dec. 2024.