In certain circumstances, GST on a taxable supply of property can be calculated by using what is called the “margin scheme”.
Under the margin scheme, the GST payable is calculated on the “margin” on the sale, rather than the total sale proceeds. The margin is the generally the excess of the sale price over the purchase price or, if the property was acquired before 1 July 2000, its value at that date.
Where the margin scheme is elected, the purchaser is not entitled to an input tax credit in respect of the purchase. Accordingly, there is usually little benefit in using the margin scheme where the purchaser is registered for GST and would otherwise be entitled to a full input tax credit. Where the purchaser is not registered for GST (eg. a private individual) or a person making input taxed supplies, there are likely to be significant benefits in using the margin scheme to reduce the amount of GST on the purchase.
Whether the margin scheme is applied or not will sometimes be determined by stamp duty considerations. As stamp duty will apply to the GST inclusive consideration for a sale of property, the application of the margin scheme to reduce the amount of the GST payable may produce significant stamp duty benefits also.
The margin scheme can’t be applied if the property was acquired under a taxable supply on which the GST was worked out without using the margin scheme. The rationale for this exclusion is that without it, you would have been entitled to an input tax credit on the purchase, and should therefore not be entitled to further relief by way of the margin scheme.
There are a number of other exclusions with a similar rationale, including where:
- you acquired the property by inheritance, and the deceased had acquired it through a supply that wasn’t eligible for the margin scheme
- you acquired the property from another GST group member, and the last supply of the property from a non-group member had been ineligible for the margin scheme
- you acquired the property from a joint venture in which you were a participant, and the operator had acquired it through a supply that was ineligible for the margin scheme
- you acquired it as a GST free supply of a going concern, a farm, or subdivided land from an entity that was registered or required to be registered for GST, and that entity had acquired it through a taxable supply on which GST was worked out without applying the margin scheme.
The margin scheme can only apply if both parties to the sale agree to its application. The agreement must be made on or before the supply is made. This is achieved by ensuring that the appropriate box in the sale contract is ticked to clearly show that the margin scheme is to be used.
If you are planning to sell your property, and the above relates to you, please don’t hesitate to contact us.