Suppliers who make taxable supplies of certain real property may apply the margin scheme, rather than calculating GST under the usual rules. The margin scheme applies such that GST is remitted on one-eleventh of the difference between the consideration received for the supply and the consideration paid for the acquisition of the property, rather than one-eleventh of the selling price. The margin cannot be negative.
The sale price includes the price specified in the contract plus any settlement adjustments paid by purchaser (e.g.rates, land tax etc). However, you do not include costs for developing the property, legal fees, any options you purchased, stamp duty and other related purchase expenses. The legal fees and development fees are claimed in the period that the purchases apply. You are not entitled to any GST credits on stamp duty as GST is not included in the cost.
If you are selling residential premises or potential residential land you must:
- notify the purchaser in writing (supplier notification)
- advise whether they need to pay a withholding amount from the contract price for the property or not
- state the withholding amount.
This can be included in the sales contract or in a separate document prior to settlement. Most states have updated their standard contracts to include this information. If you have made a mistake on the notification, it is compulsory to provide the purchaser with an amended one. You may incur penalties if you fail to provide the required notice. The purchaser pays the withholding amount directly to the ATO at the time of settlement, and they can be claimed back when the supplier lodges their business activity statement for the relevant quarter.
The margin scheme may be used to calculate the GST payable on the following supplies of real property:
> the sale of a freehold interest in land
> the sale of a stratum unit e.g. apartment and duplexes (most duplexes have a stratum on it)
> the grant or sale of a long-term lease.
Both the vendor and the purchaser must agree in writing that the margin scheme is to apply on or before the making of the supply. In the (Brady King v. C of T) case, it was held that the margin scheme valuation method can be applied by a vendor who subsequently strata titles property. For example, if an entity strata titles residential apartments created from an office building, the use of the margin scheme can still apply.
How is The Residential Withholding Payment Calculated?
The amount to be withheld will depend on GST law but is generally either:
- 1/11th of the contract price; or
- 7% of the contract price (margin scheme); or
- 10% of the GST exclusive market value of the property (for sales between associated for consideration less than GST inclusive market value).
For property acquired on or after 1 July 2000, the margin for the supply is generally the difference between the sales consideration and the original purchase consideration (improvements to the property are not factored in when determining the margin). For property acquired after 9 December 2008, the margin may have to include the value you and the previous seller added.
We have in house expertise in this area, please reach out to us if you require tax advice on purchase/sale of property under margin scheme.
Disclaimer: The material and contents provided in this blog are general guide and informative in nature only. They are not intended to be seen as legal and tax advice. If expert assistance is required, you should seek your own advice for any legal, tax or investment issues raised in your affairs.