The margin scheme lets you work out GST on the margin you made on a property rather than on the whole sale price. It sits in Division 75 of the GST Act, and the arithmetic is the easy part. Sell land for $1,100,000 that you bought for $400,000, and the margin is $700,000. GST is 1 eleventh of that, so $63,636 instead of $100,000.
Everybody knows that much. The 4 things that actually decide whether the margin scheme works for you are eligibility, the written agreement, what goes into the margin, and what it costs your buyer. I see all 4 go wrong, and in a different order to the one people expect.
The written agreement decides everything else
Section 75-5(1) requires the supplier and the recipient to have agreed in writing that the margin scheme is to apply. Section 75-5(1A) puts a deadline on it: on or before the making of the supply, or within a further period the Commissioner allows. For real property, the supply is made at settlement.
Most contracts have a tick box, and the tick box gets missed.
Once settlement has passed with nothing in writing, you are no longer applying a scheme, you are applying to the Commissioner for a discretion under PS LA 2005/15. You might get it. Nobody should be pricing a development on the assumption of getting it.
The door swings shut in both directions, which surprises people. The ATO has confirmed the parties cannot revoke a margin scheme agreement once settlement has occurred either, so you cannot add it later and you cannot take it back. On backdating, I will be blunt, because clients do ask. Signing a document after settlement and dating it before is not a fix for a GST problem. It creates a second and worse problem under the anti-avoidance provisions in Division 165. The saving on one lot is not worth that conversation.
Eligibility is inherited, and it only ratchets one way
Section 75-5(2) says the margin scheme does not apply if you acquired the entire interest through a supply that was ineligible for the margin scheme. The plain version: if you bought fully taxable and GST was worked out the ordinary way, you cannot use the margin scheme on the way out, and neither can whoever buys from you. There is a second and simpler gate that gets forgotten too. You have to be registered for GST at the time of the sale. A seller who was under the threshold and never registered has no margin scheme to apply, because there is no taxable supply to work out GST on to begin with.
The ineligibility travels. For sales on or after 17 March 2005 it passes through inheritance, through transfers between members of a GST group, and through a GST joint venture operator. From 9 December 2008 it also passes through a going concern sale, through GST-free farmland, and through a transfer from an associate for no payment.
Which produces the consequence people miss. When you buy, your eligibility depends on how your vendor acquired the property, and sometimes on how their vendor acquired it. The ATO has a worked example where a going concern purchase is killed by a fully taxable sale 2 owners back, and the current owner had no way of knowing without asking.
Amalgamated land is the one soft spot: if only part of what you acquired came through an ineligible supply you can still use the scheme on the sale, though you carry an increasing adjustment under section 75-22.
My view is that the eligibility question belongs in the due diligence checklist on every property acquisition, not in the file note 3 years later when the contract of sale is being drafted. By that point there is nothing anybody can do about it.
Construction costs do not reduce the margin
This is the most expensive misunderstanding I run into in this area, and it costs real money.
The margin is the sale price less the consideration for your acquisition of the property. Section 75-14 says the consideration for the acquisition does not include the cost of improvements you made to it.
So: land at $3,000,000, $6,000,000 of construction, apartments sold for $12,000,000 in total. The margin is $9,000,000 and the GST is $818,181. It is not $3,000,000 and $272,727, which is the number developers reach for because it matches how they think about the project.
The reasoning error is understandable. A developer works from proceeds less land less build less holding less selling equals profit. That is the profit calculation. The margin scheme is not a profit calculation and never was.
If you want a case to point at, WYPF v FC of T [2021] AATA 3050 is the one. The taxpayer developed apartments in Canberra and argued preparatory works and building works both belonged in the margin scheme base. The Commissioner accepted the preparatory works as non-monetary consideration and refused the building works. Where your acquisition genuinely involves non-monetary consideration there is an argument worth having. Where it is cash for land plus a separate build contract, there is not.
Two methods, and you do not get to pick freely
The consideration method is the common one. The margin is the sale price less what you paid to acquire the property, and it applies to essentially everything acquired after 1 July 2000. The valuation method applies where you held the interest before 1 July 2000, and in the other circumstances Division 75 specifies. There the margin is the sale price less an approved valuation. Approved means approved under section 75-35, not a number your agent liked the look of.
Section 75-11 sets the margin for particular circumstances such as inherited property, GST groups, joint ventures and supplies between associates. Section 75-15 covers subdivided land and section 75-16 covers property you assembled through several acquisitions. If any of those describe your deal, read the specific section before reaching for the general one.
Your buyer loses the credit, and that is the actual decision
Section 75-20 says a supply under the margin scheme does not give rise to a creditable acquisition. No input tax credit for the buyer, regardless of how thoroughly registered they are or how creditable their purpose is. You also do not issue a tax invoice for the supply, under section 75-30.
So the decision is really about who your buyer is.
Selling to owner occupiers who could never have claimed the GST anyway, the margin scheme is money you keep and it costs the buyer nothing. Selling to a GST-registered buyer who had budgeted on claiming 1 eleventh back, you have moved your saving onto their balance sheet, and they will notice. Sometimes before settlement, when there is still time to renegotiate. Sometimes afterwards, when the conversation is much worse.
Work out the likely buyer profile before the contract goes out, not after.
The 7 per cent at settlement is a withholding, not your liability
Since 1 July 2018 a purchaser of new residential premises or potential residential land generally has to withhold an amount at settlement and pay it to the ATO directly, under Subdivision 14-E of Schedule 1 to the Taxation Administration Act 1953. The rates are:
- 1 eleventh of the contract price for a fully taxable supply
- 7 per cent of the contract price where the margin scheme applies
- 10 per cent of the GST-exclusive market value for certain supplies between associates for less than market value
The Minister can set a higher rate for margin scheme supplies, capped at 9 per cent by section 14-250(7). It has been 7 per cent since the rules started.
7 per cent of the price and 1 eleventh of the margin are 2 different numbers, and on any real deal they will not match. You still report the sale and your actual Division 75 liability on your activity statement, and the withheld amount is credited against it. Over withheld, you get the difference back. Under withheld, you pay the balance.
The notification is the bit that trips vendors. Section 14-255 requires you to tell the purchaser in writing, before you make the supply, whether they have a withholding obligation and what the amount is. Miss it and the purchaser withholds 1 eleventh, and you spend the next few months chasing the ATO for a refund of the difference on money that was never yours to lose.
What I check before a contract goes out
- How you acquired the property, and how your vendor acquired it before that.
- Whether the margin scheme is written into the contract, and whether it will be signed before settlement rather than at it.
- The acquisition consideration figure, stripped of every dollar of build cost.
- Who the likely buyer is and whether they need the input tax credit.
- Whether a supplier notification is going out, and whether the amount in it matches the calculation.
Worth saying plainly: none of this touches the income tax side. Whether the sale is on revenue account or capital account, and whether any CGT concessions on the property are available, is a separate analysis that runs in parallel. Getting the GST right does not get the income tax right, and I have seen files where the margin scheme was handled beautifully and the character of the gain was never considered at all.
If you want the recurring version of this checklist sitting inside your workflow rather than in somebody’s head, that is what Tax Assistant is for.
Frequently asked questions
How is GST calculated under the margin scheme?
GST is 1 eleventh of the margin. The margin is the sale price less the consideration you paid to acquire the property, or less an approved valuation where the valuation method applies. Improvements you made after acquiring the property do not reduce the margin.
Can the margin scheme be applied after settlement?
Not without the Commissioner. The written agreement has to exist on or before the supply, which for real property means settlement, and the only route past that is the Commissioner allowing a further period. The ATO has also confirmed the parties cannot revoke a margin scheme agreement once settlement has happened.
Can the buyer claim GST credits on a margin scheme purchase?
No. A supply made under the margin scheme is not a creditable acquisition, so no input tax credit is available on the purchase no matter how the buyer is registered. The seller does not issue a tax invoice for the supply either.
Why is the GST withholding 7 per cent instead of 1 eleventh?
7 per cent of the contract price is the rate the withholding rules set for margin scheme supplies, and it is a rough proxy rather than your actual GST. The liability is still 1 eleventh of the margin under Division 75, reported on your activity statement, with the withheld amount credited against it.
Does the margin scheme apply to commercial property?
Yes. Division 75 applies to taxable supplies of real property generally and is not limited to residential. What is limited to new residential premises and potential residential land is the settlement withholding regime, which is a separate question from whether the margin scheme is available.
Do I need a valuation to use the margin scheme?
Only if you are on the valuation method, which applies where you held the interest before 1 July 2000 and in the other circumstances Division 75 sets out. It has to be an approved valuation under section 75-35. If you bought the property after 1 July 2000 in an ordinary purchase, the consideration you paid is the figure you work from.
The technical detail
Governing provisions. Division 75, A New Tax System (Goods and Services Tax) Act 1999 (Cth), headed Sale of freehold interests etc.
Section 75-5 applying the margin scheme. Subsection (1) requires written agreement between supplier and recipient. Subsection (1A) requires that agreement on or before the making of the supply or within a further period allowed by the Commissioner. Subsection (2) excludes the scheme where the entire interest, stratum unit or long-term lease was acquired through a supply ineligible for the margin scheme. Subsection (3) lists the ineligible supplies.
Section 75-10 the amount of GST. Section 75-11 margins in particular circumstances. Section 75-12 failure to pay full consideration. Section 75-13 supplies to associates. Section 75-14 consideration for the acquisition does not include the cost of improvements. Section 75-15 subdivided real property. Section 75-16 property acquired through several acquisitions. Section 75-20 supplies under the margin scheme do not give rise to creditable acquisitions. Section 75-22 increasing adjustment where part of the interest was acquired through an ineligible supply. Section 75-30 tax invoices not required. Section 75-35 approved valuations.
Ineligibility pass through. Applies to sales on or after 17 March 2005 for inheritance, GST group and GST joint venture acquisitions. Extended from 9 December 2008 to acquisitions as part of a GST-free going concern, as GST-free farmland, and from an associate without consideration, in each case where the previous owner was registered or required to be registered and had acquired the entire property through a fully taxable supply with GST worked out without the margin scheme.
Settlement withholding. Subdivision 14-E of Schedule 1 to the Taxation Administration Act 1953, applying to consideration other than a deposit first provided on or after 1 July 2018. Section 14-250 imposes the obligation on the purchaser for new residential premises, other than those created through substantial renovations and other than commercial residential premises, and for potential residential land. Subsections 14-250(6) and (7) set the amount at 1 eleventh of the contract price, 7 per cent where the margin scheme applies, with a ministerial power to raise the margin scheme rate to a maximum of 9 per cent. Section 14-255 imposes the supplier notification obligation. Amounts are rounded down to the nearest dollar.
Commissioner guidance. PS LA 2005/15 on the discretion to extend the time for making the written agreement. LCR 2018/4 on the purchaser obligation to pay an amount for GST on taxable supplies of certain real property. GSTR 2006/7 on the margin scheme for property acquired or held before 1 July 2000.
Case. WYPF v FC of T [2021] AATA 3050. Preparatory works accepted as non-monetary consideration within the margin scheme base; building works refused.
Worked figures used above. Sale $1,100,000 less acquisition $400,000 gives a margin of $700,000 and GST of $63,636, against $100,000 on a fully taxable supply. Sale $12,000,000 less land acquisition $3,000,000 gives a margin of $9,000,000 and GST of $818,181; the same project treated as sale less land less $6,000,000 of build would give $272,727, which is not the law.
