As a residential property developer, understanding how the GST margin scheme can affect your profits is crucial.

Buyers of residential properties typically cannot claim GST credits, which means the price they are willing to pay usually remains the same regardless of the GST amount included. Here’s how the GST margin scheme can help you maximise your profits.

The impact of GST on property development

When you sell a residential property, the GST amount you must remit to the Australian Taxation Office (ATO) can significantly impact your profits. For instance, if you sell three newly built townhouses for $1 million each and you purchased the development site for $1.5 million without claiming GST credits, using the margin scheme could increase your profit by $136,364. This is because you would remit $136,364 less in GST under the margin scheme compared to the standard method.

What is the margin scheme?

The margin scheme is a method of calculating GST where the GST payable is based on 1/11 of the profit margin (the difference between the sale and purchase price) rather than 1/11 of the total sale price. In the example above, using the margin scheme, the GST payable on the sale of the townhouses would be $136,364 (1/11 of the $1.5 million margin) instead of $272,727 (1/11 of the $3 million sale price), resulting in a $136,364 saving.

Are you eligible for the margin scheme?

To be eligible for the margin scheme, no GST credit should have been claimed on the development site. This could apply if the site was acquired before GST was introduced on 1 July 2000, from a non-GST registered vendor, or as part of a GST-free going concern arrangement. The margin scheme is optional and requires a written agreement from both the seller and the purchaser before settlement.

Tips and pitfalls to consider

Here are some key points to keep in mind when considering the margin scheme:

  • Must be considered before acquisition: A common misconception or trap that we experience is when a developer requests our assistance for whether the margin scheme can apply after they have acquired the property. Applying the margin scheme for property development requires GST planning before acquiring the property as for example, if the developer acquires the property as a GST normal taxable transaction and claimed back the GST credits, the margin scheme is unable to apply.
  • GST credit: When using the margin scheme, the purchaser cannot claim GST credit. Therefore, it’s less common for commercial property developments where buyers are usually eligible for GST credits.
  • Partial eligibility: If only part of the development site qualifies for the margin scheme, it can still be used. However, adjustments will be needed for the ineligible portion.
  • Historical valuation: If the development site was acquired before 1 July 2000, an approved valuation as at that date can be used as the margin scheme base for GST calculation.
  • Settlement adjustments: Common settlement adjustments made for rates, land tax, and other outgoings are included in margin calculations according to GSTD 2006/3.
  • Activity statements: Report only the margin under item G1 – total sales figure in accordance with the ATO’s guidance.
  • Special rules: There are specific rules for sites acquired as part of a going concern, from associates, or from governments, as well as properties inherited or involving GST groups and joint ventures.

Conclusion

Given the substantial impact of GST on property development and the complexity of the rules, developers should seek professional advice early to optimize their GST strategy, leverage available concessions, and ensure compliance. By understanding and applying the GST margin scheme correctly, you can significantly enhance your profit margins and streamline your financial planning.

Feel free to reach out for a consultation to discuss how the GST margin scheme can be tailored to your specific property development project.

Credit Co-Author: Monika Lam – Manager, Tax Consulting Melbourne.