Calculating the GST under the Margin Scheme

by | Jul 13, 2015

Issue

A taxpayer has applied the margin scheme when selling a vacant block of land. The Taxpayer is about to lodge the BAS and wants to clarify how to calculate the amount of GST payable.

Basic Facts

Taxpayer acquired a vacant block of land in 2012 for a contract price of $300,000. The land was acquired under a taxable supply on which the margin scheme was applied. In addition to paying the contract price, there were settlement adjustments of $265. Stamp Duty was also payable by the Taxpayer when acquiring the land.

The Taxpayer intended building a house on the land and selling it when complete. However, before commencing construction the Taxpayer decided to sell the vacant land. The contract price for the sale in 2014 was $410,000. Again settlement adjustments were payable by the purchaser equaling $485. The Taxpayer agreed in writing with the purchaser that the margin scheme applied to the sale.

Answer

In the above example, the Taxpayer has acquired the land on a transaction where the margin scheme has been applied. This means the Taxpayer is eligible to use the margin scheme when selling the land to a purchaser provided the appropriate written agreement is entered into with the purchaser. In the above facts, the Taxpayer has chosen to apply the margin scheme when selling to the purchaser, and has entered into the relevant written agreement (usually incorporated into the contract of sale).

Having both acquired the vacant land under the margin scheme, and having sold the vacant land under the margin scheme, the Taxpayer would calculate the GST payable as follows:

The GST payable is equal to 1/11th of the ‘margin’

The term ‘margin’ for GST purposes is expressly defined, and does not reflect the actual profit margin for accounting purposes. For GST purposes, the ‘margin’ is the amount by which the consideration for the supply exceeds the consideration for the acquisition.

We are often asked whether the Stamp Duty or the real estate agents sales commission can be taken into account (they are not!). Also, many calculations fail to take into account the settlement adjustments (where these affect the consideration payable they are taken into account).

Therefore, it would not be uncommon to find a simplified calculation of the margin under the above example $110,000 (being $410,000 less $300,000). However, the actual ‘margin’ for GST purposes is calculated as follows:

Calculation from the above example:

References:

See GSTD 2006/3 regarding settlement adjustments.

See the ATO website regarding costs excluded from the ‘margin’ calculation, such as Stamp Duty, construction and development costs, legal fees, etc.

Note: The above facts reflect the basic application of a calculation under the margin scheme. Other transactions may require more detailed analysis to (i) determine if the sale is eligible to apply the margin scheme, and (ii) in calculating the margin (for example, taking into account market valuations and acquisitions made under a GST-free supply of a going concern, etc). If in doubt, we recommend you seek advice.

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