GST and the margin scheme tax for property investors

Although you would not typically be required to pay GST on the sale of your own home, there may be goods and services tax (GST) implications to buying and selling an investment property, according to the Australian Taxation Office (ATO). Shukri Barbara, Founder of Property Tax Specialists, shares more about GST and the margin scheme.

If you’re a property investor or deal with property buying and selling, you may need to consider how potential GST implications could affect you. Fortunately, there is an alternative way to calculate the GST payable, which essentially reduces the GST amount eligible property investors are liable to pay when selling a property – the GST margin scheme.

Do you have to pay GST when selling an investment property?

The ATO explains that while the sale of residential property such as houses or apartments doesn’t normally attract GST, the tax may apply in some cases when the seller is registered or required to be registered for GST.

Where you run a business with an annual turnover exceeding $75,000, then you will be required for GST. The ATO provides a decision tool to help taxpayers work out if they need to pay GST. GST on property is payable in certain circumstances, whether it is brand new or used.

This means if the property hasn’t previously been sold as a residential home or if it’s been substantially renovated or built to replace a demolished property (classifying as brand new), then it’s likely that you’ll trigger GST liability on the sale of that property.

If that is the case, you’ll generally have to pay GST, which normally works out to 10% of the pre-GST sale price (or one-eleventh of the total price). You should, therefore, allow for GST in the selling price of your property.

However, if you meet the eligibility criteria, you could use the GST margin scheme to calculate the GST on your sale.

What is the GST margin scheme?

The GST margin scheme is an alternative way of calculating the GST on a property sale. If you’re eligible, it allows you to pay GST on one-eleventh of the sale margin instead of the gross/total selling price.

The sale margin is the selling price minus the amount you originally purchased the property for, so it will invariably be a lower amount than the entire sale price.

The margin scheme reduces the amount of GST that an eligible property seller has to pay on the sale of a new property.

How does the GST margin scheme work?

As a hypothetical example, suppose you purchase a property for $790,000 and then substantially renovate it (to be considered like new). If that is the case, you’ll likely end up selling it for much more than you paid for it.

So, let’s say you decide to sell the property for $1,450,000.

Without applying the GST margin scheme, you would end up paying 10% on the $1,450,000 – which is $145,000.

If you applied the margin scheme, you would only pay GST on the difference between the purchase price and the selling price (i.e. the sales margin) – which is $660,000.

One-eleventh of $660,000 amounts to $60,000.

So, instead of paying GST of $145,000, you’d only have to pay $60,000, saving you $85,000.

Who can use the margin scheme?

Whether or not you can use the GST margin scheme is dependent on the following factors:

1. when the property was initially purchased
2. how GST was applied at the time of the original purchase

If you purchased a property before 1 July, 2000 (the date GST came into effect), you’d be eligible to apply the margin scheme to calculate the GST on your sale. This is because the property was not subject to GST before that date.

However, if your property was purchased after 1 July, 2000, you may only use the GST margin scheme if one of the following circumstances applies:

• the original seller of the property wasn’t registered for GST
• you purchased the property as existing residential premises
• the previous owner sold you the property as a GST-free supply and was eligible to use the margin scheme
• the previous owner applied the margin scheme when selling you the property

Who can’t use the margin scheme?

There are certain circumstances where you won’t be able to use the GST margin scheme when paying GST on a property sale. These circumstances include:

• where the property you’re selling was subject to GST when you bought it, and the GST was calculated without using the GST margin scheme
• where you inherited the property, and the deceased individual had bought the property without it meeting the margin scheme eligibility criteria
• where you acquired the property from the operator of a joint venture in which you were a participant, and the operator had obtained ownership in a manner that wasn’t eligible for the margin scheme
• where you acquired the property as a GST-free supply of a going concern. A ‘going concern’, for GST purposes, refers to an enterprise’s ability to continue functioning after the date of its sale. In certain circumstances, the supply of a going concern can be GST-free.

The ATO notes that generally speaking, if the previous owner of the property wasn’t eligible to use the margin scheme, then you will also not be eligible.

Written agreement requirements

If the sale meets all the other margin scheme eligibility criteria, the buyer and seller must also agree in writing to apply the margin scheme if the contract for sale was made on or after 29 June, 2005.

According to the ATO, the agreement to use the margin scheme must be reached when the property is sold, usually at settlement.

While there are no formal requirements in terms of the agreement’s format, it must at least be clear that you and the purchaser have agreed to use the margin scheme on the sale, and it must clearly identify the property it relates to (check the contract).

Margin scheme calculations

Depending on when you purchased the property you are selling, you can use different calculation methods.

If you purchased the property before 1 July, 2000, then you can use either:

• the consideration method
• the valuation method

If you acquired it on or after 1 July, 2000, you can only use the consideration method.

Consideration method

Using the consideration method, the sale margin is the difference between the property’s selling price and its original purchase price: sale margin = sale price – purchase price

The sale price must include any settlement adjustments contained within the sales contract. Settlement adjustments in the purchase price account for each party’s share of the transaction fees.

You must not, however, have any of the following as part of the purchase price:

• costs for developing the property
• legal fees
• stamp duty
• any other related purchase expenses

Valuation method

You can only use the valuation method if you bought the property before July 2000 and you hold an approved valuation. This means that you’ll have to have a property valuer determine the sales margin as the difference between your selling price and the property’s value (usually as at 1 July, 2000, according to the ATO).

There are three different ways a valuer may work out your property’s value for this purpose:

• the market value, based on a written report by a professional valuer
• the purchase price in the most recent contract entered into before 1 July, 2000, by parties dealing at arm’s length
• the most current valuation set by a state or territory government department for rating or land tax purposes

Changing methods

According to the ATO, if you purchased your property before 1 July, 2000, you can change how you calculate the margin, using either the consideration or valuation method, until the due date for your activity statement to be lodged for the relevant tax period. The relevant tax period would be the period in which you have sold the property.

Key takeaways

If you’re involved in property dealing – in other words, you buy and sell investment property – the ATO will likely consider this as carrying out business activities. If that is the case, and if your turnover from these activities is more than $75,000, you will generally be required to register for GST.

If you’re registered for GST, there will be certain circumstances in which you’ll be liable to pay GST on the sale of your property. If this is the case for you, then the GST margin scheme could be one way of reducing the GST you must pay when you sell the property, provided you are eligible to access it.

The GST margin scheme eligibility requirements can be complex, so you may want to consider consulting with a property tax specialist, such as an expert in our team, especially if you’re unsure whether you’re required to pay GST or qualify for the margin scheme.

Cover image source: mohdizuan/Shutterstock.com.

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