When selling property people erroneously assume that the GST payable is equal to 1/11th of the sale price. However this is not always the case and you must consider the amount of GST payable when selling property.
Assuming that you are registered for GST or required to be registered for GST then you may need to pay GST on the sale of your property. One of the things to consider when selling property is whether you can use the “margin scheme” for the sale.
It is important to remember the following principles when applying the margin scheme
- the agreement to use the margin scheme MUST be confirmed in writing between the parties
- the margin is a gross figure. It is NOT the suppliers profit margin
- development costs are NOT included when calculating the margin
- GST is calculated on 1/11th of the margin
There are rules in calculating the margin depending on when the property was purchased. These include
- If pre 01/07/2000 property then margin is the increase in fair market value since 01/07/2000
- If pre 01/07/2000 property and not registered at that date then increase in fair market value from date registered for GST
- If property acquired after 30/06/2000 then difference between sale price and the price paid
The issue then is whether you can apply to use the margin scheme on the sale of a property. A supply will be ineligible for the margin scheme if it is
- a taxable supply on which the GST was worked out without applying the margin scheme;
- a supply of a thing acquired by inheriting it from a deceased person where the deceased had acquired it through a supply that was ineligible for the margin scheme;
- a supply between members of a GST group where the original supply to a member of that GST group from an entity who was not such a member was ineligible for the margin scheme;
- a supply to a participant in a GST joint venture from the GST joint venture operator where the operator acquired the thing through a supply that was ineligible for the margin scheme;
- a supply of real property acquired as part of a GST-free supply of either farmland or a going concern from an entity that was registered or required to be registered for GST at the time of acquisition and where that entity acquired the real property interest in question through a taxable supply to it on which the GST was worked out without applying the margin scheme; or
- a supply from an associate who was registered or required to be registered for GST and where that supply was for no consideration, was made by the associate in the course of an enterprise but was not a taxable supply and where the associate acquired the real property interest through a taxable supply on which the GST was worked out without applying the margin scheme.
A tax invoice is not required when the margin scheme is used and nor can the recipient of the supply claim any input tax credits to offset the margin scheme GST. This is a common error that occurs where people claim input tax credits on property acquired under the margin scheme.
Call Omega Partners Sydney Accountant and Business Advisers on (02) 8211 0429 if you are a property developer and seeking to understand how to use the margin scheme to the sale of your properties.