Below are frequently asked questions in regards to margin scheme issues. Click on the question below to view answer.
The vendor cannot apply the margin scheme to a sale if the acquisition of the property was made on a full GST basis (refer to s.75-5(3) for other circumstances in which a supply will be ineligible for the application of the margin scheme).
Developers purchasing vacant residential land for development and sale to consumers will always wish to have the margin scheme applied to their purchase as, otherwise, they will not be able to apply it to the sales of the developed properties.
Developers who buy existing residential property, where no GST was payable, and then develop the property into new residential property can still apply the margin scheme on the sale.
The parties must agree in writing to sell on the margin scheme before settlement. When using the standard LIV contract the words ‘margin scheme’ should be written in the appropriate box. If the contract is silent on the use of the margin scheme but the parties agree before settlement to use the margin scheme, an exchange of letters confirming agreement will be sufficient to comply with the requirement for an agreement in writing.
Where the margin scheme is applied, the purchaser is not entitled to an input tax credit (s.75-20) or to a tax invoice (s.75-30). This is not an issue for domestic consumers, who would not be entitled to an input tax credit anyway. The application of the margin scheme reduces the amount of GST and that is an advantage for purchasers required to pay an amount for GST in addition to the sale price. Further, less GST reimbursable by the purchaser will mean that less stamp duty will be payable.
Yes. Where land is sold to a builder who intends to resell to private individuals for residential purposes, the builder will need to buy on the margin scheme if intending to sell on the margin scheme. The ultimate purchaser will then only pay GST on the excess of the total sale consideration over the cost of land to the builder.
No – since 29 June 2005, the parties must have agreed in writing to apply the margin scheme. The ATO considers that this agreement must be in place by the date of supply.
If the conditions for a taxable supply exist:
- the purchaser is a domestic purchaser and will not be entitled to an input tax credit;
- the purchaser will be a re-supplier (e.g. a builder) to a domestic purchaser and will need to buy on the margin scheme in order to sell on the margin scheme;
- the purchaser prefers to limit the amount of GST as far as possible for cash flow reasons rather than pay the full amount and obtain an input tax credit; and
- the purchaser wishes to pay the least amount of GST so as to avoid having to pay the additional stamp duty that would be payable if the margin scheme were not applied.
The vendor should turn their mind to who pays the GST even when the margin scheme is used. It is often a commercial decision that vendors make as to whether they require the purchaser to pay the GST, even if it is only on the margin scheme basis, on top of the purchase price. Vendor’s practitioners should address the issue with their vendor clients before the contract is signed.
Where the margin scheme is applied, the purchaser is not entitled to an input tax credit (s.75-20) or to a tax invoice (s.75-30). This is not an issue for domestic consumers, who would not be entitled to an input tax credit anyway.
Your client should not sign any backdated agreement to apply the margin scheme as that could be seen as ‘avoidance’ and attract the anti-avoidance provisions of Division 165.
The Act requires the parties agree in writing that the supply is one to which the margin scheme is to apply, and that agreement must come into existence ‘on or before the making of the supply or within such further period as the Commissioner allows’ (s.75-5(1A), GST Act).
If there was no agreement to apply the margin scheme in existence at the time of settlement, the vendor should apply to the Commissioner for the exercise of his discretion to extend the time for agreement.