Why you should not sell ‘plus GST’ in margin scheme supplies

When selling property on the margin scheme, there are good reasons to make the contract inclusive of GST, especially where withholding will apply. The calculations for the application of the margin scheme in ‘plus GST’ contracts are confusing and difficult, and regularly result in costly and time-consuming debate between the parties as to the correctness of the calculations. This article explains how margin scheme GST is calculated and why the calculation is different to the calculation of the amount to be withheld by the purchaser and remitted to the ATO.

What is the margin?

Division 75 of the GST Act assumes that margin scheme supplies are to be GST inclusive; this is evident from the following provisions:

s.75-10(1): ‘If a taxable supply of real property is under the margin scheme, the amount of GST on the supply is 1/11 of the margin for the supply.’.

s.75-10(2): ‘Subject to subsection (3) and section 75-11, the margin for the supply is the amount by which the consideration for the supply exceeds the consideration for your acquisition ….’.

s.9-15(1): ‘Consideration includes … any payment act or forbearance …’.

The determination of the margin depends upon the establishment of the excess (if any) of the supply consideration over the acquisition consideration. Given the wide meaning of consideration, the supply consideration must include any amounts provided by way of GST reimbursement, such as necessarily occurs in a ‘plus GST’ contract. The consideration figures take account of the usual settlement adjustments.

Where the supply is GST inclusive, the supplier’s GST liability is easy to calculate; it will be 1/11 of the margin. In a ‘plus GST’ sale that exercise becomes more difficult. In such cases, it becomes necessary to calculate the GST reimbursement to arrive at the margin; how that might occur is demonstrated in the example below.

‘Plus GST’ reimbursement

The GST reimbursement in a ‘plus GST’ contract is calculated in accordance with Division 75 and represents the amount of the supplier’s GST liability; it is not determined by reference to the withholding provisions.

Withholding

• The amount to be withheld at settlement and remitted to the ATO is equal to 7% of the ‘contract price’ as set out in section 14-250 of Schedule 1 to the Taxation Administration Act 1953 (Cwth), regardless of whether or not the result is an amount that is less, or greater, than the amount of the supplier’s actual GST liability calculated in accordance with Division 75.
• The expression ‘contract price’ has a GST inclusive character in the GST Act. In a ‘plus GST’ sale, it is the total of the base contract sum (without reference to the usual settlement adjustments) and the GST reimbursable by the purchaser.
• The GST withholding amount remitted to the ATO is credited against the balance due at settlement in the same way as if it had been paid to the vendor.
• If the amount remitted to the ATO by the purchaser exceeds the supplier’s liability calculated in accordance with Division 75, the excess is available as a credit in the vendor’s nominated account.

Example

A property was acquired for $1,000,000. Assume either that the acquisition supply was not taxable or that it was taxable and that the margin scheme was applied, in which case, the figure includes any margin scheme GST.

The same property is now being sold, applying the margin scheme, and the supply will be taxable. The withholding obligation will apply.

The selling price is to be $1,600,000 net of GST and the vendor seeks advice as to whether to sell on a GST inclusive basis or ‘plus GST’. Based on the additional value to be realised on the sale, GST is expected to be approximately $60,000 (10% x $600,000).

Assume that the settlement adjustments result in an allowance of $2,200 in favour of the vendor.

The tables that follow demonstrate the steps involved in calculating the margin GST and the withholding sum, in a GST inclusive sale and a ‘plus GST’ sale.

Contract sum: $1,660,000.

Acquisition consideration: $1,000,000.

Supply consideration: $1,662,200

Margin: $1,662,200 – $1,000,000 = $662,200.

GST (Division 75): 1/11 x $662,200 = $60,200.

Note that, by grossing up the contract sum to include $60,000 for GST, the vendor has a slight disadvantage in not picking up the additional GST payable on the adjustments sum, but this is minor compared to the advantages that flow from using a GST inclusive model.

Withholding sum: 7% x $1,660,000 = $116,200. This amount will be withheld at settlement and remitted to the ATO and will appear in the settlement statement as an amount paid on account of the contract sum.

The sum withheld at settlement and remitted to the ATO exceeds the vendor’s liability and will result in a credit in the vendor’s account at the ATO.

Contract sum: $1,600,000 ‘plus GST’.

Acquisition consideration: $1,000,000.

GST reimbursement: $1,600,000 + $2,200 - $1,000,000 = $602,200 x 10% = $60,220.

Supply consideration: $1,602,200 + $60,220 = $1,662,420.

Margin (supply consideration – acquisition consideration): $1,662,420 - $1,000,000 = $662,420.

GST (Division 75): 1/11 x $662,420 = $60,220.

Withholding sum: $1,600,000 + $60,220 = $1,660,220 x 7% = $ 116,215.

This amount will be withheld at settlement and remitted to the ATO and will appear in the settlement statement as an amount paid on account of the contract sum.

The sum withheld at settlement and remitted to the ATO exceeds the vendor’s liability and will result in a credit in the vendor’s account at the ATO.

Vendors in a hurry may want to use the ‘plus GST’ option in margin scheme contracts because they haven’t done their homework and calculated the likely margin and therefore their total selling price. There are, however, good reasons for preferring a GST inclusive approach in margin scheme sales; they are:

• That is how the margin scheme was designed to operate.
• It gives the parties certainty from the start as to the amount payable at settlement.
• It avoids the need to wait for the availability of the adjustments figure.
• It avoids the potential for dispute in relation to the vendor’s calculation of the margin and the calculation of the GST reimbursement in ‘plus GST’ sales.
• It makes the calculation of the withholding sum a simple calculation of 7% of the contract sum; the calculation, in a ‘plus GST’ sale is complex by comparison and susceptible to error.

For these reasons, it is well worth structuring margin scheme sales as GST inclusive.

Australian Consumer Law

Note that, while there is no universal requirement that taxable supplies be GST inclusive, there is such a requirement in supplies by businesses to consumers (not bodies corporate) under the Australian Consumer Law (see Section 48, Schedule 2, Competition and Consumer Act 2010 (Cwth)). In margin scheme sales by businesses to consumers, that is another reason to treat the supply as GST inclusive.