Margin Scheme - A Brief Overview

In this article, we will discuss the Margin Scheme and the prerequisites for its application in your business. The Margin Scheme is particularly relevant for developers, as the Goods and Services Tax (GST) can significantly impact their operations.

The Margin Scheme Explained

Let’s suppose that you’re in the process of purchasing a block of land. If you bought it from a vendor who is registered for the Goods and Services Tax (GST), it means that the seller is already obligated to pay GST on the sale. In this scenario, the purchase is considered a taxable supply.

For instance, let’s assume that you purchased the land for $100,000. Since GST applies to the sale, the total amount you would need to pay the seller is $110,000 (inclusive of GST). As a result, it’s crucial to discuss with the seller that you want to apply the margin scheme if you intend to use it. If the seller agrees to this arrangement, it should be clearly outlined in the contract.

If you have purchased the land as a taxable supply, then the Margin Scheme cannot be implemented, as you will be able to claim the GST cost of $10,000, as stated in the earlier example of buying the land. However, if the land was purchased as a taxable supply, it has been discussed that the Margin Scheme will apply then Margin Scheme can be applied.

In case you have acquired the land as an input tax supply, meaning it was purchased from a non-business private seller, and it’s just residential land, then it is not subject to GST. If the Margin Scheme can be implemented, it still needs to be mentioned in the contract that both the vendor and the purchaser have agreed to use it.

Benefits of the Margin Scheme

Instead of GST being calculated as 10% of the GST exclusive purchase price, GST payable under the margin scheme is calculated on the difference between the selling price and the costs of acquiring the premises. As a result, the amount of GST payable under the margin scheme can be considerably less than that which would be payable under ordinary methods.

How can the Margin Scheme be applied?

There are two methods when applying the margin scheme:

Consideration Method

The first method for implementing the Margin Scheme is known as the Consideration Method, which has been in effect since July 1, 2000. If the property was purchased after this date, you can use this method. Essentially, to calculate the Margin using the Consideration Method, you need to deduct the purchase price, along with any settlement costs or adjustments, from the selling price. This difference represents the Margin or Consideration that you can calculate. It’s important to note that this calculation does not include any development costs, only the selling price of the land itself. Therefore, applying the Margin Scheme requires some calculation and is not as straightforward as it may seem.

Valuation Method

Another method for applying the Margin Scheme is the Valuation Method. This approach requires obtaining the market value of the land, which must be determined by an approved valuer. The valuation is based on the payment received by the seller as outlined in the contract of sale, or it can be a valuation prepared by a state or department for tax purposes.

To calculate the Margin using the Valuation Method, subtract the value of the land as per the valuation from the selling price of the property. It’s worth noting that while the Consideration Method is more commonly used, the Valuation Method may be more appropriate depending on the specifics of each case.

How to report the Margin Scheme on your BAS

Applying the Margin Scheme involves a complex calculation process, which spans across multiple financial years and takes into account various development costs. The total margin needs to be reported in the BAS sales figure, which reflects the amount of GST on the margin.

Businesses that are applying the Margin Scheme need to report the gross figures on their BAS after calculating the GST after the margin, the ATO will automatically include the GST that has been withheld, and the ATO will refund or request payment for any difference. Additionally, for GST on Purchases (1B) transactions, which involve GST on purchases, developers can claim their development costs normally.

The primary benefit of applying the Margin Scheme is that it can make a significant difference from a GST perspective, especially for developers. As the cost of land continues to rise, being exempt from the GST net for land costs can greatly improve a project’s feasibility.

This is a brief overview of the Margin Scheme, and if you have any further questions, like eligibility for the margin scheme, please don’t hesitate to contact us online.

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