Tuesday, 26 July 2011

GST and the margin scheme


source: http://www.ato.gov.au/corporate/content.aspx?doc=/content/70665.htm
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Using the margin scheme

The amount of GST you must normally pay on a property sale is equal to one-eleventh of the total sale price.
When you use the margin scheme, the amount of GST you must pay on a property sale is equal to one-eleventh of the margin.
Your margin is generally the difference between the sale price and one of the following:
  • the amount you paid for the property
  • the value of the property provided in an approved valuation of the property as at 1 July 2000 (if certain conditions are satisfied).
Your margin is not:
  • the profit margin - unlike an accounting profit margin, the margin on the sale does not take into account costs you incurred to develop the new property or subdivide the land
  • the selling price minus a valuation of the property for a property purchased after 1 July 2000
  • worked out the same way as a capital gain - it is possible that you still pay GST under the margin scheme when you have no capital gain for income tax purposes.

If you sell property as part of your business and you are registered for GST, you may be able to use the margin scheme to work out how much GST you must pay.
Whether you can use the margin scheme depends on how and when you first purchased your property. For GST purposes the date when settlement occurs will be the date that you have purchased the property.
You can use the margin scheme if you purchased the property before 1 July 2000 (the start of GST) or if it is purchased after 1 July 2000 from someone:
  • that was not registered or required to be registered for GST
  • who sold you existing residential premises
  • who sold the property to you as part of a GST-free going concern, or
  • who sold you the property using the margin scheme.
You cannot use the margin scheme if when you first purchased the property the sale to you was fully taxable and the margin scheme was not used. In this case the amount of GST included in the price you paid is one-eleventh of the full purchase price.

Attention icon
Certain requirements have to be met for you to use the margin scheme. These requirements vary depending on when you bought the property and when you are selling the property.

In terms of the purchase you made, requirements vary depending on whether you purchased your property:
  • before 1 July 2000
  • on or after 1 July 2000, or
  • on or after 9 December 2008.
In terms of the sale you made or make, the requirements vary depending on whether you make the sale:
  • on or after 17 March 2005
  • on or after 29 June 2005.
See '
Working out the margin and GST payable'.

First work out which one is you. Click the link from list below.....

Sections within Working out the margin and GST payable














GREAT EXAMPLES


There are two methods you can use to work out the margin:
the consideration method, or
the valuation method.


What method you can use will depend on when you originally purchased the property you are selling.
THE CONSIDERATION METHOD
You can use the consideration method regardless of when you purchased the property you are selling.
The margin, using the consideration method, is the difference between the property’s selling price and the original purchase price – that is the sale price less the purchase price equals the ‘margin’.
When working out the margin using the consideration method, do not include any of the following as part of the purchase price:
costs for developing the property
legal fees

any options you purchased
stamp duty
any other related purchase expenses. 


EXAMPLE FOR REAL:




EXAMPLE 2: using the consideration method for property purchased before 1 July 2000
James is registered for GST and reports GST quarterly.
On 15 June 2000 James purchases vacant land for $110,000 as part of his business. In May 2008, James contracts to sell the land for $220,000 and specifies in the contract that he will apply the margin scheme.
The margin for the sale of the land is $110,000, the sale price of the property minus the purchase price of the property ($220,000 – $110,000). The GST James must pay on the margin for the sale is $10,000 ($110,000 × 1/11th).
Because James chose to apply the margin scheme, the purchaser cannot claim a GST credit.

THE VALUATION METHOD
You can generally only use the valuation method to work out the margin if you originally purchased your property before 1 July 2000. The margin, using the valuation method, is the difference between the selling price and the value of the property (usually as at 1 July 2000) – that is the sale price less the value of the property (usually as at 1 July 2000) equals the ‘margin’.
You can only use the valuation method if you hold an approved valuation


Bayview Limited is a GST registered property developer and reports GST on a monthly basis.
Bayview bought land in 1970 for $30,000 and entered into a sales contract to sell the land in September 2008 for $1.44 million. The contract stated that the margin scheme would be used to work out the GST on the sale. Settlement occurred on 2 December 2008.
Bayview obtained a professional valuation of the land (as at 1 July 2000) of $1 million in November 2008 (Bayview’s tax period ends on 31 December).
Using the valuation method, Bayview calculates the margin as the selling price minus the value of the land provided in the professional valuation that they received, (that is $1,440,000 – $1,000,000 × 1/11th which equals $440,000). When lodging their December 2008 activity statement, Bayview reports and pays the $40,000 GST on the sale
of the land.
Because Bayview chose to apply the margin scheme, the purchaser cannot claim a GST credit for the GST included in the price they paid for the property.



CHANGING METHODS
You can change how you calculate the margin (consideration or valuation method) up until the due date for lodgment of your activity statement for the relevant tax period if you:
  • purchased your property before 1 July 2000, and
  • choose to apply the margin scheme at, or before, the time
    you sell the property.
    If you have an approved valuation by your activity statement due date, for the period the GST on the sale applies, and you work out the margin based on that valuation, you cannot later change to:
  • another valuation
  • a different method of valuation
  • an amount based on your purchase price
    (the consideration method).
    If you have more than one approved valuation by the activity statement due date, you must choose one of these by the activity statement due date. After that time you cannot change.


SALES OF PROPERTY YOU ORIGINALLY PURCHASED BEFORE 1 JULY 2000
If you are selling property under the margin scheme and you originally purchased (or held an interest in) it before 1 July 2000, you can choose to pay the GST on the difference (that is, the margin) between either the sale price and the:

  • price you paid when you purchased the property (the
    consideration method), or
  • value of the property at a relevant valuation date, usually
    1 July 2000 (the valuation method).

    EXAMPLE 4
Tom is registered for GST and is carrying on a business
of leasing commercial property. Tom bought one of his commercial properties in 1989 for $50,000. He sells this commercial property in 2003 for $105,000 using the margin scheme. If Tom applies the consideration method to calculate his GST liability, the margin is $55,000 ($105,000 – $50,000). Tom’s GST liability is 1/11th of this amount, which is $5,000. 

However, if Tom decides to use the valuation method and obtains a market valuation (approved) of the property as at 1 July 2000 and the property is valued as $61,000, then the margin is $44,000 ($105,000 – $61,000). Tom’s GST liability would then be 1/11th of this amount, which is $4,000. 


SALES OF PROPERTY YOU ORIGINALLY PURCHASED ON OR AFTER 1 JULY 2000
If you are selling property under the margin scheme and you originally purchased (or held an interest in) it on or after
1 July 2000, you:

  • must use the consideration method, that is, you must pay the
    GST on the difference (margin) between the sale price and the
    price you paid when you purchased the property, and
  • cannot use the valuation method.
  1. EXAMPLE 5
John is registered for GST and is carrying on an enterprise of property development. He buys vacant land from Jane, who is not registered for GST for $100,000 on
25 September 2007. John improves the property with roads and other services and sells it to George for $210,000 on

2 October 2008. Then, the margin is
$210,000 – $100,000 = $110,000. John must pay 1/11th of the margin, that is, $10,000, as GST.

 


SALES OF PROPERTY YOU MAKE ON OR AFTER 17 MARCH 2005


Eligibility to use the margin scheme changed for sales of property made from 17 March 2005 onwards. This means, you cannot use the margin scheme if you:

    ▪    purchased the property as fully taxable and the margin scheme was not used
    ▪    inherited the property from a person who could not use the margin scheme
    ▪    obtained the property from a member of the same GST group who could not use the margin scheme, or
    ▪    
obtained the property, as a participant in a GST joint venture, from the joint venture operator who could not use the margin scheme.

SALES OF PROPERTY YOU MAKE ON OR AFTER 29 JUNE 2005


Sales of property using the margin scheme that are made from 29 June 2005 onwards require a written agreement between the seller and purchaser to use the margin scheme 



     
WORKING OUT THE PURCHASE PRICE FOR SUBDIVIDED LAND


You may use any reasonable method of apportionment to work out the proportion of the purchase price for a subdivided allotment or stratum title unit. 
If you purchase land and subdivide it, or build strata title units on it and later apply the margin scheme, the margin is the selling price less the corresponding portion of the price you paid for the property. 




EXAMPLE 7:

Working out the margin on subdivided land or stratum title units 
















Josephine is a GST registered property developer. She purchases a 2,000 square metre block of land for $240,000 from a private individual that was not required to register for GST. The block is of equal value per square metre. She subdivides the block into two allotments of 600 square metres each, and one allotment of 800 square metres. 

Josephine decides to use an area basis to work out the purchase price of the subdivided allotments. The purchase price for each of the 600 square metre allotments was $72,000 (600/2,000 × $240,000), and the purchase price of the 800 square metre allotment is $96,000 

(800/2,000 × $240,000). 

If Josephine sells the 800 square metre allotment for $140,000, she must pay $4,000 GST on the sale of this allotment, that is, the selling price minus the purchase price of the property divided by eleven, that is ($140,000 – $96,000) × 1/11th. 









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