Applying The Margin Scheme

The GST payable on a taxable supply is ordinarily calculated as 1/11th of the consideration for the supply (sometimes referred to as 'the basic rule'). However, the margin scheme rules provide an alternative method for working out the GST on the sale of real property, being 1/11th of the 'margin' on the sale.

The amount of GST payable on a taxable supply of real property can be worked out using the margin scheme where all of the following conditions are met:

• the supply is a taxable supply of real property made by selling a freehold interest in land or a stratum unit, or by granting or selling a long-term lease.
• the vendor and the purchaser agree in writing that the margin scheme is to apply. In most cases, this requirement is satisfied by including a clause in the contract of sale.
• the vendor did not acquire the freehold interest, stratum unit or long-term lease through a supply that was ineligible for the margin scheme, as provided in the GST Act.

In effect, the margin scheme ensures that GST is only payable on the value added to real property each time it is sold by a registered entity, rather than on the full value added since it entered the GST system. Therefore, GST payable under the margin scheme is usually lower than when worked out under the basic rule (and may also result in stamp duty savings).

Whether the margin scheme should be used depends on several factors, such as (a) the GST treatment of the acquisition of the property by the vendor, (b) the tax status of the purchaser, and (c) the type of property being sold.

To learn more, visit the Australian Taxation Office website.

Ref: April 2024 edition of the NTAA Newsletter