Firstly, for those who don’t know – What is Margin Scheme Eligibility?
Why is margin scheme eligibility now more than ever critical to prospective builders, business owners & those offering bookkeeping services?
Then finally, let’s have a look at whether or not you are eligible? (Or if you are impatient, just scroll down all the way to the bottom and check for yourself real quick)
A Big Myth About The Margin Scheme!
When it comes to margin scheme eligibility, many business owners and bookkeepers are not even aware it exists and get in the construction game thinking they won’t have to pay GST if it’s residential projects only. Not true. GST always applies. Why is that such an important consideration today? I am glad you asked. Well, the rising cost of material is making short work of the margins on jobs.
As a result there isn’t much left to go around. So builders and developers start looking around for even 1 percent here and there. If it all adds up nicely, you can still pull a semi-decent margin on your projects. After all, it is no secret that fat margins are a thing of the past, even in luxury construction.
So, if there was a way to ease off the GST you remit, would you manage to scrounge a profit on your projects?
Well, in some cases, you actually could – even though things are pretty grim as we speak for many.
*If you are thinking of approaching an accountant about this, you may not need to read the article below. May we suggest our services instead? Click here to find out more.
When Can The Margin Scheme Be Applied?
The margin scheme is basically just another way to calculate GST. One that can work out quite nicely for some. Typically, in accountant speak, the margin scheme can only really be used if you are providing a “taxable supply”. So, what exactly is a taxable supply & are you providing such? A taxable supply is when you are providing a product as part of running a business e.g. not a hobby or a one-off side project for fun.
Also, the supply needs to be connected to Australia, this mostly means the action takes place here or has some relationship to Australia. The third part of this “Taxable supply” insists that you should be registered for GST or even just be required for GST.
What is the benefit of using the Margin Scheme?
As most of you already know, it reduces the amount of GST payable. On largish projects, that may well be your margin! That is a clear advantage that purchasers may have when they are required to pay GST in addition to the sale price. Secondly, less GST due from the purchaser means less stamp duty too. A nice win on all accounts, if applicable. Specially when jobs are going in single digit margins with the obnoxious increase in the price of materials.
How is it calculated?
Usually, your GST would be one eleventh of the sale price. Instead, under the margin scheme, it is one eleventh of the margin! Sweet, right? So, if your sale price is $1.1m, your GST is not $100k. It is instead one eleventh of the margin. (that is probably where the name came from). So, if your margin was 110k on that job, your GST component would only be $10k. Plus the aforementioned stamp duty benefits too! Only if you are eligible though.
Eligibility to use the margin scheme
- According to the ATO, you must sell property as part of your business model.
- You must also be registered for GST.
- Parties involved must have a written statement to use the margin scheme before settlement
- You can’t use the margin scheme if you bought the property as fully taxable and the margin scheme wasn’t used then
- If you were not registered or required to register for GST at the time of purchase (With obvious initial purchase implications)
17 March 2005 is a date you will want to remember too. You can’t use the Margin Scheme for sales on or after that date if:
- You purchased the property as fully taxable and the margin scheme wasn’t used.
- Inherited it from someone who couldn’t use the margin scheme
- (Do you know what is a GST group? It is a group of businesses that operate under one group, that files GST as a single business) You obtained the property from a fellow member of the GST group who wasn’t eligible. And they purchased it from an entity that wasn’t part of the group.
- You were part of a GST joint venture and got the property from the JV operator, who bought it through an ineligible sale
How do others opt for the Margin Scheme?
It’s a no go if you are selling property originally purchased (or you entered into a contract to do so) on or after December 2008 and:
- Bought from an ineligible entity
- Procured the property as part of a going concern (a fancy way of not calling a business a business)
- Initially bought it as GST free farmland
- Purchased the property from an associate for no consideration
The Margin Scheme is tough to navigate
Yes – most reading it so far, are about to give up and call their accountant. Admittedly, the Margin Scheme requirements are rather convoluted. However, when unsure, the ATO actually advises to seek a private ruling.
How About the Seller?
If the previous owner of the property in question was not eligible for the margin scheme, you won’t be able to use it. If you purchased the property as part of a going concern, you will need to know if the previous buyer was eligible for the margin scheme.
What is a taxable sale?
At this point you may be wondering what a taxable sale is. For a sale to be taxed, it needs to be made for payment. Barter transactions do count do but mostly sales are being considered for monetary considerations i.e. money actually exchanges hands. However, sales can be made for goods and services and other forms of payment. Payment can also be made in terms of refraining from doing something or engaging in a particular competitive business activity, in consideration for property. Although, we are starting to deviate from the scope of this article. Many times you will see these terms and they will simply mean a taxable business transaction.
Non taxable income may still be reported on your return but will not be taxable.
Now, let’s look at a few examples from the tax office.
A sells a commercial property to B and it is a fully taxable sale. So, B cannot apply the margin scheme to any related subsequent sale.
Later, B sells the commercial property to C as part of a going concern. C will not be able to apply the margin scheme either as B was not eligible.
Note: If the sale had happened prior to the 2008 changes, C would have been able to use the margin scheme.
How about if it is purchased as a business or going concern?
You score zero for margin scheme eligibility if ALL the following apply to your situation:
- You bought the property as part of a business
- The one you bought it from, was registered or required to be registered at the time when you made the purchase
- The same previous owner actually purchased that property through a fully taxable sale (A business transaction) and they did not use the margin scheme to work out the GST either.
Here’s another illustrative example from the ATO
This happens in 2019. X is registered for GST sells the business a going concern (i.e. a business) and the business sale also happens to include property, to Y.
However, X’s purchase was fully taxable from Z and they worked out the GST without using the margin scheme at all!
Now Y wants to sell the property and has to figure out the margin scheme eligibility. To do so, he needs to examine the previous seller’s position.
As a side note, many times this becomes a hurdle. As it can happen a few years later, you may find your previously supportive and amicable seller rather uncooperative as they don’t stand to gain much from helping you establish margin scheme eligibility. That is why we advise all our clients to sort this things out before signing anything and finalising money transfers i.e. when the seller is still highly motivated to assis you.
Back to our example!
- The going concern Y bought was GST free. That’s is how the property was acquired as well
- X was registered at the time of the sale.
- X purchased the entire property as a fully taxable sale. Also, very importantly, GST was calculated without using the margin scheme.
This puts the final nail in X’s margin scheme eligibility. As previous discussed, if the previous owner was not eligible for the margin scheme, then Y will not get the discount either.
The self appointed margin scheme expert?
Now, even after reading all this, I would not call you a margin scheme expert. If you are doing anything at all with property sale, it is strongly recommended that you talk to an accountant anyway. Alternatively, if you would like to look at some of our bookkeeping pricing, please click here. Doubly so, if we are talking about complex issues like margin scheme eligibility or calculation. We have made all the effort in the world to ensure the content is accurate at the time of writing this document.
However, the information is still only a broad guide and generalisation on this topic. At best, it is an overview of generalised topics available to anyone dabbling in property sales. As such, there is no way this is intended as an exhaustive source of information on anything property or tax related. It is most definitely not legal, tax or even investment advice. On these three, it will always be more prudent to seek expert advice pertinent to your own affairs nd not try to apply any perceived knowledge from any internet source.