GST, the Sale of Real Property and the Margin Scheme

Ordinarily GST is one-eleventh of the price of the supply of real property. However, the “margin scheme” can be used to calculate the amount of GST payable where there is a taxable supply of real property with respect to the sale of a freehold interest in land, the sale of a stratum unit, or the grant or sale a long-term lease. In general, the margin scheme allows the seller to choose to pay GST on one-eleventh of the margin for the supply of real property, as opposed to one-eleventh of the price of the supply. Different principles apply, depending on whether the property was acquired before or after 1 July 2000.

Property acquired after 1 July 2000

Where the property was acquired on or after 1 July 2000, the margin for supply is the difference between the consideration for your supply of the real property and the consideration for your acquisition for the real property.

For the margin scheme to apply to the sale of real property that was acquired after 1 July 2000, the property must have previously been:

acquired from a supplier who used the margin scheme in that previous sale;
acquired from an entity that was not registered or required to be registered;
supplied to the current supplier in a GST-free supply; or
supplied to the current supplier in an input-taxed supply.

Essentially, if the GST payable on the original acquisition of the property was calculated without applying the margin scheme, the owner of the property cannot use the margin scheme when selling the property.

Property acquired before 1 July 2000

Where the property was acquired before 1 July 2000, the supplier can choose to apply the margin scheme. Choosing to apply the margin scheme is an important decision that affects both the supplier and the recipient of the property and this decision is best made after receiving legal advice. For instance, from the purchaser’s perspective, if their business purchases real property under the margin scheme they will not be able to claim a GST credit.

If the supplier chooses to apply the margin scheme, the supplier must also determine whether to apply the “consideration” method or the “valuation” method. Under the consideration method, GST is paid on one-eleventh of the difference between the selling price and the price paid to acquire the real property. Under the valuation method, GST is paid on the difference between the selling price and a valuation of the real property on the relevant valuation date, usually 1 July 2000. There are five different valuation methods available and a professional can provide assistance in determining which method best suits your circumstances.

Taxation issues related to the sale of real property are extremely complex and it is important to obtain sound legal advice. A significant proportion of litigation related to the GST involves disputes about real property. An experienced solicitor can offer advice appropriate to their clients’ needs and circumstances.

Recent changes

It is important to obtain up-to-date legal advice regarding tax laws, which are ever-changing. The Government has announced it will make changes to the Tax Laws Amendment (Measures No. 2) Bill 2005 (the “Bill”).

Amendments to the Bill will postpone the introduction of the proposed written agreement requirement for contracts entered into before Royal Assent to the Bill and remove the valuation rules relating to acquisitions that are GST-free.

The Bill was introduced on 17 March 2005, without prior announcement, and contains significant amendments to the operation of the GST margin scheme. The Government proposes to make changes in relation to the following provisions of the Bill currently before Parliament.

Written agreement required

The requirement for a written agreement by the vendor and purchaser to apply the margin scheme was to apply for contracts entered into on or after 17 March 2005.

The Government has announced that this requirement will no longer affect contracts entered into, or options or rights granted, before the date of Royal Assent to the Bill. This is good news for vendors who had exchanged contracts on or before 17 March 2005 and who did not have a written agreement with the purchaser that they would apply the margin scheme on the sale, as obtaining the purchaser’s written agreement may have been problematic in some cases.

Margin scheme and property acquired GST-free

The Bill introduces new valuation rules for properties acquired as a GST-free supply of a going concern or a GST-free supply of farmland and these rules were to apply retrospectively from 17 March 2005. In such cases, it was proposed that the margin be calculated as the difference between the GST-inclusive sale price and the valuation of the property at 1 July 2000, regardless of the date on which the property was acquired after 1 July 2000.

The Government has announced that it will remove these new valuation rules and will undertake further consultation with industry on this issue. The new valuation rules would have resulted in an increased margin, and increased GST liability to the vendor, which would decrease development profits if the vendor would not have been able to contractually recover the GST cost from the purchaser.

GST groups and joint ventures

A number of amendments in the Bill relate to GST groups and GST joint ventures to ensure that there is no manipulation of the GST margin scheme.

As you can see, this is a complicated and changing area of the law. Before you decide whether to apply the margin scheme, Geoff Bartels Business Lawyer can advise you on your best option.

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