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Hi, my question is regarding marginal Scheme. I have bought a block of land in 2009 with no GST payable on the land, from a private indiviual. Following that I have subdivided the block into 2 seperate Green Titles (both blocks identical in size)the subdivsion took 8months, after that I build 2 separate homes (1st home as Primary Residence where I live in now and 2nd home for sale off the plan)I had valuations done prior to building on each land with the 2nd block of land valued at $250,000. I have registered for GST prior to building the 2nd home and have claimed GST credit Quartely from ATO on the building costs of the house, the cost of building was approximately $150,000 (2nd house), my question is if I sell the house for $450,000 will I be paying GST for the total amount (on $450,000 which will be $45,000) or am I elegible for Marginal Scheme or if not what prevents me form claiming Marginal Scheme? I have consulted few accountants but everyone is giving me different answers! Many thanks for your help. Thomas
Answer
You are certainly entitled to use the margin scheme. GST would be payable on 1/11th of the selling price not 1/10th as in your example, if the margin scheme applied. When using the margin scheme on a property purchased after 30th June 2000 you reduce the selling price by the purchase price to determine the amount on which GST is payable at the rate of 1/11th. In other words you pay GST on the margin between the purchase price and the selling price, hence the name the margin scheme.
You will not be able to justify using the $250,000 market valuation. Assuming the properties are identical, your purchase price will be half the original cost of the land.
There is good reason for you getting conflicting views. In the May 2010 budget it was announced that they were going to let developers use a market value base amount in the margin scheme. This is intended to come into effect on 1st July 2012. The treasury papers I have review just give token comments and no legislation is before parliament yet so that is about as much as I can tell you. There are two reasons I think it will not benefit you. The first is that it will probably only apply to developments after 1st July 2012 and the second is you probably purchased the property right from the start with the intention of developing it this way so there is no justification in using a valuation.
This change to the law is proposed because there is some uncertainty in the current law regarding using a market value for land purchased after 30th June 2000. This is very relevant when a person has owned the property for private purposes for years and then decides to subdivide but in your case your intention was to subdivide from the start so I don’t see any room for your circumstances. Nevertheless, this is probably why you are getting conflicting views as to whether you can use a market value.
I have taken the line you can’t because even though you were not registered until after you purchased the land (the uncertainty gives a window of opportunity to people who are not registered at the time they purchase the land) you should have been registered at that time because that is when you embarked on the business venture of building this new house. If you had a different intention at the time of purchase and later changed your mind you may have a chance but the short period of time would make this difficult to prove and the onus of proof is on the taxpayer.
Note the purchaser must agree in writing that the sale be subject to the margin scheme.
Here is a spiel on the margin scheme to give you a more general idea:
GST margin scheme
Basics:
• The margin scheme can only be used with a house and land or land. If the seller is registered for GST the margin scheme can only be used where the property was owned pre 30th June 2000 or purchased under the margin scheme. Or if the seller, who is registered for GST purchased the property from someone who was not registered for GST
• The margin is the amount of the selling price on which GST is calculated.
• The purchaser of a property under the margin scheme cannot claim any GST input credits back on the purchase price. But if they are registered for GST they can claim GST input credits for further expenditure on the property.
• On 17th March 2005 a bill was introduced to Parliament that will require a written agreement signed by both parties on or before settlement for the sale to be subject the margin scheme.
Property Purchased After 30th June 2000:
• If you are selling a property you purchased after 30th June 2000 and the price you paid was calculated under the margin scheme section 75-5 allows you to only charge GST on the difference between the selling price and the cost to you of the asset that was measured under the margin scheme. Note any improvements to the asset after purchase do not reduce the margin. For example a GST registered developer buys land for $66,000 from someone who is not registered for GST. The developer spends $100,000 (after claiming back input credits) putting a building on the land and sells the property for $200,000. If the GST on the sale is calculated under the margin scheme it will be 1/11th of $134,000 ($200,000 – $66,000). On 17th March 2005 a bill was introduced to Parliament to make it clear the margin must include the cost of improvements and to stop abuses of this area.
• Note there is one dubious exception to the above ID 2002/30 states that the price you paid for the property, as calculated under section 75-10 (i.e. the portion that is not subject to GST when you sell) includes any adjustments for land tax or council rates you may have paid at settlement. But ID 2002/31 states that this does not include legal fees.
• You cannot use the market value to set the cost under the margin scheme if you purchased the property after 30th June 2000. This is the case even if you did not register for GST until after the purchase
