Using the Margin scheme for GST on a development

Question

Hi Julia,

We are purchasing land with a house on it in Victoria which we are going to develop ie. demolish house and build 3 units to then sell.
We are purchasing from a non registered GST seller. We are wanting to use the margin scheme for calculating GST when we sell. My question is what do we need to do up front to be allowed to use the margin scheme? The contract for sale has a clause to tick if seller is selling under margin scheme but as he isn’t GST registerered, he isn’t selling under this. Is there anything we need to specify in contract of sale now to say we are buying under margin scheme?
Once we begin developing, can we claim the GST on the costs incurred along the way as we go, or do we need to wait until we sell the units to claim all costs against what we have to pay in GST upon sale?


Thankyou,
Nicole Vernall

Answer

Nicole,

You can claim the GST input credits on the costs you incur in the development, in your BAS. The BAS can be lodged monthly or quarterly. So yes you can get the GST back during the construction phase.
I suggest you get an undertaking from the seller that they are not registered for GST, just in case you have to prove this one day. Certainly that margin scheme clause should not be ticked as that implies the seller is registered for GST.
You are not buying under the margin scheme now. You will qualify to use the margin scheme when you sell because you purchased from a seller who was not registered for GST.
There is no need to state anything in the contract when you buy the property. (It is very important that you state margin scheme applies in the contract to sell). The relevant conditions for you to qualifying to sell under the margin scheme are:

1) You as the seller are registered for GST and purchased the property from someone who was not registered for GST. Though they can be registered for GST for another business just as long as the property is not part of that business.
2) There is a written agreement, when you sell, that the margin scheme applies. This is because the purchaser will not qualify to claim the GST on the sale.
Note any improvements to the asset after purchase do not reduce the margin. So if say you purchased the house and land for $66,000 from someone who is not registered for GST. Then spend $100,000 (after claiming back input credits) putting a building on the land and sell the property for$200,000. The GST on the sale is calculated under the margin scheme it will be 1/11th of $134,000 ($200,000 – $66,000).
Section 75-5(3) describes the reasons you as a seller might not be entitled to use the margin scheme here is a link. There is a lot of talk about associates, a previous area of abuse. Assuming your purchase of the property was arm’s length you do not need to worry about the sub sections on associates. http://law.ato.gov.au/atolaw/view.htm?dbwidetocone=07%3APLR%3AGoods%20and%20Services%20Tax%3AA%20New%20Tax%20System%20(Goods%20and%20Services%20Tax)%20Act%201999%3AChapter%204%20-%20The%20special%20rules%3APart%204-2%20-%20Special%20rules%20mainly%20about%20supplies%20and%20acquisitions%3ADivision%2075%20-%20Sale%20of%20freehold%20interests%20etc.%3A%23000396%2375-5%20Applying%20the%20margin%20scheme%3B
Here is a link to our How Not To Be A Developer Booklet. http://www.bantacs.com.au/booklets/How_Not_To_Be_A_Developer_Booklet.pdf There is no avoiding you are a developer because you are building units to resell. So the majority of the booklet is not directed at your circumstances but nevertheless there will be a few articles in there that will interest you, for example there is an article on margin schemes.
I strongly recommend that you involve an Accountant in this process right from the start.

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