This article is from the Australian Property Journal archive
Developers need to put written agreements in place for all sales under the margin scheme where the date of contract is June 29, 2005 or later to ensure they will be able to apply the margin scheme in calculating the GST on the supplies they make.
Recent and significant GST amendments relating to the margin scheme were a potential minefield if developers did not understand their ramifications.
In order for the margin scheme to now apply, there must be a written agreement to that effect between the vendor and the purchaser
The written agreement must be entered into before the supply is made, which is usually at settlement, although the Commissioner of Taxation can extend this time limit.
This amendment only applies to supplies made under contracts entered on or after the day that the Bill receives Royal Assent, on or after June 29, 2005.
However, where a contract is entered because of the exercise of an option acquired before that date, the requirement for a written agreement does not apply.
For the avoidance of doubt, the legislation now also makes clear that the costs of development of a property do not form a part of its cost for the purposes of calculating the “margin” under the margin scheme.
Very generally, the margin scheme was introduced in the GST law to allow businesses a choice to pay GST only on the difference, or margin, between the selling price and either the purchase price or the value of the real property at July 1, 2000.
The GST margin is not the same as profit margin, nor is it calculated in the same manner as capital gains under the income tax legislation.
The margin scheme recognises the fact that a business that sells real property held for some time before the GST started might otherwise have to pay GST on increases in property values that occurred before July 1, 2000.
In some cases, the basis for calculating the margin on sales of properties settling on or after March 17, 2005 may even be different to that used for sales settling on March 17, 2005 and earlier.
A typical example would be where a property developer is selling subdivided blocks that have been created out of a number of acquisitions.
If one of the acquired parcels of land had been purchased and full GST paid, sales of subdivided blocks from that land settling up until 16 March would not have been eligible for the margin scheme.
However, from March 17, the developer would have been able to apply the margin scheme to the sales of the subdivided blocks.
The other major changes that have been made to the margin scheme provisions include extending the circumstances in which land is ineligible to be supplied under the margin scheme and the application of the margin scheme in cases where a taxpayer is selling property that was acquired from another member of the same GST group.
The amendment proposed as part of the original Bill that would have deemed the cost for margin scheme purposes to be the land’s value at July 1, 2000, where the land was acquired GST-free under the going concern or farm land exemptions, was not proceeded with.
However, this may not be the end of the matter, as we understand that Treasury is continuing to consult on appropriate measures in this area.
By Mark Molesworth, senior tax manager, Brisbane accounting and consulting firm, BDO Kendalls.*
