Normally the amount of GST payable on a taxable supply of real property is calculated as 1/11th of the GST-inclusive price.
In contrast, where the margin scheme is applied, GST is calculated as 1/11th of the ‘margin’ on the sale. The ‘margin’ is generally the amount by which the consideration for the sale exceeds the consideration for the acquisition of the property.
The vendor and purchaser must agree in writing to apply the margin scheme and this is usually documented in the contract for sale. Where the margin scheme is applied to a sale the purchaser is not entitled to ITCs in relation to the purchase and no tax invoice is issued.
If the purchaser is an unregistered entity (i.e. a private individual buying a house and land package from a developer), then applying the margin scheme will reduce the GST on the sale and achieve stamp duty savings for the purchaser (see Tax Tip 118). The vendor may also achieve higher net sale proceeds.
The vendor can only apply the margin scheme to a taxable supply of real property if they were not entitled to claim an ITC on the acquisition of the property because it was acquired:
- From an unregistered entity.
- As an input taxed supply of residential premises.
- Before 1st July 2000 (i.e. pre-GST).
- Under a sale where the margin scheme was applied.
- As part of a GST-free going concern.