Margin Scheme

I get a stack of questions from Somersofters about CGT (or the lack of it !!)and tax on a development. That also leads to the inevitable GST issue. Some are stunned when I explain GST applies. Then are pleased to hear about the margin scheme.

Thought it worth a quick post....

GST Ruling 2008/7 and 2006/8 discuss the margin scheme. It allows some developers a way of paying GST on their profit rather than the sale price of the property. However it is based on the LAND acquired and the FINAL selling price. Basically as a rule of thumb you save 1/11th of the land value...So if land costs $1.1m you can save 100K. That's a real crude example.

Margin scheme can get complex and a good example of an area where advice is a must. Some land isn't eligible. Some land has special rules. etc. Sometimes you wouldn't use it. (eg commercial property)
 
Hi Paul

say you brought a property that you were to demolish and to develop into 3 units.

PP 200,000
Construction and other fees 200,000
end value of each unit 200,000 = 600,000 total

if you sold all 3 then normally you would have to pay 1/11 of each 200,000 unit e.g. 18,181 x 3

but say each unit is similar in size then we can divide the PP of the house and land that we are developing by 3.

200,000 / 3 = 66,666

and using the margin scheme we can take the 200,000 end value of each 3 units and subtract 1/3 of the PP. from here we can calculate our new GST owing.

200,000 - 66,666 / 11 = 12,121 which would be a savings of approx 6k or 18k over the whole development.

Construction costs and other associated costs are irrelevant when using the using the margin scheme?


There can be quite a bit of unforeseen expenses here that many new developers may not be aware of. Is there under any circumstances a developer can sell developed stock with CGT rather than Income tax and GST.

Im doing a 4 unit site under residential loans so don't have to show any signs of presales etc. Ive developed one duplex block already but its my PPOR and holding the other one long term. my accountant has told me with this information that the ATO may accept that income tax and gst not apply if i decide i won't to sell 1 or 2 of the 4 townhouses and hold the other 2 or 3.
Reading through some of your threads and other posters threads here on SS I'm not sure if my accountant has given me accurate information?

cheers

blair
 
Blair...

Yep. The apportionment may need fine tuning but a simple 1/3rd may be fair and reasonable in that case.

I'm always asked why the GST on the build isn't included. Seems unfair. Well truth is you MAY be able to still claim the GST. It depends what the intention is. If its to sell...Claim GST on an apportioned basis split over each unit. Consider what is planned for each unit (stratum they call it in rulings). If its to keep and rent the GST isn't claimed. Its only claimed if its sold. Note that this can affect the QS reports which then need to be based on GST inclusive costs.

Using the margin scheme has some catches...Needs to be in the sale contract. Needs to be eligible land. eg Land inherited may not be eligible. Some complex valuation matters. There is also an avoidance rule !! If a tax invoice or contract etc says its 1/11th and the acquirer pays that then that's how much GST is given to the ATO....Cant then use the margin scheme to reduce the debt.

I will say it over and over - Personal tax advice is always needed.

Is there under any circumstances a developer can sell developed stock with CGT rather than Income tax and GST. Hmmm...Not really. Selling is the problem. You said by referring to "stock"...However there are ways a landowner can sell developed property that has been held with an intention NOT to sell... For example if a person buys and develops new units. No intention of selling them. At all....eg Holds them for 5 years or longer after the construct. This may mean no GST on sale and also the owner may have a CGT asset subject to CGT discount. Don't hold me to 5 years - That's the GST rule. The intention for CGT is the key. If you build to rent and not for resale that's the golden goose. However if you change your mind a few years later its likely to be ordinary income....You really need to demonstrate the "hold".

It all depends.

I cant comment on what you have been told. Not enough information. "Don't show any signs of presales" could be a red flag. Have you tried ?? if so its not subject to CGT. No way. If your intent is NOT to sell that one hurdle. Now come back in many years and we can see if the intention was actually demonstrated.

Your accountant may be wrong if they suggested GST can be ignored by selling just one. If you sell $75K or more value (100% certain with house + land) and its new residential GST will apply. Doesn't matter if it was a new build PPOR or not. "New residential premises" are subject to GST when first sold.
 
Hi Paul

say you brought a property that you were to demolish and to develop into 3 units.

PP 200,000
Construction and other fees 200,000
end value of each unit 200,000 = 600,000 total

if you sold all 3 then normally you would have to pay 1/11 of each 200,000 unit e.g. 18,181 x 3

but say each unit is similar in size then we can divide the PP of the house and land that we are developing by 3.

200,000 / 3 = 66,666

and using the margin scheme we can take the 200,000 end value of each 3 units and subtract 1/3 of the PP. from here we can calculate our new GST owing.

200,000 - 66,666 / 11 = 12,121 which would be a savings of approx 6k or 18k over the whole development.

Construction costs and other associated costs are irrelevant when using the using the margin scheme?

That's correct, construction costs are not included when calculating GST on a Supply, when using the margin scheme.

This is because you would have claimed GST on the eligible construction costs as you were building the development.

eg - Land cost $66,666, building costs $99,000 (assuming for the sake of the argument that all building costs are GST inc.) Sale price $200,000

GST you pay using margin scheme - (200,000 - 66,666) / 11 = $12121

GST you have claimed during building (99,000 / 11) = $9000

Net GST you have paid = $3121
 
This is because you would have claimed GST on the eligible construction costs as you were building the development.

That's not quite true..If the developer sells OTP or in advance or during construct then yes GST is claimed during construct. However if some are unsold and to be rented or intended to be held for a while to earn rent then the GST cannot be claimed during construct. The GST claim is deferred until the sale occurs. It then becomes a decreasing adjustment to the GST collected.

This can give rise to some complexities:
- Need to apportion (fair & reasonable) all construct costs across each unit
- Need to be able to identify for each units its GST incl and GST exclusive costs. Hence need to identify actual GST per unit. Claim some ? Defer some ? Decent records needed.
- Need to retain tax invoices !!

Also for the rented portions the GST INCLUSIVE build cost is used for the QS report. Important the builder doesn't give schedule to new owner !! New owner needs a GST exclusive version. This is often far cheaper than going to a new QS and getting a whole new report. An example too why builder reports are just preliminary.
 
That's not quite true..If the developer sells OTP or in advance or during construct then yes GST is claimed during construct. However if some are unsold and to be rented or intended to be held for a while to earn rent then the GST cannot be claimed during construct. .

Paul, you're over complicating things. What I wrote is absolutely true in the example given.

ie - land is purchased, property built and sold.

The OP was asking about the margin scheme when selling a newly constructed building. He wasn't asking about developing to rent out or QS reports.
 
I over complicate things so NOBODY is mislead into thinking you can automatically claim 100% of GST on all build costs. That's an ATO bullseye always on their radar cause so many make that error. Important that others see this and learn from that key issue. I have had probably 5 calls from parties about the MS after these posts. It stimulates learning and knowledge.

There are a variety of persons who read posts who apply their facts to the general info given and make wrong assumptions. If they can walk away knowing you cant always claim GST that's a good thing. They may seek personal guidance and avoid a mistake.

I agree for your question as all three are sold. However to be specific regarding your post : Newly constructed buildings can be 100% presold, partially pre-sold, some sold at end of build, some rented short term, some sold with / without tenancy later, rented long term + Perm rental. The bigger the build the more diverse the issue.

For example if the land was acquired through inheritance the margin scheme may be very different. And yes I see that problem when kids inherit mum and dads old house on large block and they ask about developing. Their builder says use the margin scheme....Special rules apply in that situation....As well as land acquired before 1 July 2000.

Developing never has one answer.
 
I over complicate things so NOBODY is mislead into thinking you can automatically claim 100% of GST on all build costs.

I think introducing information that is barely relevant to the question asked confuses the issue, instead of clarifying it.

For example if the land was acquired through inheritance the margin scheme may be very different. And yes I see that problem when kids inherit mum and dads old house on large block and they ask about developing. Their builder says use the margin scheme....Special rules apply in that situation....As well as land acquired before 1 July 2000.

Developing never has one answer.

Sure, but the question asked was about the CALCULATION of the margin scheme, and why building costs weren't included. It wasn't about rent, QS reports, inheritance, pre July 2000 or anything else you have mentioned in your answers.

If someone asks what the time is, they don't want to be told how to build a watch.
 
I think introducing information that is barely relevant to the question asked confuses the issue, instead of clarifying it.



Sure, but the question asked was about the CALCULATION of the margin scheme, and why building costs weren't included. It wasn't about rent, QS reports, inheritance, pre July 2000 or anything else you have mentioned in your answers.

If someone asks what the time is, they don't want to be told how to build a watch.

Don't read it then.
 
Don't read it then.

You quoted my post and told me I had it wrong. Am I supposed to ignore that?

Also, how am I supposed to differentiate with what is worthwhile in your posts and what is irrelevant (or advertising) without reading it first?

What a silly response.
 
I'm pretty grateful that Paul was able to share the information with me, he also sent me an email of calculations for the margin scheme on a development that is similar to what I'm doing so now i have a much better understanding of how it works.
 
I will have to thank Paul as well for free advice, my accountant charges me every time I phone him $135.
People like Paul and Terryw do this for nothing, very generous:)
 
This looks like the info I have been looking for today! But I still cant get my head around it. The reason for my curiosity is I have just finished a 2 villa development with a nice equity gain (for a first try anyway). Another opportunity knocks and I'm thinking of going again to possibly sell and reduce some debt, but my initial understanding of selling and tax implications need clarification!

The extent of my understanding was this (dev in personal names): sell within 12 months of completion - pay CGT on 100% of profit, sell after 12 months - pay CGT on 50% of profit.

ANY info relating to this situation is appreciated, also how factors like selling OTP/new would be considered. The idea of GST with respect to developments is completely new to me :confused:

An on paper gain is great but if I can't work tax implications it makes the outcome look very hazy with respect to knocking down debt!

Thanks in advance,
 
This looks like the info I have been looking for today! But I still cant get my head around it. The reason for my curiosity is I have just finished a 2 villa development with a nice equity gain (for a first try anyway). Another opportunity knocks and I'm thinking of going again to possibly sell and reduce some debt, but my initial understanding of selling and tax implications need clarification!

The extent of my understanding was this (dev in personal names): sell within 12 months of completion - pay CGT on 100% of profit, sell after 12 months - pay CGT on 50% of profit.

ANY info relating to this situation is appreciated, also how factors like selling OTP/new would be considered. The idea of GST with respect to developments is completely new to me :confused:

An on paper gain is great but if I can't work tax implications it makes the outcome look very hazy with respect to knocking down debt!

Thanks in advance,

Incorrect. Also GST will apply.

Basic issue is this - Why did you develop? Your intent was to improve wealth, make profit or even reduce debt by enhancing value ??? That's all part of the ATO view. Its nothing to do with a company or trust or personal names. Ask yourself this - Why do developers sell OTP and sell fast ??? To turn profit into cash. They don't hold to save tax cause there is no saving.

Simple rule - If you are a developer then the CGT rules don't apply to your sale. The ordinary income rules apply. These are the same laws that existed well before CGT commenced. Its a fundamental of tax law. CGT is the exception. Its often overlooked that people who buy an IP actually buy to earn income...Their intention isn't as much to "make profit"" but to also benefit from a change in value of their income producing asset. That stuff used to go untaxed. So Keating bought in CGT. But the issue for those who build and sell remains an income producing opportunity, by way of making profit.

Some people develop and build with an intent to hold and not sell. Maybe ever... CGT may apply if they sell. The ATO can and will look at your finance applications, DA etc.

Personal tax advice before commencing a dev is fundamental.
 
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