When the GST rules came in over 15 years ago, the majority of the advice we gave and ATO audits we encountered were margin scheme related. To refresh the core concept, GST is only payable by registered parties on the value added after 30 June 2000 and the “margin scheme” is designed to quarantine the value when a piece of land first comes within the GST net. It is particularly popular for residential property developments where the buyer is unable to claim back an input tax credit. As the “price is the price” with residential property, any reduction in GST liability increases the developer’s margin.
As you would expect, in the early days there were loopholes in some of the definitions and more aggressive practitioners pushed the envelope with a series of related party schemes designed to remove or substantially remove GST liabilities. Between 2005 and 2008 the loopholes were effectively closed and given the onset of the GFC, the margin scheme barely raised its head in the market place.
In the last year, we have been inundated with requests for margin scheme advice as the demand for development sites has heated up. It’s worth touching on some of the key points. Land is ineligible for the margin scheme when it has been acquired in a taxable form. This is seen to break the nexus to the pre GST era. The main types of eligible sites are:
• Land held at 30 June 2000;
• Land purchased under the margin scheme;
• Land purchased from an unregistered buyer;
• Purchase of second hand residential premises;
• Land purchased under a GST Free “Going Concern”;
• Farm land purchased under a GST Free supply.
Some of the more interesting matters we have encountered in the last year include:
• Older residential towers used for time share holidays. Is it a taxable supply of commercial residential premises (no margin scheme) or a supply of second hand apartments (input taxed and margin scheme eligible)?
• Use of multiple agents to acquire lots in older high rises (to protect the commercial confidentiality of the intention to knock down and develop) and then amalgamating lots and common areas. Throw in a mortgagee sale to reduce access to historical records. Are all the lots margin scheme eligible and if so, what is the base cost?
• Purchase of large farmland areas and continuation of agistment arrangements which provide a nominal return in comparison to land values; and
• Working out the true benefit of the margin scheme for a mixed use development when the parties have negotiated an agreed net price and the purchaser has to pay a gross up under the margin scheme. The buyer pays GST now they can’t claim back and only get the benefit when they settle sites well into the future. The large increases in value after 30 June 2000 is resulting in large gross ups which reduce the benefits of the margin scheme.
Given the numbers are always large, we recommend developers take the time to get their margin scheme position right.
DISCLAIMER: This article is intended to provide a general summary only and should not be relied on as a substitute for professional advice.