Mar 2021 4 Minutes
Margin Scheme Valuation Method
Usually, sales of commercial property, vacant land and new residential premises are likely to be taxable supplies and therefore subject to GST. If certain conditions are met, the GST margin scheme is an option of working out the GST payable.
Where GST is usually 10% of the value of the supply, if the margin scheme can be applied, the amount of GST on the supply is 1/11th of the margin for the supply.
Generally, the margin for the supply is the amount by which the consideration for the sale exceeds the consideration for the acquisition of the property. (Note: Consideration for the acquisition of the property excludes the costs incurred in developing the property, such as subdivision costs.) However in certain circumstances, the margin can be the difference between the amount of the consideration for the supply and the value of the land in an approved valuation as at a particular specified date.
The margin is not the profit margin, (that is, it is not the accounting profit margin). The margin on the sale excludes costs incurred to develop the new property or subdivide the land, as well as stamp duty and other related costs to purchase the property.
Essentially, the main issues in the calculation of the “margin” on which GST is payable will be:
- What is the appropriate” value” of the property to be used; and
- On what “specified date” does the seller use as the value of the property.
The method you can use will depend on when you originally purchased the property you are selling. Where the property being sold under the margin scheme was originally purchased on or after 1 July 2000, you can only use the consideration method.
Under the consideration method, the margin is the difference between the property’s selling price and the original purchase price. If the property being sold under the margin scheme was originally purchased before 1 July 2000, you can calculate the GST payable using either:
- the consideration method; or
- the valuation method.
If you are using the valuation method to sell property under the margin scheme, you must use an approved method of valuing the property. The three valuation methods considered acceptable (depending on the circumstances) by the Commissioner are:
- an approved valuation (obtained from a Licensed Property Valuer);
- a valuation based on the payment the seller receives under a contract of sale (if the contract was entered into before the valuation date); or
- a valuation prepared by a state or territory department for rating or taxing purposes.
The approved valuation must provide the market value of the property as at a specified valuation date. Generally, the valuation date for the property is either:
- 1 July 2000 – if the property was held or owned before 1 July 2000 and you were registered (or required to be registered) for GST at that date; or
- The date the seller was registered (or required to be registered) for GST, if the seller held or owned the property before 1 July 2000 and was not registered (or required to be registered) until after that date.
Even though the seller must obtain an approved valuation of the property as it was at the valuation date (eg. The market value of the period as at 1 July 2000), it is not a requirement that the valuation process also be conducted on that date. That is, you can obtain an approved valuation now, for the market value of the property as at 1 July 2000.
Each development or property transaction is unique. Where a seller is eligible to apply the margin scheme, the value of the property for the purposes of calculating the margin is crucial in determining the GST payable (if any). Failure to apply the above rules correctly may lead to an incorrect calculation of the margin, potentially resulting in the ATO imposing penalties and interest charges where GST has been underpaid.
We recommend that any issues in this regard be determined prior to the lodgement of the BAS in which the sale of the property is disclosed, rather than when the ATO conducts a review. This provides businesses and their advisors more confidence in the GST payable reported on the BAS and mitigates the occurrence of the ATO delving further into all the details of a subdivision or development to obtain further assurance that the GST has been treated correctly.
If you require further assistance in this regard, please contact Iggy Moro.