Methods to work out the margin
There are two methods you can use to work out the margin:
The method you can use will depend on when you originally purchased the property you are selling.
The consideration method
You can use the consideration method regardless of when you purchased the property you are selling.
Using the consideration method, the margin is the difference between the property’s selling price and the original purchase price. That is, the sale price less the purchase price equals the ‘margin’.
The sale price must include any settlement adjustments contained within the sales contract.
When working out the margin using the consideration method, do not include any of the following as part of the purchase price:
- costs for developing the property
- legal fees
- any options you purchased
- stamp duty
- any other related purchase expenses.
Example 1: using the consideration method for property purchased on or after 1 July 2000
Bob is a GST registered builder. On 1 December 2002, Bob purchased a block of land for $150,000 from a vendor who was not registered for GST.
Bob paid $550 in conveyancing fees and $7,000 in stamp duty on the purchase of the land.
Bob later constructed a house on the land and sold the house and land for $315,000. Bob chose to use the margin scheme to work out the GST on the sale.
The margin for the sale of the house and land package is $165,000, the sale price of the property minus the purchase price of the property ($315,000 - $150,000).
The GST Bob must pay on the margin for the sale is $15,000 ($165,000 x 1/11th).
Bob has a tax invoice for the conveyancing fees and can claim a GST credit of $50 ($550 x 1/11th) in the tax period in which the purchase applies to.
Bob also holds tax invoices for $110,000 of business purchases he made when building the house. Bob is able to claim $10,000 in GST credits for these purchases.
Bob is not entitled to any GST credits on the stamp duty as GST is not included in the cost.
Example 2: using the consideration method for property purchased before 1 July 2000
James is registered for GST and reports GST quarterly.
On 15 June 2000 James purchases vacant land for $110,000 as part of his business. In May 2008, James contracts to sell the land for $220,000 and specifies in the contract that he will apply the margin scheme.
The margin for the sale of the land is $110,000, the sale price of the property minus the purchase price of the property ($220,000 - $110,000). The GST James must pay on the margin for the sale is $10,000 ($110,000 x 1/11th).
Because James chose to apply the margin scheme, the purchaser cannot claim a GST credit.
End of example
- GSTD 2006/3 Goods and services tax: are settlement adjustments taken into account to determine the consideration for the supply or acquisition of real property?
The valuation method
You can generally only use the valuation method to work out the margin if you originally purchased your property before 1 July 2000. Using the valuation method, the margin is the difference between the selling price and the value of the property (usually as at 1 July 2000). That is, the sale price less the value of the property (usually as at 1 July 2000) equals the ‘margin’.
You can only use the valuation method if you hold an approved valuation.
Example 3: using the valuation method
Bayview Limited is a GST-registered property developer and reports GST on a monthly basis.
Bayview bought land in 1970 for $30,000 and entered into a sales contract to sell the land in September 2008 for $1.44 million. The contract stated that the margin scheme would be used to work out the GST on the sale. Settlement occurred on 2 December 2008.
Bayview obtained a professional valuation of the land (as at 1 July 2000) of $1 million in November 2008 (Bayview’s tax period ends on 31 December).
Using the valuation method, Bayview calculates the margin as the selling price minus the value of the land provided in the professional valuation they received, that is ($1,440,000 - $1,000,000) which equals $440,000.
When lodging their December 2008 activity statement, Bayview reports and pays the $40,000 GST on the sale of the land.
Because Bayview chose to apply the margin scheme, the purchaser cannot claim a GST credit for the GST included in the price they paid for the property.
End of example
Find out about:
You can change how you calculate the margin, using either the consideration or valuation method, up until the due date for lodgment of your activity statement for the relevant tax period if you apply all of the following:
- you purchased your property before 1 July 2000
- you choose to apply the margin scheme at or before the time you sell the property.
If you have an approved valuation by your activity statement due date, for the period the GST on the sale applies, and you work out the margin based on that valuation, you cannot later change to either:
- another valuation
- a different method of valuation
- an amount based on your purchase price (the consideration method).
If you have more than one approved valuation by the activity statement due date, you must choose one of these by the activity statement due date. After that time you cannot change.
Last modified: 24 Jun 2016QC 18646