• Eligibility to use the margin scheme

    If you sell property as part of your business and you are registered for GST, you may be able to use the margin scheme to work out how much GST you must pay.

    You cannot use the margin scheme if, when you first purchased the property, the sale to you was fully taxable and the margin scheme was not used.

    Generally, if the previous owner of the property was not eligible to use the margin scheme, you will also not be able to use the margin scheme.

    You must work out your eligibility to use the margin scheme before you sell the property.

    Find out about:

    Conditions for eligibility

    Eligibility to use the margin scheme depends on when you bought the property and when you are selling the property. Your eligibility can be affected by the eligibility of the person from whom you bought the property. In determining their eligibility you will need to take into account amendments made to the eligibility requirements in 2005 and 2008. For this reason, various transactions are outlined in some detail below.

    The amendments affect your eligibility to use the margin scheme where property has been purchased or acquired either from:

    • inheriting the property
    • an associate
    • a fellow GST group member
    • a fellow participant in a GST joint venture
    • an associate without payment
    • a GST-free sale (either as part of a going concern or farmland) where the seller was not eligible to use the margin scheme.

    If none of these amendments affect your purchase or acquisition, you are eligible to use the margin scheme if:

    • you purchased the property before 1 July 2000 (the start of GST), or
    • you purchased the property after 1 July 2000 and one of the following applies to the seller:  
      • they were not registered or required to be registered for GST
      • they sold you existing residential premises
      • they sold the property to you as part of a GST-free going concern or GST-free farmland, and were eligible to use the margin scheme
      • they sold you the property using the margin scheme.

    For GST purposes the date when settlement occurred is the date that you purchased the property.

    Applying the amendments

    Amendments to the GST Act in March 2005 introduced the requirement that you cannot apply the margin scheme to a sale if you purchased the entire property without using the margin scheme. The amendments also created certain circumstances where the previous seller's ineligibility to use the margin scheme affects your eligibility to use it.

    Amendments to the GST Act in December 2008 extend the circumstances where you cannot apply the margin scheme if the previous owner was ineligible to apply it.

    Sale on or after 17 March 2005

    Eligibility to use the margin scheme changed for sales of property made from 17 March 2005 onwards. This means you cannot use the margin scheme to sell a property if you:

    • purchased the property as fully taxable and the margin scheme was not used
    • inherited the property from a person who was not eligible to use the margin scheme
    • obtained the property from a fellow member of a GST group who was not eligible to use the margin scheme and who had purchased it from an entity that was not a member of the GST group
    • were a participant in a GST joint venture and obtained the property from the joint venture operator who had purchased the property through a sale that was ineligible for the margin scheme.

    Determining the seller's eligibility

    Since these amendments were introduced, you need to determine the previous owner's eligibility to use the margin scheme if you:

    • inherit a property
    • purchase a property from a fellow member of a registered GST group or a joint venture operator.

    Purchase on or after 9 December 2008

    If you are selling property that you originally purchased, or entered into a contract to purchase, after 9 December 2008, you cannot use the margin scheme if the entity you purchased the property from was not eligible to use the margin scheme and the property was purchased:

    • as part of a GST-free going concern
    • as GST-free farm land
    • from an associate for no consideration (no payment).

    If the entity you purchased the property from was eligible to use the margin scheme and you purchased the property through one of the above, you must include the value you and the previous seller added to the property when you calculate the margin.

    This measure intends to ensure that the interaction between the margin scheme provisions and the going concern, farmland and associate provisions does not allow property sales to be structured in a way that results in GST not applying to the value added to property once it enters the GST system.

    Example: Sale of property purchased (settled) after 9 December 2008 under a contract entered into before 9 December 2008

    In September 2008, John signed a contract to buy a partially completed residential development from Helen. The purchase price was $10 million. John and Helen agreed that the sale was a GST-free sale of a going concern and that all other requirements for it to be a GST-free going concern were met. The sale was settled in February 2009.

    Sale of property purchased (settled) on or after 9 December 2008 under a contract entered into before 9 December 2008

    Although Helen's sale to John was made after 9 December 2008, the sale is not considered under the 2008 amendments because it was made under a written agreement where the following applied:

    - it was entered into before 9 December 2008

    - it specified the amount to be paid on the sale.

    If John intends to sell the property, the 2005 amendments (not the 2008 amendments) will apply.

    End of example

    Determining the seller's eligibility

    The 2008 amendments seek to ensure that certain transactions cannot re-open eligibility for the margin scheme to be used on a subsequent sale.

    In effect, the criteria prevent you from applying the margin scheme to your subsequent sale of the property if the previous owner was ineligible to use the margin scheme.

    This means that, for example, if you want to use the margin scheme when selling property that you purchased as part of a GST-free going concern, you need to know if the previous owner was eligible to use the margin scheme. The following example shows how to work out if the margin scheme applied to the previous owner.

    Example: Eligibility for the margin scheme based on previous owner's eligibility

    Eligibility for the margin scheme based on previous owners' eligibility

    John sells a commercial property to Augusta as a fully taxable sale. Augusta is not eligible to apply the margin scheme to any subsequent sale. On 30 March 2010, Augusta sells the property to Mahalia as part of a GST-free going concern. Mahalia cannot apply the margin scheme to any subsequent sale of the property because Augusta was ineligible to use the margin scheme.

    If the sale from Augusta to Mahalia had occurred before the 2008 amendments, Mahalia would have been eligible to use the margin scheme.

    End of example

    Find out about:

    Purchased as part of a GST-free going concern

    You cannot use the margin scheme to sell a property if all of the following applies:

    • you purchased the property from the previous owner as part of a GST-free sale of a going concern
    • the previous owner was registered or required to be registered for GST at the time you purchased the property
    • the previous owner purchased the entire property through a fully taxable sale and GST was worked out without using the margin scheme.

    Example: Property purchased as part of a GST-free going concern where the subsequent sale will be ineligible for the margin scheme

    In June 2009 Sam, a GST-registered entity, makes a GST-free sale of a going concern to Mary that includes property. Sam purchased the entire property through a fully taxable sale made by Hugo where the GST was worked out without using the margin scheme.

    Some time later, Mary seeks to sell the property.

    Property purchased as part of a GST-free going concern where the subsequent sale will be ineligible for the margin scheme

    In working out if Sam was able to apply the margin scheme, Mary notes that her purchase of the property (that is, the sale to her of the going concern by Sam) was a sale where all of the following applied:

    • Mary purchased the property from Sam as part of a sale of a going concern that was GST-free
    • Sam was registered for GST at the time of Mary's purchase
    • Sam had purchased the entire property through a fully taxable sale and GST was worked out without using the margin scheme.

    As Sam was ineligible to use the margin scheme, Mary is also ineligible to use it.

    End of example
    Purchased as GST-free farm land

    You cannot use the margin scheme to sell a property if all of the following applies:

    • you purchased the property from the previous owner as GST-free farm land
    • the previous owner was registered or required to be registered for GST, at the time of your purchase of the property
    • the previous owner purchased the entire property through a fully taxable sale and GST was worked out without using the margin scheme.

    Example: Property purchased as GST-free farm land where the subsequent sale will be ineligible for the margin scheme

    In August 2009 Peter makes a GST-free sale of farm land to Quyen. Peter purchased the farm land through a fully taxable sale made by Jane and GST was worked out without using the margin scheme.

    Some time later, Quyen seeks to sell the property.

    Property purchased as GST-free farm land and the subsequent sale will be ineligible for the margin scheme

    In working out if he is able to use the margin scheme, Quyen notes his purchase of the property was a sale (by Peter) where all of the following applied:

    • Quyen purchased the property from Peter who sold the property as GST-free farm land
    • Peter was registered for GST at the time of the purchase
    • Peter had purchased the property through a fully taxable sale and GST was worked out without using the margin scheme.

    As Peter was ineligible to use the margin scheme, Quyen is also ineligible to use it.

    End of example
    Sale between associates without payment

    You cannot use the margin scheme to sell a property if all of the following applies:

    • you purchased the property from an entity who was your associate and who was registered or required to be registered for GST at the time of your purchase
    • the purchase of the property from your associate was without payment
    • the sale of the property to you by your associate was not a taxable sale
    • your associate made the sale of the property to you in the course or furtherance of a business that your associate carried on
    • your associate had purchased the entire property through a fully taxable sale and GST was worked out without using the margin scheme.

    The purchase of the property from your associate does not have to be a sale for this condition to apply.

    Example: Property purchased from an associate without any payment where the subsequent sale will be ineligible for the margin scheme

    In October 2009 Kate, a GST-registered entity, supplies property to her associate Scott for no payment. Kate supplies the property in the course of a business she carries on, but the sale is not a taxable sale on the basis that Scott is registered for GST and acquires the property solely for a creditable purpose. Kate purchased the entire property through a fully taxable sale made by Greg and GST was worked out without using the margin scheme.

    Some time later, Scott seeks to sell the property.

    Property purchased from an associate without any payment where the subsequent sale will be ineligible for the margin scheme

    In working out if he is able to apply the margin scheme, Scott notes that the sale through which he acquired the property was a sale where all of the following applied:

    • Scott acquired the property from an associate, Kate, who was registered for GST at the time she supplied the property
    • the sale of the property was without payment
    • the sale by Kate was not taxable
    • Kate made the sale in the course of a business she carried on
    • Kate had purchased the entire property through a taxable sale and GST was worked out without using the margin scheme.

    As Kate was ineligible to use the margin scheme, Scott is also ineligible to use the margin scheme.

    End of example

    Amalgamated land

    The margin scheme cannot be used in the sale of property if you purchased the entire property through a sale that was ineligible for the margin scheme.

    However, you may be able to use the margin scheme on your sale of property if part of the property you purchased is eligible for the margin scheme. If you do apply the margin scheme in these circumstances, you will need to make an adjustment.

    For example, you may be able to use the margin scheme if you amalgamated land, part of which you purchased as a GST-free going concern that was ineligible for the margin scheme and part of which you purchased through a taxable sale where the margin scheme was used.

    Example: applying the margin scheme to amalgamated land

    Chris amalgamates property that she purchased partly through a supply that was ineligible for the margin scheme (the supply from Bob to Chris) and partly through a supply that was eligible for the margin scheme (the supply from Xeo to Chris).

    Chris consolidates property partly purchased through a supply that was ineligible and partly eligible for the margin scheme

    Chris is able to use the margin scheme on her sale as she did not acquire the entire property through a sale that was ineligible for the margin scheme. However, Chris will need to make an adjustment.

    End of example

     

    Example: selling land that you have amalgamated

    Bob amalgamates property that he purchased partly through a taxable sale where GST was worked out without using the margin scheme (supply from Amy to Bob) and partly under the margin scheme (supply from Xeo to Bob).

    Bob supplies the property to Chris as part of a GST-free sale of a going concern.

    Bob consolidates property that he purchased partly through a taxable sale and then supplies the property to Chris

    Chris is able to apply the margin scheme, as Bob did not acquire the entire property through a taxable sale. However, Chris will need to make an adjustment.

    End of example

    See also:

      Last modified: 28 Jun 2017QC 18646