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  • Property contract considerations

    There are many different types of property contract considerations. Common ones include:

    Margin scheme

    A margin scheme enables GST to be calculated on a concessional basis. Rules depend on when a property was first purchased.

    You can only apply the margin scheme if the sale of a property is taxable.

    Generally the GST is based on the difference between:

    • the price the you paid for the property when you first purchased it, and
    • the subsequent sale price of the property.

    There must be a written agreement to say the sale of the property is under the margin scheme before the settlement date.

    If you purchase a property where the margin scheme is applied to the sale, you can't claim a GST credit for the GST included in the price.

    If you're charged the full rate of GST when you purchase a property as part of your business, generally you can claim the GST back. However you can’t apply the margin scheme on a subsequent sale.

    Example: How the margin scheme works

    John is registered for GST and purchases a property for $100,000 in January 2018 from a seller not registered for GST.

    He builds a house on the property for $165,000 and holds tax invoices for all the costs. He is entitled to claim GST credits of $15,000 (1/11 of $165,000).

    John sells the house to Peter for $400,000 in September 2018. The margin is calculated at $400,000 − $100,000 = $300,000. Therefore GST under the margin scheme is 1/11 × $300,000 = $27,272.

    Note: Under GST at settlement rules, Peter has an obligation to withhold and pay the GST.

    As Peter is purchasing a property subject to the margin scheme, he withholds and pays 7% of the contract price ($28,000).

    John still has to report the sale of the property on his September BAS, including the GST of $27,272. The withheld credit is offset against this amount, and John receives a refund of $728. 

    John's purchase and GST payable

    Supplier

    Purchaser

    Land purchased for $100,000

    n/a

    House built $165,000

    n/a

    GST credits claimed $15000 (1/11 of $165,000)

    n/a

    New property sold $400,000

    $400,000

    Margin is calculated at $400,000 − $100,000 = $300,000

    Margin 7%

    Lodge BAS (Label 1A Total sales) $27,272 (1/11 × $300,000)

    n/a

    GST property credit $728 ($28,000 − $27,272)

    GST payable $28,000

     

    End of example

    Multiple supplies in one contract

    There are contracts that include multiple supplies (for example, new residential premises and commercial premises) of different kinds. This is where each supply hasn't been allocated a particular portion of the total contract price.

    In this situation a supplier needs to determine a reasonable apportionment of the contract price that applies to the withholding obligation.

    If it's not practical to apportion the price, the withholding amount should be based on the total price for the supply.

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      Last modified: 09 Oct 2019QC 55431