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  • Property contract considerations

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

    Margin scheme

    The 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 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 subsequent sales.

    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 (1/11th 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. The 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 (1/11th 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 G1 (Total sales) $300,000
    • Label 1A (GST on sales) $27,272 ((1 ÷ 11) × $300,000) 

     

    n/a

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

    GST payable $28,000

     

    End of example

    See also:

    Rebates and adjustments

    Rebates are a type of discount, or a reduction in price that's not a normal settlement adjustment. Examples include variations to the finish of an apartment that applies before completion and discounts following a building report that are negotiated and applied before completion.

    These types of adjustments are included when calculating the GST withholding amount.

    When an adjustment or rebate is applied before settlement, the contract price should be reduced and the GST withholding amount calculated on the adjusted price.

    Example – Rebates and adjustments

    On 7 April 2020, Rachel entered into a contract to purchase a block of land from Bigtime Property Developers Pty Ltd for $275,000 with a rebate of $2,000. Rachel pays a 10% deposit of $27,500.

    Bigtime Property Developers Pty Ltd (supplier) notifies Rachel that she must withhold $24,818 and pay it to the ATO at settlement. This is 1/11th of the reduced purchase price $273,000.

    Rachael is required to complete and lodge the two GST at settlement online forms to the ATO.

    At settlement, on 2 June 2020, Rachael must withhold and pay $24,818 to the ATO and pay Bigtime Property Developers Pty Ltd the balance of the contract price $220,682.

    This means that:

    • $275,000 − $2,000 rebate = $273,000 total land price
    • $273,000 ÷ 11% = $24,818 is the withholding amount paid to the ATO at settlement
    • $273,000 − $27,500 deposit − $24818 GST = $220,682 remainder of sale price is paid to the supplier at settlement.
    End of example

    See also:

    • LCR 2018/4 Purchaser's obligation to pay an amount for GST on taxable supplies of certain real property describes how we apply the law.

    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.

    See also:

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      Last modified: 08 Jul 2020QC 55431