Some time ago, I heard the woeful tale of an investor who couldn’t claim a GST refund for his commercial investment property. Sadly, he had not sought his conveyancer’s and accountant’s advice prior to signing the contract to purchase the property, a mistake which cost him tens of thousands in GST which would not be refunded by the ATO.
How did that happen?
3 words: ‘GST Margin Scheme’
What is the GST Margin Scheme?
Usually, if GST is applicable for the sale of a property (eg. sale of vacant block of land by a developer), the amount of GST normally paid on the property sale is equal to one-eleventh of the total sale price.
The GST Margin Scheme is an alternative way of working out the GST that must be paid when selling a property as part of a business, where the amount of GST applicable on the property sale is equal to one-eleventh of the margin.
The margin is generally the difference between the sale price of the property and purchase price of the property, excluding all other expenses (eg. costs incurred to develop the new property or subdivide the land). In other words, this margin does not refer to the profit margin.
Why Does the GST Margin Scheme Matter to an Investor?
Under normal circumstances, a GST-registered investor who is purchasing a commercial property will receive a GST refund from ATO for the GST incurred for the purchase.
However, when the GST Margin Scheme is applied, the GST paid under the GST margin scheme is not refundable by ATO. That’s because the seller did not claim GST credits when they purchased the property.
In order for the GST Margin Scheme to apply, the purchaser must agree to allow the seller of the property the discretion to apply the margin scheme, and the seller must confirm in writing that the margin scheme has been applied on or before the settlement date. This is usually specified in the contract, so it is always worthwhile having the contract checked by a conveyancer prior to signing. Your conveyancer may advise you to seek your accountant’s advice as well.
In such instances, you may wish to consider negotiating with the seller not to use the GST Margin Scheme, walk away from the purchase or budget for the additional 10% GST which will not be recovered from ATO.
Disclaimer: This blog post has been simplified to cover the basic principle of the GST Margin Scheme. This should not be construed as advice from Glint Accountants. We encourage readers of this blog post to contact Glint Accountants for advice on their specific circumstances.
Geraldine Lee is a Chartered Accountant in Singapore and a Fellow of CPA Australia. She is a seasoned property investor with both residential and commercial properties. Contact us at Glint Accountants for assistance if you are contemplating a property investment and would like some advice and a fact check.