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Property: Margin work


Every Issue

Cite as: (2009) 83(04) LIJ, p.83

The ATO has responded to some rorting of the GST margin scheme by introducing changes for all.

Last month I wrote about owner-builders and suggested that the only issue that causes property lawyers greater concern is GST.1

Perfectly on cue, changes have been made to the operation of the margin scheme within the GST regime and these changes are bound to cause heartache and pain.

The margin scheme is a legitimate method by which developers of land are able to minimise the impact of GST on their activities.

The Australian Tax Office (ATO) accepts that GST is not meant to be a tax on land, but rather a tax on the proceeds of activities involving land.

In its simplest form the margin scheme allows a developer (someone who is conducting a profit-making enterprise) to pay GST on the “profit” or marginal increase in value of the real estate activity that the developer is conducting. Thus a developer who buys a property for $1 million and sells it for $2 million is able to pay GST on the “margin” of $1 million rather than the sale price of $2 million.

This applies whether the developer simply holds the land and resells it, which is an enterprise in itself, or undertakes a more intensive enterprise, such as constructing homes on the land, and then selling.

Like all benefits, the margin scheme has qualifications. The rule that to rely on the margin scheme “the seller must have purchased on the margin scheme” is widely known. In such circumstances the vendor will have remitted GST on its margin to the ATO and the purchaser does not receive a tax invoice and is not able to claim the GST back.

However this rule, while an easily remembered mantra, is not strictly correct. In fact, the qualification is a little more generous than that and the margin scheme may be used if the purchase was on the margin scheme or on a no-tax basis. Thus a purchase from a vendor not liable for GST, or the purchase of a going concern or farm (both non-taxable) will entitle the purchaser to adopt the margin scheme when reselling. The ATO accepts that it is not entitled to a share of such sales, although it waits for a piece of the action from the next transaction.

The corollary of this rule is that the margin scheme is not available on resale if the purchase was on a full-tax basis.

In such cases the ATO will have received GST on the transaction but the purchaser will have received a tax invoice and claimed the GST back. Thus the ATO has gained no net benefit out of that taxable supply and eagerly awaits the next transaction to recover its entitlement.

The margin scheme is available for successive transactions (with successive owners paying tax on their margin) but once someone hops off the merry-go-round and sells on a full-tax basis, the music stops and the margin scheme is no longer available.

However, as often happens, some have apparently been rorting the system and so the rules have changed for everyone.

One “rort” was to insert a GST-free transaction (such as a going concern) between a full-tax supply and a margin scheme supply, thereby “re-opening” the margin scheme that had been closed by the full-tax supply.

A sells to B on a full-tax basis (no net GST to the ATO) then B “converts” the asset to a going concern and sells to C (no GST to the ATO). When C resells the development (now no longer a going concern as it is complete), instead of C paying GST on the sale price the ATO only receives GST on C’s margin as C had purchased a going concern and is therefore entitled to apply the margin scheme. The value that B added to the development escapes GST.

The new rules require C to “look back” to the transaction through which B acquired the property (from A) and only entitles C to apply the margin scheme if A was also entitled to do so.

A second rort relates to calculation of the margin itself. Again, the modus operandi is to insert a GST-free transaction, such as a going concern, between two margin scheme transactions.

The first transaction from A to B is conducted on the margin scheme and B then “converts” the asset to a going concern before selling (GST-free) to C. C (under the old rules) was entitled to apply the margin scheme to the subsequent sale of the completed development.

The value that B added to the project escaped GST. Again the amendments adopt the “looking back” obligation and require C to “look back” to the first transaction (A to B) and to adopt A’s sale price in determining C’s margin. In that way the value that B added is taxed.

These amendments came into effect on 8 December 2008 and no doubt some will have already moved on to find other loopholes in the GST Act.

Fortunately, the amendments only apply to “new supplies”, being a supply (on the margin scheme) of a property that was itself acquired after 8 December 2008. However, such transactions will begin to take place much faster than anyone expects and an appropriate inquiry process must be established.

Inevitably, the unprepared will unintentionally allow their clients to enter transactions that come back to bite them at tax time and the Legal Practitioners’ Liability Committee will no doubt have to walk along behind to pick up the pieces. l


RUSSELL COCKS is the author of 101 Conveyancing Answers.

1. “Owning warranty insurance obligations”, March 2009 LIJ, p81.

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