For residential property developers, GST is rarely the headline number in a feasibility model, but it’s often the one that quietly makes or breaks the project return. The margin scheme is the mechanism that determines whether GST on your end sales is a full 1/11th of the sale price, or something materially less.
And in our experience, the difference between those two outcomes is decided long before the first sale contract is signed. It’s decided at acquisition.
The rule developers must burn into memory is this: how you acquire a site for GST purposes determines how much GST you pay when you sell the developed residential premises.
Why the margin scheme matters
Under the margin scheme, GST is calculated at 1/11th of the ‘margin’, that is, broadly, the difference between the developer’s sale price and its GST cost base, rather than 1/11th of the full sale price. On a $300,000 land sale, that can be the difference between netting $272,727 (fully taxable acquisition, no margin scheme) and $290,909 (margin scheme applied, GST cost base of $200,000), before development costs even come into play. Scale that across a project of 50, 100 or 200 lots and the uplift is substantial.
Conservatively, feasibilities should still be modelled on GST at 1/11th of residential sales, so that any margin scheme benefit enhances, rather than underpins, project feasibility.
The acquisition decides everything
The margin scheme is only available if the property was itself acquired in a way that is not ‘ineligible’ for GST purposes. In practice, that means every site needs a GST transaction history back to 1 July 2000. This includes- vendor status, prior owner status and how each supply along the chain was treated for GST purposes.
At a minimum, check how the vendor selling to the developer originally acquired the property for GST purposes. Crucially, the margin scheme cannot be used to the extent that the property has gone through a fully taxable supply. Best practice is to run this due diligence before making an offer, not after contracts are exchanged.
A handful of acquisition pathways preserve, and in some cases significantly enhance, the developer’s margin scheme cost base.
The first is where the vendor is not registered or required to be registered, which is typical for private landowners or businesses sitting under the $75,000 GST turnover threshold. Here the purchase price simply becomes the cost base. It is worth remembering that when you test a vendor’s projected GST turnover, certain supplies are disregarded. These include any supply made, or likely to be made, through the transfer of a capital asset, and any supply made solely as a consequence of ceasing to carry on an enterprise or substantially and permanently reducing its size or scale.
That said, a vendor who cancels their GST registration on this basis may be required to make increasing adjustments for input tax credits previously claimed, so the decision to deregister needs to be modelled rather than assumed.
The second pathway is input taxed existing residential premises, where again the purchase price becomes the cost base.
The third, and often the most rewarding, is a property acquired as a GST-free going concern or GST-free farmland, which is where the benefits can genuinely surprise you.
Going concern or farmland look-through, surprising results
Where a site is acquired as a GST-free going concern, commonly a leasing enterprise or in some cases a development enterprise, or as farmland, a look-through rule applies. The developer can choose between the vendor’s original purchase price or the market valuation of the property at the date the vendor acquired it, whichever is higher. In a falling market, going concern treatment can be even more valuable than asking a vendor to cancel their GST registration. Any valuation used must be an ‘approved valuation’ under MSV 2020/1, typically prepared by a professional valuer working from a letter of instruction from a qualified accountant, because the look-through can reach back to a higher historic value.
Options, security amounts and mixed sites
There are two traps worth flagging here. The first concerns call option fees, which the ATO does not treat as part of the margin scheme cost base even where they are credited to the deposit. For substantive amounts under put and call structures, better practice is to document these as security amounts for the developer’s performance under the put rather than as call option fees, keeping in mind that security amounts cannot be used in call-only options.
The second concerns mixed sites, where a parcel contains both existing residential and retail or commercial space. These are best acquired on an apportioned basis, partly input taxed residential and partly GST-free going concern, assuming a genuine leasing history. For amalgamated development sites there is some good news. Provided at least one parcel was acquired in a way that is not ineligible for the margin scheme, the developer can still apply the scheme across the amalgamated project, with an input tax credit clawback where relevant.
Common issues
Two further structural issues are worth keeping on the radar. The first is Project Development Agreements. For commercial reasons, developers sometimes do not acquire the site at all and instead structure their returns through fees charged to the landowner under a PDA. These arrangements need careful structuring to ensure the developer and landowner are not treated as being in a tax law partnership as a profit-making venture, which would fundamentally change the GST and income tax analysis of the project.
The second is confirming what actually qualifies as a ‘going concern’. In a property context the typical examples are leasing enterprises and development enterprises, and the key is that the vendor must carry on the enterprise until the date of settlement and supply all the things necessary for its continued operation. This matters most for development enterprises, where the point at which the enterprise exists, and what it comprises, is often far less obvious than it is for a straightforward leasing enterprise.
The margin scheme rewards developers who plan the GST treatment of every acquisition, not those who leave it to the conveyancer at settlement. Due diligence on vendor status, transaction history since 1 July 2000, option structuring and valuation planning should be standard practice on every site.
If you’re currently negotiating a site, structuring a put and call or reviewing a project feasibility, talk to our tax team about optimising your next residential development under the GST margin scheme.
