Margin scheme valuation: how it cuts GST on a property sale

A margin scheme valuation is an approved valuation of a property's market value at a set date, used to work out GST under the GST margin scheme. The margin scheme lets eligible sellers pay GST on the margin, broadly the difference between the sale price and the property's value, instead of on the full sale price. Where you use the valuation method, that value comes from an approved valuation by a professional valuer. This guide explains what the margin scheme is, how a valuation fits in, who can prepare one, and the ATO's requirements. It is general information on GST law, so confirm your position with a tax adviser.

Key takeaways

• The GST margin scheme lets eligible sellers pay GST on the margin, not the full sale price.
• GST under the scheme is one eleventh of the margin, which can mean a lower GST payable.
• The margin is worked out using either the consideration method or the valuation method.
• The valuation method needs an approved valuation of market value at the valuation date.
• Strict rules apply, so getting the valuation and the paperwork right matters.

What is the GST margin scheme?

The GST margin scheme is a way to calculate GST on a taxable sale of property. Instead of charging GST on the full sale price, an eligible seller charges it on the margin.

The margin is broadly the difference between the sale price and either what the seller paid for the property, or its approved valuation. GST is then one eleventh of that margin.

For property developers, this can reduce the GST payable on a sale, which is why the margin scheme is common in property development.

Goods and services tax normally applies to property transactions at ten per cent. The margin scheme, administered under the Australian Taxation Office's rules, simply narrows the base the tax applies to.

Why the margin scheme matters

The appeal is simple. On a normal taxable supply, GST is one eleventh of the full sale price. Under the margin scheme, it is one eleventh of the margin only.

For a property that has risen in value, that difference can be significant, improving the cash flow and after-tax return on a project.

It does not change the GST rate. It changes the amount the rate applies to.

The result is a reduced tax liability on the sale, and a lower tax liability flows straight through to the developer's return.

Who can use the margin scheme?

Not every sale qualifies. The margin scheme applies only where the seller is registered for GST and the sale is a taxable supply of real property.

It is typically used by property developers and businesses selling new residential property, commercial property, subdivided land or vacant land as part of an enterprise.

It is common on property sales of new stock, including investment properties sold to buyers who cannot claim the GST back.

Eligibility criteria

There are specific eligibility criteria. In general, you and the buyer must agree in writing to use the margin scheme, on or before settlement.

Eligibility also depends on how you acquired the property. If you bought it in a way that did not allow the margin scheme, you usually cannot use it when you sell.

When the margin scheme does not apply

The margin scheme cannot be used on every sale. If you acquired the property through a fully taxable supply where the GST was worked out the normal way, the scheme is generally not available.

How properties acquired from a previous owner were taxed determines your options, so a GST registered property developer should check the chain of supply before they sell property.

Because the rules on eligibility are detailed, this is an area where tax professionals earn their keep.

How the margin is calculated

There are two ways to work out the margin, and the one you can use depends on your circumstances.

The consideration method

The consideration method compares the sale price with the original purchase price. The margin is the selling price less what you paid, and GST is one eleventh of that.

This method suits property purchased after GST began, where you have clear sale and purchase prices.

Your margin scheme calculation here uses the total sale price and the original purchase price, not the property's later value.

The valuation method

The valuation method compares the sale price with an approved valuation of the property at a valuation date, rather than the price you paid. The margin is the sale price less that valuation.

This method applies in specific cases, most commonly where the property was held before GST started. Here the margin scheme calculation relies on the valuation, not the purchase documentation.

What is a margin scheme valuation?

A margin scheme valuation is the approved valuation used in the valuation method. It is a professional valuation of the property's market value as at the relevant valuation date.

It is not a casual estimate. To calculate GST based on it, the valuation has to meet the ATO's requirements and be documented in a written valuation report.

The valuation date

The valuation date is central, because the whole calculation turns on the value at that point in time.

Property held before 1 July 2000

If you held the property before 1 July 2000 and were registered for GST, the valuation date is generally 1 July 2000, when GST began. The valuation captures the property's market value on that day.

Property acquired later

In other cases, the valuation date is set by the rules, such as the date your GST registration took effect. The right date depends on your situation, so it is worth confirming before you commission the valuation.

What an approved valuation must include

The ATO sets out what an approved valuation looks like. A compliant valuation generally must:

• Be made by a professional valuer.
• State the market value of the property at the valuation date.
• Follow the ATO's approved methods in the Margin Scheme Valuation Requirements Determinations.
• Be a written report, with the valuer's signed certificate.

If any of these is missing, the valuation may not be accepted, and you may be pushed back to the consideration method.

Who can prepare a margin scheme valuation?

The valuation must come from a professional valuer. That includes a valuer registered or licensed under state or territory law, or a Certified Practising Valuer accredited by the Australian Property Institute, the Royal Institution of Chartered Surveyors, or the Australian Valuers Institute.

An agent's appraisal does not qualify. The professional standing of the valuer is part of what makes the valuation approved.

A worked example

Suppose a developer sells a property for a sale price of $1,100,000. Under the normal rules, GST would be one eleventh of that, $100,000.

Say an approved valuation at the valuation date was $800,000. The margin is $300,000, and GST under the margin scheme is one eleventh of $300,000, around $27,273.

The valuation has reduced the GST payable substantially, which is the point of the valuation method. The figures here are illustrative only.

Stamp duty is assessed separately by the state on the buyer's side and is not affected by the margin scheme.

GST on subdivided and vacant land

Developers often sell subdivided land or vacant land, and the margin scheme frequently applies to these sales.

Where a valuation method is used, the value of the land at the valuation date drives the margin. Good evidence of land value at that date is essential.

Development costs and legal fees are not deducted from the margin. The calculation works from value and price, not from those associated costs.

Input tax credits and the margin scheme

There is a trade-off to understand. If you sell under the margin scheme, the buyer generally cannot claim an input tax credit for the GST included in the price.

For a buyer who is themselves registered for GST, that can matter, so the margin scheme is often used where the buyer is an owner-occupier or investor who could not claim the credit anyway.

For that buyer there is no GST credit to claim, so the scheme does not shift a GST liability onto them either way.

The margin scheme and the contract of sale

The written agreement is not optional. You and the buyer must agree in writing to apply the margin scheme, generally on or before settlement.

Sale contracts for development stock often include a margin scheme clause for this reason. Without the written agreement, the scheme is not available, no matter how the numbers work.

Common mistakes to avoid

A few errors come up again and again with margin scheme sales.

Missing the written agreement is the classic one. So is using the wrong valuation date, or commissioning a valuation that does not meet the ATO's requirements.

Another trap is timing: once you obtain a valuation and use it to calculate the margin by the activity statement due date, you generally cannot switch to another method later. Getting advice early avoids these.

When you need a margin scheme valuation

You need one whenever you are selling eligible property under the valuation method, most often as a developer disposing of property held before GST, or where the rules point to a valuation rather than a purchase price.

An independent, approved valuation gives you a defensible market value at the valuation date, and the documentation the ATO expects.

How Valato helps

Valato provides independent property valuations across Australia, including approved valuations for GST margin scheme purposes, prepared by qualified valuers to meet the ATO's requirements.

Each report sets out the market value at the valuation date, with a written valuation report and the evidence behind it, ready for your margin scheme calculation. Compare the valuation options or order a valuation, and confirm your GST obligations with your accountant or tax adviser.

The bottom line

A margin scheme valuation lets eligible sellers work out GST on the margin using an approved valuation of the property at the valuation date, rather than the full sale price. Done correctly, with the right valuation date, an approved valuation and a written agreement, it can meaningfully reduce the GST payable on a property sale. Because the GST rules are strict and case-specific, get an approved valuation and confirm the treatment with a tax professional.

Frequently asked questions

General information only: This article is general in nature and does not take into account your individual circumstances. It should not be relied on as tax, financial or legal advice. GST and the margin scheme are complex; confirm the current rules and your own position with a qualified tax professional before relying on the margin scheme.