Upcoming Mallesons seminarsProperty Developers that regularly sell property under the margin scheme.
What do you need to do?Property Developers that regularly sell property under the margin scheme should be aware that changes to the margin scheme provisions were flagged in the recent Federal Budget. These changes apply to land that was acquired through a GST-free or non-taxable supply (eg; the farm land or going concern exemptions). The changes may impact upon the benefits of applying the margin scheme for particular projects.
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Changes to the margin scheme provisions in the GST Act were flagged in the Federal Budget released on 13 May 2008.
Applying the margin scheme to land bought through a GST-free or non-taxable supply
The proposed changes relate to the application of the margin scheme where the land being sold was acquired through a GST-free or non-taxable supply (such as the farm land or going concern exemptions).
Broadly speaking, the margin scheme is designed to ensure that GST only applies to the increase in the value of land after 1 July 2000. The Government is concerned that where the margin scheme is applied to land that was purchased through a GST-free or non-taxable supply, the GST calculated under the margin scheme may not capture the increase in the value of the land after 1 July 2000.
To address this concern, it is proposed that the "value added by the registered entity which sold the land" will be factored into the GST subsequently payable under the margin scheme.
The amendments are also expected to apply where the margin scheme is applied to the sale of stratum units (which have been built on land that was acquired through a GST-free or non-taxable supply).
Margin scheme amendments proposed in 2005
Similar margin scheme amendments were first proposed in March 2005. However, those amendments were subsequently withdrawn following lobbying by the property industry. This was partly due to the practical difficulties associated with determining the "value added" by the previous vendor.
The amendments proposed in 2005 were only intended to apply where the land had been acquired GST-free as a going concern or as farm land. However, the new proposal appears to go further and may apply where the land is acquired through any GST-free or non-taxable supply (for example, the new provisions may also apply to unimproved land that is acquired from the Commonwealth or a State through a GST-free supply under section 38-445 of the GST Act).
Impact of the proposed changes
Once enacted, the proposed changes will increase the GST payable on land (or stratum units) sold under the margin scheme, where the land was acquired through a GST-free or non-taxable supply. This may significantly reduce the benefit of applying the margin scheme.
When do the changes take effect?
The changes will apply from the date of Royal Assent of the amending legislation. No details were provided in the Budget Papers as to when the amending legislation will be released.