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GST and the Margin Scheme: What Every Property Seller in Australia Should Know

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When it comes to buying and selling property in Australia, GST can be a complex area, especially for businesses and developers in the property industry. One of the most misunderstood areas is the margin scheme — a special method used to calculate the GST payable when selling property. Whether you're a developer, investor, or tax agent assisting clients, understanding how the margin scheme works is vital to avoiding mistakes, minimising tax liabilities, and staying compliant with Australian tax laws.

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At Trinity Accounting Practice, we’ve helped countless clients in the construction, property development, and real estate sectors structure their sales properly under the GST regime. In this blog post, we explain the key features of the margin scheme, how it differs from normal GST calculations, methods used to calculate margins, and how to keep records that stand up to ATO scrutiny.

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What Is GST on Property?

Goods and Services Tax (GST) applies to many commercial property transactions in Australia. Residential property is generally input-taxed (meaning GST doesn’t apply and input tax credits can't be claimed), but new residential premises and commercial real estate are typically subject to GST.

If you're registered (or required to be registered) for GST and you’re selling property as part of a business, you may be required to include GST in the price of the sale. This is particularly true if you’re:

• A developer or builder selling new residential premises
• A business selling commercial property
• A person engaging in property transactions as part of an enterprise

Ordinarily, GST is calculated as 1/11th of the sale price. However, for eligible property sales, you might be able to use the margin scheme instead — which usually results in less GST payable.

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What Is the Margin Scheme?

The margin scheme is a method used to calculate the GST payable on certain taxable property sales. Instead of paying GST on the full sale price, you only pay GST on the "margin" — the difference between the sale price and the original purchase price (or an alternative method depending on acquisition circumstances).

The benefit of the margin scheme is that it generally reduces the GST liability for the seller, as GST is only applied to the increase in value (or "margin") rather than the full selling price.

However, this scheme is only available under specific conditions and must be properly documented in the contract of sale. Additionally, the margin scheme cannot be used for all property transactions.

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When Can the Margin Scheme Be Used?

You may be eligible to apply the margin scheme if:

• The property is being sold as part of a business activity
• The property is subject to GST
• The seller and buyer agree in writing to apply the margin scheme (usually in the sale contract)
• The property was acquired in a manner that allows for margin scheme eligibility

You cannot use the margin scheme if:

• The seller originally acquired the property using the margin scheme
• The seller claimed the full GST credit when the property was purchased
• The acquisition was from a vendor who was not registered for GST and the purchase was not a taxable supply

Correct eligibility assessment is essential to avoid overpaying GST or risking an ATO audit. This is where tax professionals like Trinity Accounting Practice can guide you through the finer details.

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Benefits of the Margin Scheme

Using the margin scheme can lead to significant GST savings for developers and sellers of taxable property. Key benefits include:

• Lower GST liability: Since GST is only calculated on the margin, the amount payable is reduced.
• Competitive pricing: You may be able to offer lower prices to buyers without reducing your profit margin.
• Cash flow advantage: Reduced GST obligations can support better financial planning and working capital retention.
• Avoidance of double taxation: GST already embedded in the property's cost base isn’t taxed again under the margin scheme.

However, it’s important to weigh these benefits against the need for accurate historical documentation and correct application of the scheme.

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Methods to Calculate the Margin

There are two primary methods for calculating the margin:

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1. Consideration Method

This is the most common method. Under this approach, the margin is the difference between the sale price and the purchase price of the property.

• Sale price: The consideration received for the sale (excluding GST).
• Purchase price: What the seller originally paid for the property (excluding GST if the seller was not entitled to claim it back).

This method is applicable when the property was acquired on or after 1 July 2000.

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Example:

You bought a block of land for $300,000 and sold it for $600,000 using the margin scheme.

• Margin = $600,000 - $300,000 = $300,000
• GST Payable = 1/11 × $300,000 = $27,272.73

This is significantly less than if GST were calculated on the full $600,000 (which would be $54,545.45).

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2. Valuation Method

This method is used when the property was purchased before 1 July 2000. In such cases, a valuation must be obtained as of 1 July 2000 (the start date of GST in Australia).

• Margin = Sale price - Approved valuation as of 1 July 2000

The valuation must meet ATO requirements and be conducted by a qualified professional. There are strict rules around the method used and the qualifications of the valuer.

When the Valuation Method Can Be Used:

• The property was acquired before 1 July 2000
• The property was held at 1 July 2000
• No GST was claimed on the original purchase

This method is less commonly used today due to the time that has passed since GST’s introduction, but it still applies for long-held property.

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Special Considerations

GST-Free and Input-Taxed Acquisitions

If the property was purchased as a GST-free supply (e.g., as a going concern or farmland) or was input-taxed, and the buyer did not claim an input tax credit, the margin scheme may still be applied.

However, thorough documentation is necessary, especially proof that no input tax credits were claimed at the time of acquisition.

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Subdivisions and Improvements

For subdivided land or properties with significant improvements (such as a new building), careful calculations are needed. The margin scheme applies to the entire sale — not just the land component — and must consider costs of development, rezoning, construction, and infrastructure.

You must ensure:

• Land costs and improvement costs are appropriately separated
• You retain proof of costs incurred
• The GST on improvements is correctly accounted for

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Record-Keeping Requirements

Accurate records are essential to support the use of the margin scheme. The ATO may request:

• A copy of the sale contract clearly stating margin scheme applies
• Proof of the original purchase price or valuation
• Evidence that no input tax credits were claimed on acquisition
• Valuation reports (if valuation method used)
• Calculation worksheets
• Relevant tax invoices

Records must be retained for at least five years after the transaction. At Trinity Accounting Practice, we recommend maintaining digital records in a structured system such as SuiteFiles or Xero-integrated platforms.

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Common Mistakes and Pitfalls

Many taxpayers misunderstand or incorrectly apply the margin scheme, leading to costly mistakes. Common errors include:

• Applying the margin scheme when not eligible
• Using the full sale price instead of margin for GST calculation
• Failing to get the buyer’s written agreement to use the margin scheme
• Claiming input tax credits and still applying the margin scheme
• Not obtaining a valid valuation when required

If these errors occur, you may be liable for back payments, penalties, and interest. We’ve assisted many clients in rectifying such issues with voluntary disclosures to the ATO and amended BAS lodgments.

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When the Margin Scheme Cannot Be Used

The margin scheme cannot be used in the following situations:

• The property was acquired through a taxable supply where the full input tax credit was claimed
• The seller already used the margin scheme on their acquisition
• The property was acquired through a supply that was not a taxable supply (e.g., private sale from a non-registered person)

Understanding these exclusions is critical to avoid GST non-compliance.

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GST Reporting and the Margin Scheme

When using the margin scheme, the GST payable is still reported on your Business Activity Statement (BAS). However, the details differ slightly:

• Report the GST on the margin under label 1A on the BAS
• Do not include the full sale price at G1
• You are not entitled to claim GST credits for the purchase

Accurate BAS lodgment is crucial. Trinity Accounting ensures your BAS is completed correctly, especially if you're managing multiple property sales under different GST methods.

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Margin Scheme and Property Developers

For property developers, using the margin scheme strategically can significantly reduce GST obligations. However, developers often purchase property in bulk, subdivide, and build — which complicates cost tracking and GST treatment.

Developers should:

• Consult early before the acquisition to ensure proper GST structuring
• Understand how the margin scheme affects cash flow, contract pricing, and feasibility studies
• Ensure margin scheme terms are clearly stated in all contracts

We work with developers across Sydney and greater NSW to navigate these rules effectively.

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Should You Use the Margin Scheme?

Whether the margin scheme is right for you depends on:

• How you acquired the property
• Your GST registration status
• The nature of the transaction (commercial vs. residential)
• Whether you claimed GST credits on acquisition
• The availability of purchase documentation or valuation reports

A thorough review of your transaction history is required. At Trinity Accounting Practice, we provide GST advice tailored to your circumstances and help you assess the suitability and financial impact of using the margin scheme.

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Final Thoughts

The margin scheme can be a valuable tool to manage GST obligations for property sellers and developers. But it requires a careful understanding of eligibility rules, calculation methods, and compliance requirements.

Incorrect application can result in overpaid GST or ATO penalties, while strategic use can deliver tax savings and improve project cash flow.

At Trinity Accounting Practice, we help businesses across Australia plan their property transactions with precision. Whether you're subdividing land, selling a new development, or reviewing your GST strategy, we provide the expert advice and support needed to get it right.

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How Trinity Accounting Practice Can Help

👉 Trinity Accounting Practice
✅ Accounting Firm in Beverly Hills
☎️ 02 9543 6804
📍 159 Stoney Creek Road Beverly Hills NSW 2209
🌐 www.trinitygroup.com.au
📅 Weekend & after-hours appointments available!
📅 Booking Link: https://calendly.com/ramy-hanna

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We specialise in property GST issues, margin scheme applications, BAS reviews, ATO correspondence, and GST planning for developers and property investors. Contact us today to schedule a consultation.

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