Understanding the GST Margin Scheme — What Every Property Investor Should Know

Introduction

The Margin Scheme has been mentioned from time to time amongst property investors; however, it seems that not many fully understand its meaning or the reason why the Margin Scheme was introduced by the government in 2000, when the A New Tax System (Goods and Services Tax) Act 1999 came into effect.

This article aims to explain why the Margin Scheme exists, its relevance in property sales and developments, and the procedural steps vendors must follow to apply it correctly.

1. What Is the Margin Scheme?

The Margin Scheme allows eligible sellers of real property to pay GST only on the “margin” — that is, the difference between the property’s sale price and its original purchase price (or, in some cases, an approved valuation if acquired before 1 July 2000).

It was introduced to ensure that GST applies only to the value added by the seller, rather than to the entire property value, thereby preventing GST from being imposed on amounts that were not subject to GST when the property was previously sold.

2. When the Margin Scheme Can Apply

Under section 75-5 of the A New Tax System (Goods and Services Tax) Act 1999, a vendor may apply the Margin Scheme when making a taxable supply of real property — most commonly new residential premises or subdivided land developed as part of a business.

Eligibility checklist:

• The vendor will be making a taxable supply of real property, which may include residential, commercial, retail, industrial, or vacant land.

• The property was not acquired:

  • As a fully taxable supply from a vendor who did not apply the Margin Scheme;

  • As a GST-free supply under going concern or farm land rules after 9 December 2008, where the previous vendor was registered for GST and did not use the Margin Scheme;

  • From an associate for no consideration under similar conditions;

  • By inheritance, where the deceased would not have been eligible to apply the scheme;

  • From a GST group member or joint venture operator not eligible to apply the scheme.

    
    

Residential Property Eligibility

Residential properties — particularly new residential premises — are eligible for the Margin Scheme when the sale is a taxable supply. This includes newly constructed dwellings sold for the first time, subdivided residential lots created from existing landholdings, and conversions of commercial buildings into new residential premises.

However, established (second-hand) residential premises are input-taxed and therefore not subject to GST. Because GST does not apply to such sales, the Margin Scheme cannot be used.

In short:

✅ New or newly created residential premises → Eligible (if other conditions met)

❌ Existing or previously sold residential premises → Not eligible (no GST applies)

3. GST Withholding Obligations (From 1 July 2018)

From 1 July 2018, purchasers of newly constructed residential premises or new subdivisions of potential residential land are required to withhold and remit GST directly to the ATO at settlement.

• The withholding rate is 1/11th of the contract price, or 7% where the Margin Scheme applies.

• Vendors must issue a written notification to purchasers before settlement outlining the withholding details — even if the supply is not subject to GST (LCR 2018/4 — GST Withholding for Certain Real Property Transactions).

• The vendor is entitled to a credit for the amount withheld when the purchaser pays the Commissioner.

  
  

4. How to Calculate the Margin

Under section 75-10 of the GST Act, the margin is generally:

Sale price – Purchase price (both GST-inclusive).

If the property was acquired before 1 July 2000, and an approved valuation exists, the margin is the sale price – valuation amount (with valuation dates depending on the registration timing).

Scenario	Valuation Date
Registered for GST on 1 July 2000	1 July 2000
Registered after 1 July 2000	Earlier of registration-effect date or application date
Property held with improvements before 1 July 2000	1 July 2000

If the property was acquired after 9 December 2008 as a going concern or farm land supply, or from an associate for no consideration, the previous owner’s acquisition cost must be used as the base.

Apportionment:

For subdivided or strata-titled properties, costs or valuations must be apportioned reasonably — by area, number of lots, or expected sale price.

GST Payable:

GST = 1/11 × margin. It is payable by the vendor in the period the property settles. The vendor does not need to issue a tax invoice (section 75-30).

5. Common Methods of Calculation

Method	When Used	Calculation
Purchase Price Method	For acquisitions after 1 July 2000	Margin = Sale Price – Purchase Price
Valuation Method	For acquisitions before 1 July 2000	Margin = Sale Price – Approved Valuation

Example:

Developer buys land for $400,000, sells new units for $600,000.

Margin = $200,000 → GST = $200,000 ÷ 11 = $18,182.

6. Key Conditions and Pitfalls

Requirement	Common Risk / Note
Written Agreement	Must be executed before settlement. Late agreement invalidates scheme.
Ineligible Acquisition	Scheme cannot apply if property was bought via full-GST taxable supply.
Record-Keeping	Keep valuation reports, contracts, settlement statements for ATO verification.
GST Reporting	Report under G1 (total sales) and 1A (GST payable) in your BAS.
No Input Tax Credit	Purchasers cannot claim GST credits for acquisitions under the Margin Scheme.

As an investor, ensure that you fully understand the conditions before applying the Margin Scheme. It can provide substantial GST savings, but it also carries strict eligibility and documentation requirements.

A single oversight — such as failing to agree in writing or misunderstanding how the property was originally acquired — can result in double taxation or the loss of GST credits. Careful planning, accurate calculation, and proper record-keeping are essential to achieve both compliance and the intended tax benefit.

References

• A New Tax System (Goods and Services Tax) Act 1999, Div 75

• GSTR 2000/21 – Supplies of Real Property: GST Treatment

• GSTR 2006/7 – GST: How the Margin Scheme Applies to Supplies of Real Property

• LCR 2018/4 – GST Withholding for Certain Real Property Transactions