The GST margin scheme is one of the more counterintuitive areas of Australian GST law, and mistakes in how it is applied — or miscoding the GST liability at settlement — create BAS errors that can take years to surface and are expensive to correct. For bookkeepers working with property developers or vendors of new residential property, understanding the mechanics is not optional.
What the Margin Scheme Is and When It Applies
Under the standard GST method, GST on a taxable supply of property is 1/11th of the sale price. For a $1.1 million sale, GST is $100,000. The developer remits $100,000 at 1A on the BAS for the period of settlement.
The margin scheme, available under Division 75 of the A New Tax System (Goods and Services Tax) Act 1999, changes the GST base from the full sale price to the "margin" — the difference between the sale price and the acquisition price. GST is then 1/11th of that margin.
For a property acquired for $400,000 and sold for $1.1 million, the margin is $700,000 and the GST is $700,000 / 11 = $63,636. The developer remits $63,636 instead of $100,000. The saving ($36,364 in this example) is the financial incentive for using the scheme.
The margin scheme applies only to supplies of real property that are taxable supplies. This covers new residential premises (including newly constructed homes, substantially renovated dwellings, and new units off the plan) and subdivided land where the subdivider is registered for GST and making a taxable supply. It does not apply to the sale of existing residential premises (which are input-taxed supplies under s40-65, not taxable at all).
Eligibility Conditions
Not every property sale is eligible for the margin scheme. The conditions under s75-5 of the GST Act are:
1. Agreement to apply the scheme. The supplier and the recipient must agree, in writing, that the margin scheme applies before or at the time of supply. The agreement is typically included in the contract of sale. If the contract does not contain a margin scheme election, the margin scheme cannot be applied retrospectively after settlement — and the full GST on the sale price becomes payable.
2. The property must have been acquired in a way that allows the margin to be calculated. Specifically, the acquisition must have been:
- Before 1 July 2000 (pre-GST acquisition, so no GST was embedded in the purchase price), or
- From a supplier who also applied the margin scheme to that supply, or
- A GST-free acquisition (e.g., a going concern, farmland), or
- An input-taxed acquisition (residential property bought from a private vendor).
If none of these apply — for example, a developer who bought a commercial building under the standard method, paid $100,000 GST on acquisition, and claimed that as an ITC — the margin scheme is generally not available.
3. The property must not be luxury or mixed-supply situations that fall outside Division 75. There are edge cases involving stratum lots, car parks, and marina berths that have specific ATO rulings — consult the tax agent for anything non-standard.
Calculating the Margin
The margin is the sale price minus the GST-exclusive consideration the vendor paid to acquire the property. For pre-GST acquisitions, the acquisition price is the market value at 1 July 2000 (established by a written valuation from a qualified valuer, which must be obtained by the time the BAS for the settlement period is lodged). For acquisitions that were themselves under the margin scheme, the acquisition price is the consideration paid.
Formula:
Margin = Sale Price − Acquisition Price (or Valuation at 1 July 2000)
GST = Margin ÷ 11
The acquisition price used is the full consideration, not the GST-exclusive amount, because in a margin scheme supply the acquisition itself was not subject to a separate GST amount — the margin absorbed it.
If the developer has made improvements to the property (construction costs, subdivision costs, infrastructure), those costs do not increase the acquisition price for margin scheme purposes. They are included in the cost base but do not reduce the GST margin. This is a critical point — some developers incorrectly assume they can add construction costs to the denominator. They cannot. Only the original acquisition price (or 1 July 2000 valuation) is the acquisition price under s75-10.
Journal Entries at Settlement
At settlement of a margin scheme property sale, the bookkeeper needs to correctly split the settlement proceeds between the GST component and the net sale proceeds.
Assume sale proceeds $1,100,000, acquisition price $400,000, margin $700,000, GST = $63,636 (rounded — the precise figure is $700,000 / 11 = $63,636.36).
On unconditional exchange (where revenue is recognised):
Dr Settlement Trust / Receivable 1,100,000
Cr Revenue — Property Sales 1,036,364
Cr GST Liability (margin scheme) 63,636
The revenue line is the net of GST figure: $1,100,000 − $63,636 = $1,036,364. Do not recognise $1,100,000 as revenue — the GST is not the developer's income.
When settlement proceeds are received from the conveyancer:
Dr Bank 1,100,000
Cr Settlement Trust / Receivable 1,100,000
On the BAS for the settlement period, label 1A increases by $63,636. The total sales at G1 include the full $1,100,000 (the supply price), but only $63,636 flows to 1A — not $100,000 as it would under the standard method. The BAS instructions require reporting the margin scheme GST at 1A directly, not deriving it from G1 via the standard calculation.
When the Margin Scheme Cannot Be Used
The margin scheme is unavailable when:
- No written agreement exists between seller and buyer before or at settlement.
- The property was acquired from a supplier under the standard method, who charged full GST that was claimed as an ITC. In this situation, the developer has effectively already received the ITC benefit — applying the margin scheme again would double the concession.
- The supply itself is not a taxable supply — existing residential premises are input-taxed and the margin scheme is irrelevant.
- The property is sold to an associate at below market value and the parties have not used the approved valuation methodology.
ATO Interpretive Decision AID 2013/11 and related private rulings have addressed a number of edge cases. For anything outside a straightforward new residential sale or subdivision, the tax agent should confirm eligibility before the contract is signed — not after.
Comparison with the Standard Method
Under the standard method, GST is 1/11th of the total sale price. The developer also claims full ITCs on construction costs (labour, materials, professional fees). Under the margin scheme, the GST liability is lower, but the developer cannot claim ITCs on the acquisition cost (because the acquisition was either pre-GST or input-taxed and no ITC was available anyway). ITCs on construction and development costs are still claimable under the margin scheme — the restriction only applies to the original acquisition.
The margin scheme is financially advantageous when the margin between acquisition price and sale price is modest relative to the sale price — typically when land costs are low, acquired long ago, or when the 1 July 2000 valuation is conservative. On high-margin developments in inner-city markets where land cost is a small fraction of end value, the scheme may save very little or nothing compared with the standard method combined with ITC recovery.
The decision between margin scheme and standard method should be made by the developer's tax advisor before the project structure is locked in — changing methods after contracts are signed is either impossible or triggers significant cost.