The GST margin scheme is one of the most valuable concessions available to Australian property developers, but it is also one of the most technically demanding. Applied correctly, it can reduce the GST payable on a residential development by tens of thousands of dollars. Applied incorrectly, or missed entirely, it can result in GST being assessed on the full sale price when it did not need to be.
The default GST calculation on property sales
Without the margin scheme, GST on a taxable property sale is calculated as 1/11th of the sale price. For a $1.1M residential lot, that is $100,000 in GST.
How the margin scheme works
Under current ATO rules for the 2025–26 financial year, the margin scheme calculates GST as 1/11th of the margin rather than 1/11th of the sale price.
The margin is: Sale price minus the original acquisition cost (or approved valuation)
If a developer:
- Acquired vacant land for $400,000 (GST-free, which is typical for residential land purchases)
- Sold the developed lot for $1,100,000
The margin is $1,100,000 minus $400,000 = $700,000. GST = 1/11 of $700,000 = $63,636.
Versus the standard method: 1/11 of $1,100,000 = $100,000.
Saving: $36,364 per lot. Multiply across a 20-lot development and the benefit is material.
Eligibility requirements
The margin scheme is only available if both parties agree in writing before the sale contract is signed. This is the most common reason the scheme is missed: the agreement must be in the contract or a separate written document prior to settlement.
The scheme is available if you acquired the property under one of the following circumstances:
- The original acquisition was GST-free (most common: residential land purchased from a non-registered seller, or subdivision of private farmland)
- The original acquisition was itself under the margin scheme
- The property was acquired before 1 July 2000
If the property was acquired with full GST charged and a full ITC was claimed, the margin scheme is generally not available and would not benefit you anyway, since you have already received credit for the input GST.
The approved valuation option
Where the land was acquired before 1 July 2000 (or certain other pre-GST scenarios), the developer can use an approved valuation as at 1 July 2000 rather than the original purchase price as the base. This can significantly increase the cost base, reducing the margin and the GST payable.
Approved valuations must be done by a qualified valuer and must be obtained before the margin scheme election is made. Retrospective valuations are not accepted.
Subdivision and the margin
When land is subdivided, the acquisition cost must be apportioned across the lots based on a reasonable method (typically market value at time of subdivision, or area if lots are broadly comparable). The ATO has released guidance on acceptable apportionment approaches.
If the apportionment is done incorrectly, the margin calculation for each lot will be wrong, and the resulting BAS adjustments can be significant.
Input tax credits under the margin scheme
When using the margin scheme, the developer cannot claim ITCs on anything directly related to the supply of the lot (construction costs, development levies, marketing). This is the trade-off: lower output GST, but no ITC on direct costs.
ITCs can still be claimed on overheads and other inputs not directly attributable to the margin scheme supplies. In practice, for a standard residential developer, most of the significant construction inputs are directly attributable and therefore not creditable.
Bookkeeping implications
For a property development using the margin scheme, the accounts need to separately track:
- Acquisition cost of each lot (for margin calculation)
- Direct costs for which no ITC is claimable
- Overhead costs for which ITCs are claimable
- GST calculated under the margin scheme at each settlement
The chart of accounts should be set up from the start of the development project with this separation built in. Trying to reconstruct it at settlement is difficult and creates audit risk.
When the margin scheme is NOT beneficial
The margin scheme is not always the right choice:
- Where the developer has acquired with full GST on acquisition and cannot use the scheme anyway
- Where the margin is very small (close to zero) because development costs have been high relative to sale price
- Where the buyer is a registered developer who wants to claim a full ITC on the purchase (the margin scheme does not allow the buyer to claim an ITC, whereas a standard GST sale does)
The decision needs to be made at acquisition, not at settlement. Building the margin scheme election into the standard contract template for residential land acquisitions is good practice.