Australia: GST And The Sale Of Real Property

Last Updated: 8 October 2008
Article by Stephen O'Flynn

Announced in the 2008/09 Federal Budget were a raft of measures aimed at improving the integrity of the Australian Taxation System.

Tax Laws Amendment (2008 Measures No 5) Bill 2008 "Bill" was introduced into Parliament on 25 September 2008 with one of the aims to ensure that GST was correctly applied to the sale of real property in the interaction between the margin scheme and the going concern, farmland and associates provisions.


The margin scheme looks to levy GST on a property's increase in value from 1 July 2000 each time it is sold by a registered entity on or after 1 July 2000.

To be eligible to apply the margin scheme to your disposal you need to have acquired the property in a supply on which the margin scheme was applied or a supply that was GST-free or non-taxable.

If a property was acquired under a taxable supply it would ordinarily not be eligible to apply the margin scheme to it's disposal.

However, the current laws enable a supply under the going concern (subdivision 38-J of the GST Act) and farmland (subdivision 38-O of the GST Act) provisions to reinstate the eligibility to the margin scheme provisions.

The going concern and farmland provisions were intended to assist in the cashflow implications of having to finance the GST component of the purchase and consequently claim back the input tax credit. As a result, the Bill looks to remove this unintended outcome where the GST is not applied to the full increase in value from 1 July 2000.

The Explanatory Memorandum provides the following example

A is registered for GST and held vacant land before 1 July 2000 – Value $100,000

A sells the land to B in a supply against which the margin scheme is applied - $155,000 (Including $5,000 GST)

B begins an enterprise of construction and sale of a unit complex and sells out to C before completion in a supply as part of a going concern - $400,000 (No GST)

C completes the construction and sells to D under the margin scheme as the acquisition had occurred under a GST-free supply - $730,000 (including $30,000 GST)

This example demonstrates that under the current rules the margin added by C will be liable for GST but the margin added by B is overlooked, giving a benefit that was not intended by the legislation. The same result would have ensued had A sold to B under a taxable supply as the transaction between B and C restored the eligibility.

New Rules

The new rules look to improve the integrity of the margin scheme by

  • Ensuring that once a supply of real property is ineligible for the application of the margin scheme, that it remains ineligible
  • Where the acquisition was acquired GST-free as part of a going concern, GST-free farmland, or from a registered associate for no consideration the GST calculation on the subsequent sale under the margin scheme is to take into consideration the value added by the previous owner.
  • Amending GST general anti-avoidance provisions to ensure it applies to any schemes entered into with the sole or dominant purpose of creating a circumstance or state of affairs by which a choice can be made to give rise to a GST benefit.

Referring back to the previous example, the provisions that are to ensure that the full increase in value is captured for the margin scheme has a marked difference on the GST that must be remitted.

A is registered for GST and held vacant land before 1 July 2000 – Value $100,000

A sells the land to B in a supply against which the margin scheme is applied - $155,000 (Including $5,000 GST)

B begins an enterprise of construction and sale of a unit complex and sells out to C before completion in a supply as part of a going concern - $400,000 (No GST)

C completes the construction and sells to D under the margin scheme as the acquisition had occurred under a GST-free supply - $730,000 (including $52,273 GST)

The new rules look through the prior GST-free sale or non-taxable supply in order to calculate the margin. With the acquisition price of the previous owner "B" being $155,000 and the disposal under which the margin scheme is applied $730,000 the margin of $575,000 produces GST of 1/11th to be remitted of $52,273.

These amendments will take effect from the date the Bill receives royal assent, which given the current rate of success for the passing of legislation may take some time.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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