The Margin Scheme Changes – what does it mean for developers?
The 2008 Federal Budget was largely non-controversial and subdued although several important, less publicised changes are proposed. One such change is the amendment foreshadowed to the GST legislation concerning the way the margin scheme will operate on sales of land which have been purchased under a GST-free supply.
The amendments may have a significant impact on the GST liabilities of those entities which develop and sell residential land acquired under a GST-free supply.
The Changes
The margin scheme currently operates so that GST is paid on the difference between the acquisition cost of the lot (as a proportion of the parcel acquisition cost) and the sale price of that lot when developed.
The proposed change announced in the Budget provides that, where the margin scheme is used after a GST free supply, “the value added by the first seller” (the entity which made the GST-free supply) is included in determining the GST payable by the second seller under the margin scheme.
The practical effect of this for the development industry is not yet clear. In its most expansive view, the amendments could apply such that the margin on which GST is payable is no longer the amount by which the sale price of the developed lot exceeds the purchase price paid by the developer for that lot (as a proportion of the parcel acquisition cost) under the GST-free supply. Rather the margin would have relation back to the value of the parcel as at 1 July 2000, i.e. the date when it entered the GST system.
These laws will come into effect from the date of Royal Assent of the enabling legislation which may mean that they will capture sales of land already purchased under a GST-free supply which are completed after the date of Royal Assent.
Rationale
These measures are designed to prevent real property transactions from being structured in such a way so as to reduce the GST liability.
The Budget announcement states that the amendments “will also strengthen the GST anti-avoidance provisions to ensure that they can apply to contrived arrangements entered into to avoid GST.”
The changes may therefore affect a wide range of transactions which the Taxation Office perceive to be structures designed to reduce the GST liability on sales of subdivided or redeveloped land.
It also has the obvious effect of increasing GST revenue by ensuring the GST is calculated on a larger margin. The value of this measure is estimated to be $620.0 million, which will largely be distributed to the States.
Of course the devil will be in the detail of the amendments once drafted.
Continued Utility of Margin Schemes
If implemented, these changes will have a significant effect on the GST liability or cost when developers, holding land banks for development into residential lots acquired on either GST-free farmland or GST-free going concern bases, proceed to subdivide and sell the land. Given the considerable increases in the values of land since 1 July 2000, the margin on which 10% GST will be payable will have increased significantly.
As happened when the Taxation Office persuaded the previous Government to propose similar changes in 2005 we expect that the Development Industry will mount a significant effort to persuade the current Government to abandon or water down this measure which, on its face, will only add to the cost of residential land.
For further information on how these changes affect you, please contact:
Matthew Rollason, Partner, Brisbane;
Keith Carl, Partner, Brisbane; or
Peter Burden, Consultant, Sydney
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