Selling new residential lots or new residential premises usually means charging GST on the full sale price. The margin scheme is an alternative method: GST is calculated on the margin, broadly the difference between the sale price and what the property cost when it was acquired, rather than on the full price. Payable GST under the scheme is one eleventh of that margin. For a developer or a family holding land that has sat on the books for decades, the difference between GST on the full price and GST on the margin can be substantial.
The scheme is straightforward where there is a clean purchase price to subtract. It gets harder where there is not, because the property was acquired before GST existed, or was acquired without GST being charged at all. In those situations the law lets you substitute a valuation for the missing purchase price, but the ATO does not accept any figure someone writes down. It has to be a particular kind of valuation, done by a particular kind of valuer, as at a particular date. Getting that wrong tends to surface at the worst time, after settlement and after the activity statement has already been lodged.
What the margin scheme changes
Under the normal GST rules, a taxable sale of real property attracts GST on the full price paid by the purchaser. Under the margin scheme, where the seller and purchaser agree in writing to use it, GST is instead calculated on the margin between the sale price and the seller’s acquisition cost. The agreement to use the scheme has to be made on or before settlement, not decided afterwards, and the scheme is generally not available if the seller acquired the property through a fully taxable sale on which GST was charged under the normal rules. It is aimed at property that has been held for some time, not flipped straight through the tax system.
Why some sales need a valuation instead of a purchase price
The margin calculation assumes there is a meaningful original purchase price to work from. That assumption breaks down in a few common situations: the property was acquired before the GST system existed, it was inherited, it came in as part of a GST-free sale of a going concern, or it was transferred from an associate for no consideration or for less than market value. In each of those cases there is no GST-relevant purchase price on record, so the GST Act allows an approved valuation to stand in its place. The valuation effectively becomes the acquisition cost for the margin calculation.
The 1 July 2000 valuation
GST commenced on 1 July 2000. If an entity held its interest in the land before that date and is selling it now under the margin scheme, the margin can be calculated using the value of the property as at 1 July 2000 instead of the original purchase price, whatever that price was decades earlier. This is the situation the practice sees most often: a family holding broadacre or semi-rural land bought long before GST existed, now being subdivided into residential lots. The valuation has to be dated precisely at 1 July 2000, reflecting the property in the condition and with the zoning and improvements it had on that date, not today’s. That makes it a retrospective exercise, similar in method to the historical valuations used for capital gains tax cost bases, but anchored to a fixed statutory date rather than a date the client chooses.
Other acquisition dates that call for a valuation
The 1 July 2000 date is not the only trigger. Where a property was acquired after that date through a transaction on which GST was not charged, an approved valuation as at the effective date of that specific acquisition can be used instead. This covers deceased estates, where a beneficiary or the estate later sells development land inherited from someone who held it for years. It covers going concern purchases, where an entire enterprise including its property was bought GST-free. And it covers transfers between associated entities, a common feature of family and company structures, where land moves from one related party to another for no consideration or on non-arm’s length terms. The evidentiary standard for that kind of transfer is the same one that applies more broadly to related party property transfers: the ATO expects market value evidence, not a figure the parties agreed between themselves.
What makes a valuation approved
The ATO sets out specific requirements for a margin scheme valuation to be accepted, and a market appraisal, a rates notice figure or an internal estimate does not meet them. An approved valuation has to be prepared by a professional valuer, meaning someone appropriately qualified and, in practice, a registered valuer with recognised standing, working from the standard evidence base of comparable sales and reasoned adjustments. It has to be in writing, it has to state the basis and method used, and it has to be dated to the correct effective date rather than simply issued close to the sale. Where the land carried improvements, or partial improvements, as at the valuation date, the report needs to account for what stood on the site then, which is the same distinction between land and improvements that runs through most valuation work. A valuation obtained years after the fact, reconstructing what a site was worth on a date long past, is a harder and more careful exercise than a current market valuation, and the report needs to show that working in enough detail to survive an ATO review.
Who this affects
The margin scheme valuation question mostly comes up for developers and subdividers turning long held land into saleable lots, particularly land that has been in a family or an entity’s hands since before GST existed. It also affects executors and beneficiaries dealing with development sites in a deceased estate, and it affects businesses restructuring property between related entities ahead of a future sale. Anywhere land is being unlocked for development after sitting outside the ordinary sale cycle for a long period, the question of what valuation basis applies to the margin calculation is worth checking early, alongside the broader question of what the development potential itself is worth.
Timing matters more than most people expect
The valuation needs to exist, correctly dated and correctly prepared, before the activity statement reporting the sale is lodged, and ideally well before settlement so it can inform the contract terms and the margin scheme agreement itself. Trying to reconstruct an approved valuation after the fact, once a dispute or a review has started, is a far weaker position than commissioning one properly at the outset. For a tax related valuation of this kind, the report has to be built to be checked, because that is exactly what happens to it.
