Playing at the margins

A QUIRK of the GST is preventing some property buyers from claiming input tax, even though they thought they were entitled.

The margin scheme, a way of handling the GST on a property transaction, limits the vendor’s GST liability to the profit margin on a sale rather than on the wholesale price.

If the vendor chooses the margin scheme the buyer cannot claim input tax credits. It is usually applied to commercial property transactions.

Under GST law the margin scheme can be applied to the sale at any time before or after the offer is accepted or at the settlement date – without the buyer’s consent.

Some tax professionals believe the standard Real Estate Institute of WA contract does not make it clear whether the vendor is opting to apply the margin scheme.

In one case, a property was bought for about $3 million. The buyer thought he could claim about $300,000 as input tax credits but soon found this was not so, because the vendor had opted to apply the margin scheme.

It is up to the vendor to decide which GST treatment to apply to the sale of a property.

A property sale can: draw full GST; draw GST only on the margin if the margin scheme is applied; be GST free; or attract no GST.

The buyer can only sell the property under the margin scheme if it was acquired under the margin scheme.

Jackson McDonald tax partner Graham Harrison said the “unexpected” aspect of the GST was one of the big issues.

“We want the margin scheme to be added to the REIWA form,” Mr Harrison said.

“We’ve had several cases where the purchaser has been caught out expecting to claim input tax credits only to find out they couldn’t because of the margin scheme.”

He said property purchasers needed to check whether the vendor was applying the margin scheme.

PricewaterhouseCoopers indirect tax partner Ross Thorpe said the margin scheme could prove devastating for the unwary.

Real Estate Institute of WA public affairs director Lino Iachomella said the institute had taken extensive steps to ensure its standard form sale contracts met the needs of the GST.

“The contract form refers to the GST and gives provision for people to deal with it,” he said.

“The parties to a property sale should always obtain competent tax advice.”