The Australian Goods & Services Tax (GST) has a very significant effect on the cashflows of Australian property development projects because – apart from government charges (like stamp duty and planning approval fees), rates and taxes, and finance costs – nearly every cost or income item involved in a development that is undertaken for profit-making purposes has a GST element. The timing of GST cashflows can have a substantial effect on interest costs, especially with respect to: the Australian government’s “GST at Settlement” laws for “new Residential property”, and input tax credits from creditable real estate purchases.
One of the most complex areas of Australia’s GST laws concerns the Margin Scheme (MS), which usually relates to taxing the difference between: (a) the sale price that is received by a vendor of a piece of (real) property, and (b) the original purchase price that was paid for that property when the said vendor purchased it. Under the usual method of the MS (the “Consideration method”): the margin is equal to the sale price minus the purchase price; and one-eleventh of the margin is the amount of GST payable.
A purchaser cannot claim a GST input tax credit for real property purchased under the MS; however, when a developer is able to use the MS on a property, it may be more financially advantageous for that developer to use the MS rather than use the Full Taxation (FT) method of GST, which involves finding one-eleventh of the sale price of a property as the GST payable, when that property is sold.
Generally speaking, if a developer buys a property from a vendor, who is not eligible to use the MS, that developer will not be able to use the MS for that property. Also, in general at least, if a GST input tax credit is available for the purchase of a property, then a purchaser of that property cannot use the MS for that property.
The calculations that our software, Feastudy Professional, uses to deal with GST are set out in some detail as follows:
If the option, “the Developer is registered for GST”, or the option, “the Investment is a Non-Residential Property”, is entered in the GST Settings window, then at the default rate of ten percent (10%) GST, it is assumed that one-eleventh of every development or investment cost and income is the GST element, except amounts entered or calculated for:
If the entry in the GST Settings window is effectively “the Developer is registered for GST” in a Development file, then it is assumed that amounts entered for construction in the Construction Cost item windows, consultants in the Consultants Cost item windows, Selling and Leasing fees in the Selling & Leasing Fees window, conveyancing fees in the Duties & Conveyancing window and contingency amounts in the Other Settings window are all GST-inclusive.
In accord with the Australian “GST at Settlement” laws enacted in 2018, Feastudy assumes that, at the settlement of each purchase of a “new Residential property” from a GST-registered developer, the purchaser must remit to the Australian Taxation Office (ATO) either: seven percent (7%) of the purchase price of that property if the Margin Scheme (MS) applies to the transaction; or all of the GST that applies to the purchase price of that property if the Full Taxation (FT) method of GST applies to the transaction.
For the purposes of Feastudy it is assumed that:
In the case of MS-taxed Sell-On Income items for “new Residential property,” if 7% of the value of such items is too high or too low for the purposes of the overall amount of GST that needs to be remitted to the ATO for the MS-taxed Sell-On Income, the program makes appropriate credit or debit adjustments at the relevant Business Activity Statement intervals. (The 2018 Australian “GST at Settlement” laws do not actually require a change in the overall [net] amount of GST that should be paid for a development’s GST-taxed development sales but they do require a change in the timing of the payment of GST cashflows that are relevant to “new Residential property.”)
If the option, “the Investment is a Non-Residential Property”, is entered for an Investment file or a Develop-and-Hold (D&H) Investment file, then it is assumed that amounts entered for Selling, Leasing and Management Fees in the Selling, Leasing & Management Fees window, Conveyancing Fees in the Duties & Conveyancing window and Contingency Amounts in the Other Settings window are all GST-inclusive.
If the entry in the GST Settings window is effectively ‘the Developer is not registered for GST’ or ‘the Investment is a Residential Property’, then it is assumed that no GST input tax credits are available for any costs (even if GST has been paid in the price of these costs) and all incomes are GST-free or input taxed (i.e., collections of GST in Incomes do not occur).
For a D&H Investment file, if the entry is “the Developer is registered for GST” in its source Development file, GST cashflows will occur (where applicable) in the Develop Period and the Hold Period of the D&H Investment file, except when the Type of Development entered in the Development Identification window for the source file is “Residential”. For such an exception no GST cashflows occur for the D&H Investment file because it is assumed that costs and incomes related to residential investment properties are either GST-exempt or input taxed.
If the entry is “the Developer is not registered for GST” in the source Development file for a D&H Investment file, no GST cashflows will occur for the D&H Investment file because it is assumed that costs and incomes related to the investment are either GST-exempt or input taxed.
When the setting is "registered for GST" or “the Investment is a Non-Residential Property” and the setting is for GST amounts to be "remitted/refunded monthly", it is assumed that all GST input tax credits for creditable costs will be refunded monthly and all GST collected in income will be remitted monthly. In Development and Investment files, the only alternative to this is to have a setting in which GST is remitted/refunded quarterly; but only monthly GST remittances/refunds are available for D&H Investment files. In the case of monthly refunding/remitting, GST input tax credits are refunded and GST Debits in Income are remitted the following month. For quarterly instalments, the input tax credits refunded and the GST remitted are summed for each quarter, i.e. for the September, December, March and June quarters, and the refunds/remittances are received in the month immediately after the end of the quarter, i.e. in October, January, April and July.
For a Development file, Feastudy Professional allows for the entry of the Margin Scheme (MS) method and/or the Full Taxation (FT) method for determining, at least in part, how GST is calculated for Land Costs items and Sell-On Income items.
The MS method, for the purposes of Feastudy, involves deducting that part of the total value of all Land Cost items that is attributed to Sell-On Income items that are MS-taxed from the total value of those Sell-On Income items and by finding one-eleventh of the result, if the entered GST Rate is 10%, to determine the GST payable for those Sell-On Income items. If the result of this deduction is an amount that is greater than zero, then the GST is apportioned to each MS-taxed Sell-On Income item in accord with its percentage of the total value of MS-taxed Sell-On Income items (i.e., it is distributed pro rata, according to value). However, no GST Input Tax Credits (ITCs) are available for any Land Cost items when the MS is entered in a Feastudy Development file.
In Feastudy, if an uncheck is entered for the question, “Is the Margin Scheme to be applied?”, in the GST Settings window for the file, it is assumed by default that the Full Taxation (FT) method of calculating GST applies to all GST-inclusive Sell-On Income and, for this default case, the program calculates one-eleventh of such Sell-On Income to determine the amount for GST Debits in Income if the entered GST Rate is 10%.
The program defaults to the MS method for a Development file when “Subdivision” or “Residential” is entered in the Type of Development field of the Development Identification window and it defaults to the FT method when any other Type of Development is entered. When the FT method is subsequently entered for a “Subdivision” or “Residential” file, the program defaults all Land Cost items to the status of being input taxed or GST-free. This is to assist an instant “apples for apples” comparison of the feasibility of a Development proposal, or the Residual Land Value of a Development site or property, under the MS and FT methods, by having any Land Cost items treated as though they are input taxed or GST-free immediately after switching from the default MS setting to the FT setting. The assumption for making this default is that if the MS method can be (validly) applied to the development proposal, a GST input tax credit will not be available for the purchase of a Land Cost item because it is assumed that it is a GST rule that if such a GST input tax credit is available, the MS method cannot be applied to the purchase and sale of the relevant property.
When a check is entered in the check box for the question, "Is any Sell-On Income not Margin Scheme taxed?", in the GST Settings window for the file, some of the file's Sell-On Income can be taxed using the FT method of GST and/or GST-free and/or input taxed. When a check is entered in the check box for this question, the GST Summary report shows Development Sales (Margin) and Development Sales (Other) as separate sub-categories of the Development Sales category of income, if both sub-categories have values which are greater than zero. Otherwise, no such sub-categories for Development Sales in the GST Summary report apply.
If an uncheck is entered in the check box for the question, "Is any Sell-On Income not Margin Scheme taxed?", and a check is entered for the question, “Is the Margin Scheme to be applied?, in the GST Settings window for the file, all Sell-On Income is MS-taxed and none of the entered Land Cost items is assumed to give rise to a GST Input Tax Credit (ITC) because it is assumed that any Land Cost item that is eligible for MS taxation cannot give rise to an ITC for the developer.
If there is at least one Sell-On Income item to which the MS applies, then the program calculates the GST Debit in Income for each such item. To do this, both the total value of all Sell-On Income items and the portion of the total Land Cost relevant to the MS are calculated, as per the formula shown below. If the total value of all MS-taxed Sell-On Income is greater than the total Land Cost value attributable to the MS method, then the difference is the “margin” for the purposes of the MS calculations; and the GST Debit in Income for that method is distributed pro rata to all MS-taxed Sell-On Income items, according to the value of those items.
Provided that the Total MS-taxed Sell-On Income is greater than Total Land Costs multiplied by Total MS-taxed Sell-On Income divided by Total Sell-On Income, total GST Debits in Income for the total value of all MS-taxed Sell-On Income items =
(TotMS-SOI - (TotLC x TotMS-SOI / TotSOI)) / (1 + GSTRate) x GSTRate
where:
(i) TotMS-SOI is the total value of all “MS” Sell-On Income;
(ii) TotLC is the total value of all Land Costs;
(iii) TotSOI is the total value of all Sell-On Income; and
(iv) GSTRate is the entered GST Rate.
If TotMS-SOI is equal to or less than TotLC x TotMS-SOI / TotSOI, then the GST for all MS-taxed Sell-On Income in the data file is zero.
The GST Debit in Income for each FT-taxed Sell-On Income item =
FT-SOI / (1 + GSTRate) x GSTRate
where:
(a) FT-SOI is the value of the FT-taxed Sell-On Income item.; and
(b) GSTRate is the entered GST Rate.
(The detailed discussion of Feastudy’s GST calculations ends here.)
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Mark Andrews
Managing Director
Devfeas Pty Ltd
20/09/2021