GST and the margin scheme: a plain-English guide for small developers

Ask a small developer what surprised them most on their first project and GST often tops the list. The build ran close to budget, the townhouses sold well, and then the tax on the sales took a far bigger slice than expected.

The margin scheme exists to soften that. Used properly, it can make a real difference to what a project returns. Used carelessly — or not available because of how the site was bought — it can leave a hole in the feasibility you only discover at settlement.

This guide explains how GST works on a small residential development, how the margin scheme changes the sum, and how both affect the cash that repays any lender secured on your stock. It’s general information to help you ask your accountant better questions, not a substitute for their advice on your project.

Does GST apply to a small development at all?

It can, even on a one-off. The ATO says that if you build new residential premises for sale you’re liable for GST and can claim GST credits on some costs, and that how you go about the activity — as a one-off or as a regular activity — affects your obligations.

Registration is the first test. According to the ATO, you may need to register if your activities are regarded as an enterprise and your turnover from property and other taxable transactions reaches the GST threshold, which is $75,000 for most businesses. Once registration is required, the ATO gives you 21 days to do it. A small project selling two or three new homes will usually be well past that figure.

Once registered, the sale of new residential premises is generally a taxable sale. The ATO’s definition of new residential premises includes homes that haven’t been sold as residential property before, homes created through substantial renovations, and homes that have been rented out for less than five years.

What is the margin scheme, in one sentence?

It’s a way of working out GST so that it’s charged on your margin rather than on the full sale price. In the ATO’s words, the GST on a margin scheme sale equals one-eleventh of the margin.

	Standard taxable sale	Margin scheme sale
How GST is worked out	One-eleventh of the full GST-inclusive price	One-eleventh of the margin
Margin (property bought after 1 July 2000)	Not relevant	Sale price less original purchase price
Written agreement needed	No	Yes, signed by both parties before settlement
Buyer can claim a GST credit	Yes, if registered and buying for business	No
GST credits on your construction costs	Generally claimable	Generally claimable

How is the margin calculated?

For property bought or held after 1 July 2000, the ATO requires the consideration method, which measures the margin as selling price minus original purchase price. The sale price includes any settlement adjustments in the contract. A second method exists for property held from before 1 July 2000; your accountant will tell you whether it’s open to you.

The part that catches people out is what you can’t add to the purchase price. The ATO lists the exclusions:

• development costs
• legal fees
• options you purchased
• stamp duty
• other related purchase expenses

So the margin isn’t your profit. It’s the gap between what you paid for the land and what you sell for. Build costs don’t reduce it — although you can generally claim GST credits on those costs separately.

Subdivided sites. Where one site becomes several lots or dwellings, the original purchase price has to be spread across them. The ATO says you may use any reasonable method of apportionment, and its own worked example splits a block by area.

Who can use the margin scheme, and who can’t?

Per the ATO, the scheme is open to a GST-registered seller disposing of property in the course of their business, provided both parties agree in writing before settlement that it will apply. The ATO also lists cases that rule it out, including where:

• your own purchase was fully taxable and didn’t use the margin scheme
• at the time of sale you were neither registered for GST nor required to be
• the property came to you by inheritance from a person who couldn’t have used the scheme
• your purchase was GST-free (as a going concern or as farmland) from a registered seller whose own acquisition had been fully taxable

The first point is the one small developers trip over. If you buy a site from a GST-registered developer who charges full GST — and you claim the credit — you will usually lose access to the margin scheme when you sell. That trade-off belongs in the feasibility before you exchange, not after. Our development site due diligence guide covers what to ask the vendor about how the site is being sold.

What does the written agreement need?

The ATO doesn’t prescribe a form. Seller and buyer both sign it, the property must be clearly identified, and it can be built into the contract of sale. Since 29 June 2005, sales need the agreement in place before settlement. Miss that and you can write to the ATO asking for extra time, but the ATO is clear it can’t impose the scheme if the parties haven’t agreed to it.

In practice, the simplest protection is to make sure the margin scheme clause is in every contract from the first release.

How does GST withholding change the cash at settlement?

When the sale is of new residential premises (or of potential residential land), the buyer generally has to send a GST withholding amount straight to the ATO at settlement, and you receive the rest. On a fully taxable sale that amount is one-eleventh of the price in the contract; on a margin scheme sale it’s a smaller fixed proportion of it.

You must also give the buyer written notice before settlement — the ATO says this applies whether or not withholding applies — and the notice includes your name, ABN, the amount to withhold and when it’s payable. In your activity statement, you report the full sale price and the GST on the sale for the period in which settlement happens; the withheld amount is credited to your GST property credits account.

Why this matters for finance: if a loan over your stock is repaid unit by unit, the release amount has to come from the cash that actually arrives, not the price on the contract. Our page on residual stock loans explains how release amounts are set.

Illustrative example: the same townhouse, two ways

Illustrative: A Perth developer buys a block for $660k from a private owner who wasn’t registered for GST, builds two townhouses, and apportions the land cost evenly — $330k to each. One townhouse sells for $990k.

• Standard taxable sale: GST is one-eleventh of $990k, or $90k. That whole amount is withheld by the buyer at settlement and sent to the ATO.
• Margin scheme sale: the margin is $990k less $330k, or $660k. The GST, at one-eleventh, comes to $60k. The buyer withholds the ATO’s set amount for margin scheme sales at settlement, which works out to about $69,300 on this contract price, and the developer’s activity statement squares up the difference.

The margin scheme saves about $30k of GST on one townhouse in this example. Had the block been bought in a fully taxable sale with the credit claimed, that saving would likely not be available.

How does this affect a private loan secured on your property?

A private lender looks at the net proceeds of each sale, because those proceeds are the exit strategy. GST, the withholding mechanics and selling costs all come off before the loan is repaid. When you plan a loan against completed stock or other existing property, give the lender:

• the expected sale prices and whether each sale will be taxable or under the margin scheme
• your accountant’s estimate of GST per unit
• any other amounts that will come out of settlements, such as an existing mortgage

If GST timing leaves a gap — for example, construction-related tax debts due before the last sales settle — a short-term loan against existing property can bridge it. Our developer finance hub explains how that works without becoming a construction loan, and you can check what your property could support in about a minute.

Key terms at a glance

• Margin: for property held after 1 July 2000, the sale price less the original purchase price.
• Consideration method: the ATO’s method for calculating the margin from actual prices paid and received.
• Fully taxable purchase: buying with full GST charged, which generally rules out the margin scheme on resale.
• GST withholding: the amount a buyer of new residential premises pays directly to the ATO at settlement.
• New residential premises: broadly, homes not previously sold as residential, created by substantial renovation, or rented for less than five years.

Plan your next sale with the right numbers

GST is one of the biggest lines in a small developer’s feasibility, and the margin scheme can change it significantly. Get the purchase structure, the contract clause and the settlement cash right, and the rest of the plan stands on solid ground.

If you’re funding the gap between projects, or carrying stock while it sells, our lending partner fundU reviews each enquiry with a real specialist. There’s no credit check to enquire and your details aren’t shopped around to other lenders. Give an accurate picture of the property, what’s owing and the expected sale proceeds after GST, and the first answer you get will be one you can rely on. Start a developer enquiry.