In a tumultuous property market, every dollar counts. Property developers rely on the margin scheme to reduce the impact of the GST on property sales. The ATO carefully scrutinizes the proper application of this scheme, and can launch an audit when they feel mathematical calculation under the scheme has inappropriately deferred or reduced the GST payment.
A recent client came to Calibre Business Advisory under the pressure of such an audit. They were facing the imminent impact of a costly payment in GST, tax audit penalties, and potential litigation.
The way we were able to be ultimately successful in objecting to the ATO’s punitive outcome is an important example of how to face an audit and manage the financial accounting of any property development.
The ATO and the Margin Scheme
The margin scheme ultimately determines the calculation of the GST. All sales of land or newly built residential properties are subject to the GST, which is 10% of the purchase price. This means a prospective home owner is hit with an additional 10% on the cost of their first home. The margin scheme seeks to reduce this and assist property developers by working out the GST based on the difference between the sale price to the prospective home owner and the portion of the developer’s purchase price for each plot of land. In this way the GST is reduced; it is charged on this difference, or margin, not on the full purchase price.
The ATO scrutinises the calculation of this margin closely. They mostly look into the determination of the original cost of the overall property and the method of apportioning plots. If they feel there are discrepancies in the calculation of the margin, an audit may result.
A Client Returns with a Tax Audit Penalty
A former client of Calibre Business Advisory came back to us unhappy with the results of just such a tax audit.
- The client purchased 3 plots of rural land near Sydney for the purposes of a future subdivision. The land was sizeable and one residential house was on it at the time.
- They subdivided the land into approximately 100 individual lots. They installed the infrastructure necessary for prospective homeowners to buy the land and build their own houses (for example, roads, sewerage, electricity connections, etc.).
- Apart from than these 100 lots, there were areas on the land which they could not sell because they were restricted by the council. For example, they had to dedicate part of the land to a community park and another plot as a retention basin for water.
- The client applied for the margin scheme on the sale of all 100 subdivided lots between August 2017 and June 2018. The original purchase price paid by the developer for the 3 plots of land (which was approximately $20 million) had to apportioned amongst the 100 subdivided lots so that each prospective purchaser could benefit.
- The ATO audited our client’s BAS between August 2017 and June 2018; this audit was handled by another accounting firm. The outcome was that the client was required to pay almost $400,000 in GST and penalties. Naturally, the client was not happy with the outcome. In particular, they were upset with the penalty because it was imposed based on the ATO’s assumption that they were reckless in calculating their GST. This stood to significantly tarnish their standing.
Having engaged us previously for other matters, the client sought the help of Calibre Business Advisory to take over representation with the ATO and lodge an objection to the original decision. If we failed with this objection the client would have to litigate. This would have put them even more out of pocket.
A Client Returns with a Tax Audit
Our tax audit advisors adopted the following approach to challenge the ATO’s position that our client had not calculated the GST correctly under the margin scheme:
- We carefully analysed the ATO’s recalculation of the original cost and apportionment method to determine how they had calculated the $400,000 in GST and penalties.
- We reviewed the plans of the subdivision project and spoke with the planners and engineers.
Ultimately, we won. The client had the amount of tax refunded to them. Calibre Business Advisory’s success in this matter hinged on the fact that the ATO allows apportionment based on fair methodology. This includes apportionment by the area of each lot or by the selling price of each lot. Our client had originally used the selling price when apportioning under the margin scheme but the ATO decided that an area-based calculation was fairer. We were able to recalculate the apportionment based on both area and selling price and demonstrate that, in reality, the difference in GST proposed by the ATO was actually immaterial between the two methods.
Based on our review of the plan for the subdivision and our discussions with the engineers we were clear on the sections of the development which could not be sold (for example, areas given to the community park and retention basin). The apportioned cost of those items was excluded from the margin calculated for each lot sold when in fact it should have been spread proportionately over the sold lots. We were able to convince the ATO that these lands were lost and could not be sold and hence their cost should benefit the other sold lots. Hence the ATO had excluded other costs that should have been included in the original margin scheme calculation.
Our success in this matter demonstrates both the value of the margin scheme and of good advice. The calculation of the GST under the margin scheme can bring developers significant savings. Yet using demonstrably fair methodology in the apportionment is the crux of earning such savings. Reliable accounting advice can make all the difference. It can not only save money on notable GST payments. It can also be the difference in avoiding the potentially dire impact of even more significant tax audit penalties should the calculation of apportionment be questioned by the ATO. Calibre Business Advisory is expert in managing tax audits and has successfully won objections with the ATO, saving a number of clients hundreds of thousands of dollars.
Calibre Business Advisory invests more time than most firms into finding solutions for our clients. Contact our business advisors and tax accountants to discover new options for your business in Australia and beyond.
Important Disclaimer: Readers should not act solely on the basis of the material on this page. Items herein are general comments only and do not constitute or convey advice. Legislation and proposals of legislation are also subject to constant change. We therefore recommend that formal advice be sought before acting in any of the areas. This news article is issued as a guide to the readers. Calibre Business Advisory Pty Ltd and its associated entities disclaims any losses that may be incurred as a result of the reader undertaking any action based on this article.