Margin scheme GST lets a GST-registered seller of property work out GST as 1/11 of the margin (usually the sale price less the purchase price) instead of 1/11 of the full sale price. The seller and buyer must agree in writing to use it before settlement, and the buyer can’t claim a GST credit on the purchase.
Developers, builders and investors use it most when selling new homes, townhouses and vacant lots, and it can cut the GST bill on a sale by tens of thousands of dollars. But not every property qualifies, and how the property was bought can rule it out.
This guide covers who can use the margin scheme, how to calculate the margin, GST withholding at settlement, BAS reporting and a worked example comparing the margin scheme with normal GST.
Key takeaways
- Under the margin scheme, GST is 1/11 of the margin, not 1/11 of the full sale price.
- The seller and buyer must agree in writing to use it on or before making the supply, which in practice means before settlement.
- For property bought on or after 1 July 2000, the margin is generally the sale price less the purchase price. Development costs, legal fees and stamp duty are not deducted.
- You can’t use the margin scheme if you bought the property as a fully taxable supply, and some going concern, farmland, associate and inherited property purchases are also excluded.
- For new residential premises and potential residential land, the buyer withholds 7% of the contract price at settlement when the margin scheme applies.
Margin scheme GST at a glance
| Item | Rule |
|---|---|
| GST under the margin scheme | 1/11 of the margin |
| GST without the margin scheme | 1/11 of the GST-inclusive sale price |
| Who can use it | A seller registered or required to be registered for GST, selling a freehold interest in land, a stratum unit or a long-term lease as a taxable supply |
| Written agreement | Seller and buyer must agree in writing on or before making the supply (before settlement) |
| Property bought on or after 1 July 2000 | Consideration method: sale price less purchase price |
| Property held before 1 July 2000 | Consideration method or valuation method (needs an approved valuation) |
| Costs that don’t reduce the margin | Development costs, legal fees, stamp duty and other purchase costs |
| Buyer’s GST credit | None for GST in the price |
| Settlement withholding (new residential premises and potential residential land) | 7% of the contract price with the margin scheme, 1/11 without |
| BAS reporting | Margin at G1, GST on the margin at 1A |
What is margin scheme GST?
The margin scheme is a different way of working out GST when you sell real property in the course of a GST-registered business. It sits in Division 75 of the GST Act. Under section 75-5, it can apply to a taxable supply of real property made by selling a freehold interest in land, selling a stratum unit, or granting or selling a long-term lease, as the ATO’s ruling GSTR 2006/8 explains.
The idea is to tax only the value added while you held the property. If you bought land from someone who didn’t charge GST, for example a private owner, normal GST would tax the full sale price even though no GST was paid on your purchase. The margin scheme limits GST to the increase.
Margin scheme GST is optional. If you don’t use it, GST on a taxable sale of new residential premises or commercial property is 1/11 of the price. Our BAS and GST team can help you compare both before you sign a contract.
Who can use the margin scheme?
According to the ATO’s margin scheme eligibility guide, you may be able to use it if you sell property as part of your business and you are registered for GST. You also need a written agreement with the buyer before settlement. You can’t use it if:
- you weren’t registered or required to be registered for GST when you sold the property
- you bought the property as a fully taxable supply and the margin scheme wasn’t used on your purchase
- for sales on or after 17 March 2005, you inherited the property from a person who wasn’t eligible to use the margin scheme
- for property bought or contracted on or after 9 December 2008, you bought it from an ineligible previous owner as part of a GST-free going concern, as GST-free farmland, or from an associate for no payment
Watch out: the contract clause is not enough
A margin scheme clause in the contract doesn’t make a sale eligible. If you bought the land with GST charged on the full price and no margin scheme, you generally can’t use it when you sell. Check the purchase contract and settlement statement from when you bought before you agree to anything with the buyer.
New developers and family trusts starting a project should sort out GST registration early, because registration status at the time of sale matters.
How do you calculate the margin?
The ATO’s page on methods to calculate the margin sets out two methods:
- Consideration method: the margin is the sale price less the price you paid for the property. You must use this method for property bought on or after 1 July 2000.
- Valuation method: for property held before 1 July 2000, you can instead use an approved valuation of the property. You can only use this method if you hold an approved valuation.
Under the consideration method, the purchase price does not include development costs, legal fees, stamp duty, option costs or other related purchase costs. So building a house on the land doesn’t reduce the margin, even though it adds a lot to your total cost. The GST on the margin is 1/11 of the margin.
If you use the valuation method, the ATO’s valuations guide says you must have the valuation by the due date for lodging the activity statement for the sale, and it must be done by a professional valuer, such as a person registered or licensed to value real property under Commonwealth, state or territory law.
Worked example: margin scheme GST vs normal GST
The facts
- A GST-registered builder buys a vacant block for $700,000 from a private owner who isn’t registered for GST, so no GST is included in the price.
- The builder builds a townhouse and sells it for $1,000,000 (GST inclusive) to a home buyer.
- The buyer agrees in the contract that the margin scheme applies.
Option 1: normal GST
- GST = $1,000,000 ÷ 11 = $90,909.09
- Builder keeps $1,000,000 − $90,909.09 = $909,090.91
- Withholding at settlement = $1,000,000 ÷ 11 = $90,909 (rounded down to the nearest dollar)
Option 2: margin scheme GST
- Margin = $1,000,000 − $700,000 = $300,000
- GST = $300,000 ÷ 11 = $27,272.73
- Builder keeps $1,000,000 − $27,272.73 = $972,727.27
- GST saved = $90,909.09 − $27,272.73 = $63,636.36
- Withholding at settlement = $1,000,000 × 7% = $70,000
Construction costs don’t reduce the $300,000 margin. Under the margin scheme, the buyer withholds $70,000 at settlement, which is more than the $27,272.73 of GST. The ATO credits the withheld amount to the builder’s GST property credit account, and it moves to the activity statement for the settlement period, where it offsets the GST. The ATO’s supplier guide says surplus credits are refunded under normal GST refund processes.
What the buyer gives up
A buyer who purchases under the margin scheme can’t claim a GST credit for GST in the price. For a home buyer that usually makes no difference, because they couldn’t claim a credit anyway. For a business buyer, such as another developer, losing the credit can make the deal more expensive, so expect them to negotiate on price or refuse the margin scheme.
How does GST withholding at settlement work?
When you sell new residential premises (such as house and land packages, off-the-plan apartments and display homes) or potential residential land (such as subdivided lots), the buyer must generally withhold GST at settlement and pay it straight to the ATO. Under the ATO’s GST at settlement rules, the amount is:
- 1/11 of the contract price for a normal taxable supply
- 7% of the contract price where the margin scheme applies
- 10% of the GST-exclusive market value for some sales between associates for less than market value
The steps are:
- Supplier notification: the seller must tell the buyer in writing before settlement whether withholding applies, and if it does, the seller’s name and ABN, the amount to withhold, when to pay it and the GST-inclusive contract price.
- Form one: the buyer (or their conveyancer or solicitor) lodges the GST property settlement withholding notification any time after the contract is signed.
- Form two: the buyer lodges the GST property settlement date confirmation within 2 business days before settlement, on the day, or on the next business day.
- Payment: on a standard land contract, the buyer pays the withheld amount at settlement.
Tip: get the notice right
The supplier notification is the seller’s job, even though the forms are lodged by the buyer. If the notice says the margin scheme applies, the buyer withholds 7% rather than 1/11, so the contract and the notice need to match.
How do you report a margin scheme sale on your BAS?
The ATO’s guide to completing your activity statement for margin scheme sales says:
- report the margin at label G1 (total sales), not the full sale price
- if the margin is nil or negative, don’t report any amount at G1
- report the GST on the margin at label 1A, not the amount the buyer withheld
For margin scheme GST records, keep the purchase contract, the written agreement, any approved valuation, the supplier notification and your margin calculation together. If you also hold rental property or buy and sell regularly, our guide to investment property accounting explains the records to keep.
What are the most common margin scheme GST mistakes?
- Agreeing to it too late. The written agreement must be made on or before the supply. Fixing the contract after settlement is generally too late.
- Ignoring how the property was bought. A fully taxable purchase without the margin scheme usually rules it out.
- Deducting building costs from the margin. Development costs, stamp duty and legal fees don’t reduce the margin.
- Using the wrong withholding rate. 7% applies for margin scheme sales, 1/11 for normal taxable sales.
- Reporting the full price at G1. Only the margin goes at G1.
- Forgetting income tax. The margin scheme only affects GST. Profit on the sale is still assessed for income tax, which we cover in our guide to capital gains tax on property.
For more ways to manage GST on property projects, see our guides to reducing GST payable legally and buying off the plan.
Frequently asked questions
How is GST calculated under the margin scheme?
GST is 1/11 of the margin. For property bought on or after 1 July 2000, the margin is generally the sale price less the purchase price. For example, land bought for $700,000 and sold for $1,000,000 has a $300,000 margin and $27,272.73 of GST.
Can I use the margin scheme if I bought the property with GST?
Generally no. If you bought the property as a fully taxable supply and the margin scheme wasn’t used on your purchase, you can’t use it when you sell.
When must the margin scheme be agreed?
The seller and buyer must agree in writing to use the margin scheme on or before making the supply, which in practice means before settlement. It is usually written into the contract of sale.
Can the buyer claim a GST credit under the margin scheme?
No. A buyer who purchases under the margin scheme can’t claim a GST credit for the GST in the price, even if they are registered for GST.
What is the GST withholding rate for margin scheme sales?
For new residential premises and potential residential land sold under the margin scheme, the buyer withholds 7% of the contract price at settlement. Without the margin scheme, the rate is 1/11 of the contract price.
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Talk to a registered tax agent
Selling a development, a few townhouses or a subdivided block? Call Nanak Accountants & Associates on 1300 626 258. Our property tax advisers can check whether the margin scheme is available, review the contract clause and settlement notice, and our BAS and GST team can report the sale correctly. You can also contact our team to book a time.
This article is general information only and is not personal financial or tax advice. Information checked against ATO and ATO legal database sources on 19 October 2026.
