The margin scheme is one method that can be used (if certain requirements are satisfied) to calculate the GST liability on the sale of real property. It is typically used by residential property developers for the sale of new residential premises.

There are two methods that can be used to calculate the GST liability under the margin scheme. These are:

The valuation method - which can only be used in certain circumstances, including when the property was acquired before 1 July 2000; and The consideration method - for property purchased after 1 July 2000.

Since the introduction of the GST and the margin scheme, the main area of contention and audit activity has involved valuation issues. Thankfully, 12 years on, the Australian Taxation Office (ATO) has released some guidance.

New guidance on the valuation method

The ATO has recently released guidance which specifically addresses common issues identified with non-complying valuations. These issues are relevant for the sale of real property as the margin scheme provisions require that all valuations are prepared by professional valuers in order to support the market value of the property used for the purposes of the calculation of the GST on the margin.

In particular, the ATO, together with both the Australian Property Institute and Australian Valuations Office (AVO), hold the view that a number of margin scheme related property valuations are falling “outside an acceptable range [and that] the ultimate valuation is higher than it should be resulting in a lower margin and less GST payable”.

The following is a summary of the issues identified by the ATO and its view on these issues.

The burden of proof to substantiate any valuation is the sole responsibility of the seller/supplier of the property.  Whilst the valuation principles above are only a guide, they should be considered during the valuation process as these will be key areas that will be considered by the ATO/AVO during a review. 

It is imperative that a reputable and qualified valuer be engaged to undertake the valuation. If the valuer’s assumptions and conclusions are not sustainable or reasonable, the ATO/AVO may not consider the valuation to be a complying professional valuation. The valuer may also be considered not to have met the standard of care required of a professional valuer.

Recommendations

In light of the above, we recommend that any valuations previously received are reviewed to ensure that they are complying valuations. 

It is also imperative that future instructions to valuers address all of the areas of concern for the ATO/AVO so as to ensure that all new valuations obtained are complying valuations. When instructing valuers, it is important that they also understand the requirements that their valuations must comply with, including the requirements contained in the GST law, as well as GST rulings and determinations issued by the ATO.