September 15, 2017
by Duncan Melbin
The Australian Tax Office (“ATO”) has been actively pursuing developers large and small for failing to repay input tax credits (“ITCs”) (and being the Goods & Services Tax (“GST”) on expenses which has been claimed back from the ATO) where there has been a change in their intended and actual use of a property development.
It is not uncommon for a developer whose initial intention was to sell their finished product upon completion to subsequently change this strategy to hold some apartments/units as longer term investment rentals until the property market picks up.
In these instances, the developer would be required to repay some of the GST claimed during construction, over a period of time as there has been a change of intended use.
The initial basis for allowing the ITCs on construction and development costs to be claimed by the developer during the development of the project, is that the end product, being the sale of the new residential property, would be a taxable supply. That is, upon the property being sold after completion, GST would be liable to the ATO of 1/11th of the sale price (or less if sold under the Margin Scheme).
Where there is a change to the ‘actual use’ of the property, and it is not sold or marketed for sale at the end of the development, a GST adjustment liability can arise due to the dual application of Division 11 (extent of creditable purpose) and Division 129 (change in extent of creditable purpose) of the GST Act .
The amount of the liability depends on how the property is ‘applied’ after completion. That is, whether the property was actively marketed for sale or simply rented with no sale efforts or a combination of both. There are many other factors which also determine the amount of GST to be repaid to the ATO, i.e. the timing of when the GST was first claimed on the construction costs and the value of each supply on which GST was claimed.
GSTR 2009/4 Good s and Services Tax: New Residential Premises and Adjustments for Change in Extent of Creditable Purpose provides specific guidance and some examples of calculations on this nature. Practically, this calculation is cumbersome and involves considering firstly the extent of creditable purpose according to Division 11 of the GST Act by applying a “fair and reasonable” apportionment methodology to reflect the intended or actual use of the developer’s costs, and then applying these to the appropriate adjustment periods. Importantly, the ruling requires that each acquisition (i.e. each tax invoice) be considered separately.
Additionally, it is important to note that the decision to hold the property for investment purposes may also change the tax characterisation of the property from being held as trading stock to being as a capital asset. This is an implication that affects the income tax treatment of the property that could have significantly more financial impact to the developer.
The Tax Office are targeting all of these issues at the moment due the size and scale of the ITCs involved as well as the readily available Landgate and Office of State Revenue records of property titles.
Developers and their advisers would be unwise to ignore these issues as the financial impact of a GST audit of this nature could significantly undermine tight cashflows of property developers in the current market.
If you have any doubts about your compliance, or are considering your options with a property development that isn’t selling, repaying GST claimed is likely to be required, so please get in touch.