GST Adjustments and Change in Purpose

Bill is registered for GST and is constructing a new development. During the development he has claimed a full input tax credit of $50,000 for the GST paid on his supplies (contractors invoices, building supplies, etc)

As the market was slow Bill decides to rent out the property rather than sell it straight away. Does Bill need to make any adjustments for GST.

Yes he does. The sale of new residential premises is generally a taxable supply and subject to GST. Acquisitions relating to the construction will generally be for a 'creditable purpose' and Bill could therefore claim 100% of the GST on his acquisitions.

However if the house is rented for a period before its sale some of those inputs tax credits previously claimed for acquisition applied to a non-creditable purpose such as making input taxed supplies and what is called a Division 129 GST adjustment will be required.

Something for the developers and prospective developers on the forum to consider.

 

I do not normally recommend claiming GST on a development until Bill has made a concerted commitment. The issue is a high risk trigger for audit since its a new entity, making no sales and claiming large GST refunds. The ATO then treat it as a audit review and involves way too much enquiry.

The ATO view is that construction (alone) isn't reason to claim GST input tax credits. There needs to be a expected supply. ie a creditable purpose. And if the property is rented even briefly that purpose may lead to a partial creditable use or none at all !! Selling or use by a related party can also impact this creditable use. The ATO will ask for OTP evidence and other evidence of sales and marketing. And penalties can be applied despite no $ have actually been refunded. The ATO think of the GST input credits as a leakage of revenue so they will fight to hang onto it.

A large developer in Syd (not Harry) is arguing substantial penalties now for making blanket claims for 100% of GST on builds when many units get rented on completion until they are sold. Some held by associated too. The ATO thinks only part of the GST on the build for those units is creditable. Read Ruling views in: GSTR 2009/4 which explains more in detail

I find that accumulation of the GST on costs until such time a sound a conclusive marketing strategy is formulated and implemented to be safer. The safest is the defer claiming the tax credits until matched against the GST on the sale. But ever developer is different and each site too. And even then the GST only on expected sales should be claimed. eg If its expected to hold and rent 5 out of 20 then only claim 75%.

Every project will be different and the importance of a sound tax plan for each site needs to be evident early and progressively reviewed from time to time. Perhaps each quarter.

 

There is a good example of a mixed supply in the above ruling. Jane is a developer who decides to rent the unit for 6 months until it is sold. The example indicates how a reduced input tax credit arises from this choice

Jane is registered for GST and constructed new residential premises for sale and was entitled to full input tax credits on her acquisitions. However, because the market for new premises was slow Jane leased the premises for six months before the premises were finally sold. Jane received $15,000 in rent over the six months. The premises were sold for $500,000. There had been no private or domestic use of the premises.

At the end of the next adjustment period following the sale, Jane calculates the extent of creditable purpose using the formula above as follows:

$500,000 / ( $500,000 + $15,000 ) = 97.09%

So Jane cannot claim 2.93% of the GST on construction costs. However 100% of selling expenses (ie agent etc) may be creditable.

Complex stuff.

 

from a cashflow perspective many developers want to claim the input tax credits along the way as the development can be going for 18 months or more. waiting 2 years to claim back $60k in input tax credits on a project where you dont intend to rent them out would seem to me to be poor cashflow management.

Division 129 deals with cases where the purpose changes anyway so i wouldnt be advising clients to hold off on claiming the input tax credits.

The ATO usually calls asks you to provide the invoices to support the GST refunds and asks a few questions and if all is legitimate it is refunded. I've never found it to be the big issue you say it is.

 

Thats why a site specific tax plan is important. To identify when and how much and timing strategies so all are on the same page. Claiming 100% just because they are building it would be poor advice if any are to be kept, possibly rented etc. The larger the project the bigger the issue can become.

Div 129 works both ways is what I'm saying. Sometimes it is safer and far more practical to claim what is prudent now and then claim more later. Thats the tax plan. I agree to claim as early as possible but not 100% if the known issue (ie keep 5 sell 15) is evident at project start.

I have a ATO questionaire somewhere they send for this issue and its very probing for these issues. See below

 

agreed. with all my developer clients (even the small ones) we sit down at the beginning of the project and document the intentions. whether it be to sell immediately, rent initially and then sell or keep as a long term investment. prevents issues later on and is an essential part of tax planning for any developer.

 

And is often the key factor between the silly mistakes others make based on what their mates suggest

 

good post.
could someone provide an insight into how the apportioning between creditable and non-creditable purposes is calculated?
In the case of Bill, can any of the inputs tax credits previously claimed continue to be claimed if the development is leased?
thanks

 

It is quite complex and tax advice would be required. Just renting them out and then quickly selling can see a loss of 25% or more of the input tax credits.

Note that this can and will affect things like QS reports too. Most QS reports are based on new apartment builds on a ex-GST cost. If some or all of the GST is not allowed this could reflect as higher costs.

 

thanks.
just following this up.
I had a read of GSTR 2009/4, and after getting my head around it, it doesn't sound as bad as I thought.
to simplify it, the rental is usually a tiny fraction of the costs, so the GST amendment isn't significant.
more of an issue is showing that rental is only temporary and you are continuing to market the properties.