GST and property adjustments on development

The ATO provides guidance on adjustments required where there is a change in creditable purpose.

In both examples given, Bob and Kevin are registered for GST.

The example of Kevin is:

Kevin is a GST registered carpenter. Kevin decides to build residential premises that he intends to rent out for at least 10 years. As he has always planned to rent the property, Kevin does not claim any GST credits on his costs to construct the premises.

Three months after Kevin originally rents the property he gets an offer from a prospective purchaser to buy the property that is too good to refuse. Kevin decides to sell the property rather than rent it out for the long term. GST will be payable on the sale of the premises as they are still considered 'new residential premises'. By making a taxable sale of the premise, Kevin has used the premises differently to using the premises to make an input taxed supply as he originally planned, and accordingly, he will need to make a decreasing adjustment for some of the GST credits he did not claim.​

However, what if Kevin is not GST registered and not a carpenter. Since the construction and subsequent rental of residential property is not subject to GST, does Kevin need to be registered when he decides to build the residential premises? If so, why, or if 'it depends', under what circumstances? As, in the example, if he changes his mind and sells one or more of the premises as “new residential premises” (ie within 5 years), does he need to register for GST at that time, can he apply the margin scheme to the sale and apply a decreasing adjustment to the GST. ie, can he still claim input credits from the construction costs, even though he was not registered for GST at the time those costs of construction be incurred.

 

I know you can claim the inputs and margin scheme later if your intention changes BUT I'm not sure about the registering for GST part if it has to be before construction or you can do it when intention to sell changes - sorry not an accountant.

 

GST is very complex and confusing. GST may be needed where the owner is carrying on an 'enterprise'

 

Step 1. May an ABN be needed? Read MT 2006/1

The key issue is whether there is a mere realisation or an enterprise. If its an enterprise since the taxable supply is greater than $75K then GST registration is required as new resi is a taxable supply

There is a catch to the 5 year rule. The input tax credits on the build may be unable to be claimed after 4 years in any event. The margin scheme may reduce the GST payable and sale between years 4 and 5 are often best avoided since GST may be payable but no credits can be claimed.

 

Two things to address first

1. does the isolated transaction mean you are carrying on an 'enterprise' and if it does
2. has the turnover threshold been met ?

turnover threshold is $75k so generally that has been met. question then is whether you are carrying on an enterprise.

MT 2006/1 at paragraph 263 states "the issue to be decided is whether the activities are an enterprise in that they are of a revenue nature as they are considered to be activities of carrying on a business or an adventure or concern in the nature of trade (profit making undertaking or scheme) as opposed to the mere realization of a capital asset"

if you have a profit- making intention then generally you would be carrying on an enterprise and need to be registered for GST.

 

The vague issues with MT 2006/1 is that its written so loosely to apply generally. But those who take the time to really read it may well identify a intention and matters that lead to an enterprise. ATO are happy to look at a DA with council and apply that as reasoning.

 

Very interesting points raised, but am I still missing something in the responses? The OP questioned the need for GST registration at the time of DA/BA/construction if he intends to build and hold. He can't claim input credits during this period even if he were registered, so why bother registering (unless legally required to of course). He isn't planning to make any taxable supplies, so $75k threshold isn't relevant?



MT 2006/1 (87 pages worth) relates to determining if an entity is entitled to an ABN. "This Ruling provides assistance to entities in determining their entitlement to an Australian Business Number". Unless I misunderstand paragraph 4 of MT2006/1, the ruling does not address the need for registration for GST (which generally requires an ABN) .

Para 263 was mentioned by MikeLivingTheDream. Para 265 may also be relevant to developers being considered to be running an enterprise.

So although in Kevin, the 'non carpenter' (in the OP) may be considered to be running an enterprise, he could therefore be entitled to an ABN under MT2006/1. But if he is not intending to make a taxable supply (ie he intends to build and hold), is he still required to register for GST, or does he only register for GST at the time of actually making that taxable supply (ie when he changes his mind to sell new residential premises).

And if he is not required to register for GST at the time of construction since he has no intention to sell and make a taxable supply, although he may be entitled to an ABN, does he need to actually obtain an ABN?

 

Ray - If a person constructs without any intention to sell they would not and cannot apply for an ABN and also cannot register for GST. If that intention changes then yes an ABN is required and registration for GST to be considered at some point in time.

Ditto that owners of resi investment properties cannot apply for an ABN as
1. They do not conduct an enterprise. They receive passive rental income; and
2. The only supplies they make are input taxed (resi rent) and so no GST and also no ability to claim GST input credits