In GSTR 2003/3 90. Subsection 40-75(2) requires that for the period of at least 5 years the premises have been used only for making input taxed supplies under paragraph 40-35(1)(a). This requirement in subsection 40-75(2) is satisfied where the only supplies of the premises were by way of lease, hire or licence (i.e. residential rental) for any continuous period of at least 5 years between when the premises would otherwise have become new residential premises and when they are sold. See Example 8 at paragraphs 124 to 127. With regard to the word 'any', does it mean for example, if I constructed a new premises, instead of renting it out immediately, I chose to move in after the occupancy permit was issued, stayed there for 2 years, and then moved out, and then rented it out for >5 years, I should still meet the above? Basically does it mean it doesn't matter whether the 'by way of lease' happens first or not?
The 5 years must be a continuous period. A continuous period is not broken by short periods between tenancies where the premises are actively marketed for rent following the departure by a previous tenant. However, a continuous period would not include periods when the premises are used for a private purpose or left vacant with no attempt to lease, hire or licence.
Yes the so called "5 year rule" has numerous traps. I also recommend good property tax advice since the use of the margin scheme and claiming credits on the build can virtually eliminate GST. Too often people tell me they they are worried about the cost of GST when they dont know what the number is. I get told its 10% of the sale and thats wrong. In reality when the margin scheme is used its often 4-6% and that varies - Large dev sites may be 8%. Then when GST on the build is claimed it often nets out to almost nil. Many who defer a sale 5 years merely chasing a tax saving make a range of mistakes incl: - Dont sell using the MS in their contract (since they didnt get paid advice) - Cant claim any input tax credits (or claimed them and it must be repaid) - Get the dates and issues as Mike identified wrong. - Market for sale just prior to the 5 years thinking the contract date is relevant - Have a related party renting the premises without a "lease" and a range of non arms-length issues - Thinking the deferred sale makes the sale a capital gains event at discount in place of ordinary income when the enterprise already is the reasoning for GST registration. And even if the premises sell for the exact same price after 5 years the final tax cost will be MORE than the GST saving
So what happens if you rent the new premises for say four years and then decide to sell? Presumably using the Margin Scheme. If the GST credits on the build were not claimed, can they still be claimed, or is there a time limit?
Input Tax Credits expire after 48 months relevant to the quarter when the tax credit was available (eg cash basis = when paid) ITCs also erode during the rental period since you have both input taxed supply (rent) and (sale) so that the rents received as a % of total income reduces the credits that are available based on time. The unused ITCs will reduce profit on sale of course (since costs are now GST inclusive) and increase the costbase used for QS deductions for example.
