New Residential Premises and GST and 5 Year Rule

Don't assume GST doesn't apply

The AAT has held that 4 properties sold by a taxpayer (a sole trader property developer) were new residential premises and therefore subject to GST.

The taxpayer was registered for GST bought each of the 4 properties under the margin scheme and built residences on each of them for the purposes of sale. She did not claim input tax credits for the construction.

She rented each of the properties to a variety of tenants before selling them. She claimed that the sale of the residences she built were not taxable because of the ‘5 year rule’

She thought it was enough that the residences were all at least 5 years old when sold and had been rented out. But the Tribunal pointed out this is not enough and the carve out did not apply because they hadn’t been rented for the requisite 5 years.

She faced a number of difficulties in substantiating its contention, including:

• Some of the premises were sold less than five years after construction was completed (but more than five years after acquisition). The Tribunal found that the time period starts once a person has a right to occupy the premises – which is not necessarily the date of completion of the building and it cannot be during the period when construction continues to take place.
• Some of the premises were not rented until some time after completion. Also, due to difficulties with tenants the premises were vacant for substantial periods of time. In each case the total amount of time of rental was less than 5 years.
• She required the tenants to also sign an agreement to purchase the house.

The Tribunal found that she did not satisfy its onus of showing that the 5-year period was satisfied.

The taxpayer then tried to reduce the GST on the sale by applying the margin scheme. Despite being eligible to apply the margin scheme under the GST Act (because she bought under the margin scheme), she failed on this too, because she did not have written agreements from any of her purchasers that the margin scheme would apply to the sale (which is a requirement under s75-5(1)). The Commissioner even gave her additional time to get the written agreement of the purchasers but she failed to get any.

This left the sales fully taxable as ‘new residential premises’. She was allowed about 80% of the GST in her constructions costs as input tax credits (the balance being allocated to the non-creditable purpose of making the ‘input taxed’ rental supplies). The remaining expenses related to renting the premises and were not creditable at all because those supplies were input taxed.

This left her with net GST to pay. The Commissioner imposed a 25% penalty for not using reasonable care in the preparation of her returns, which the Tribunal did not reduce.

FKYL and Commissioner of Taxation (Taxation) [2016] AATA 810

 

Mike that case is so common. I was surprised it got to AAT to be honest. I found it interesting as it seemed to include all the foolish new property dev mistakes in one case. The taxpayers admitted to the issues too ! The 5 year issue is NOT straight forward and the word CONTINUOUS RENTAL is overlooked....and when taxpayers lose it they inevitably also find out that the GST on inputs is also partially allowed. Again a sign that a taxpayer had either no advice or really bad & inexperienced advice.

Unfortunately some think the simple strategy is to hold for five year then quickly sell. That can expose all sorts of problems especially where the first months were not occupied...Its like getting the 12mth CGT discount concession wrong by selling after 11 months.

All indicators of the significant complexities in property taxes and the need to have a quality property savvy adviser on board from planning all the way through.

I'm constantly warning devs that the 5 year rule does not save money by bypassing GST. It changed a host of factors and often just using the margin scheme and selling while its newer can give a clearer profit outcome. All are different.

I question why the ATO even allowed the input tax credits. How can you claim GST credits out of time? (4 year limit). I thought the taxpayer was lucky the ATO didnt play harder on that issue and deny the credits until after the 4 years...Then ....Out of time ? The adjustment event seemed out of time to the tax invoices. Bad luck.

 

Interesting one @MikeLivingTheDream and @Paul@PFI. I have seen worse though. My brother in law build 4 townhouses on the Gold Coast to retain and rent out, so didn't claim any GST on the build. 2 or 3 years in he changed his mind and sold them. Didn't amend his business activity statements or tax returns and didn't sell in the margin scheme. So he paid full GST on the build and the sale, all up around $300k? It got him into financial trouble.

In terms of this statement:

Residential premises are no longer new residential premises if they have been continuously rented for five years after first becoming new residential premises.
​

is there any guidance on what the ATO might consider continuously rented? For example, if I rent out a new build for 5 years but it is vacant for 4 weeks between tenants leaving and new tenants found, does the 5 years start again or is the 4 weeks taken off the 5 years? Not saying it is a good idea financially to hold for 5 years then sell. Just wondering how it works if someone decided to do that.

EDIT:

Therefore, the requirement in subsection 40-75(2) of the GST Act will be satisfied where the premises are rented for any continuous period of at least 5 years from the date they became new residential premises. In this regard, the 5 year period will include short periods between tenancies, where the premises are available for rent.​

However, paragraph 61 of the Draft Ruling states: “a continuous period of at least 5 years used for making input taxed supplies would not include periods when the premises are used for a private purpose or left vacant with no attempt to rent”.
​

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Doesnt the edit explain the answer ? "will include short period between tenancies".
The greater concern is
1. The start date of when it is first rented (NOT when available to rent which is a income tax issue for some owners !!)
2. The date the occupancy cert is issued and first tenanted (what occurs between the two dates may also be important)
3. Actions taken to sell while its tenanted also may impact. eg Lets assume its a clear single tenancy of 1830 days. Making the property available with an agent to sell prior to the 1826th day may also be a concern. It means that the SOLE use of the property within the five years is not only a input taxed residentail rent but an intention to create a supply

A personal property tax plan should identify these and other issues.
- Timing of claiming GST
- Using the margin scheme

The claiming of GST can also be a problem if the sale occurs well AFTER five years. Remember GST can be claimed where the intention is to sell a taxed supply. If its GST free then the credits cant be claimed...An over claim can occur using the 5 year rule also. There maybe no entitlement to GST credits if the sale isnt a taxed supply.

The tax rulings on how much GST to claim is very very complex and provides formulas and methods. GSTR 2003/3, 2009/4 (especially) and 2012/5 I think covers most. For a developer its often easier to minimise GST impacts and sell asap to avoid these complex issues all together. Fast profits are good profits. But then sometimes things dont work that way. One of Sydneys largers devs has a tax dispute over this issue boiling away.

Perthguys example of overpaying GST isnt unusual. "Whats the margin scheme" isnt a question to ask after the contracts are signed.

 

Yes, I found that info after.

I don't know if my BIL got any tax advice after selling. It would be typical of him not too. But even if he did after the sale it would have been too late... margin scheme provisions need to be in the contract.

In some cases a personal property tax plan is not particularly helpful for people like my BIL if he told his advisers he was building to hold and rent long term and then changed his mind after 2 years. He would have had to have had his personal property tax plan updated at that point for it to be useful. I'm certain he didn't. It's no good to have your personal property tax plan updated after you sell property.

 

GSTR 2003/3 paragraph 91 and 92

"
91. We consider 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.

92. 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. See Example 9 at paragraphs 128 to 130."

 

Thanks @MikeLivingTheDream

 

Hi Paul,
Just to confirm.
I knock down my PPOR and build a new premise and sell it. GST is applicable. Is this correct?
if i rent it out for 3 years and then move in as PPOR.. GST is no longer applicable right?
How long do I have to live in there as PPOR to avoid the GST before I sell.. 3 months ? 12 months? or still have to pay GST...

Thanks

 

It all depends.

Property is still new for up to 5 years after it the building works are complete.

 

Wow seriously?? Even if I live in as PPOR?...
What about if knockdown and rebuild and move in as PPOR.. and sold after 2 years.. Still GST applicable?

I doubt ordinary joe would know this? Since everyone thinks once is PPOR you escape GST...

Thanks

 

Residential premises

Yikes... So regardless is PPOR or IP need to be "5" years.. before the property is no longer GST applicable when sold.
If someone build a new home with every intention to use it as PPOR. but sold it 4 years later because or work family etc. etc... Then get hit by GST.....

 

I didn't say GST would apply but that it depends on the circumstances.

 

Question is - Was an enterprise being conducted at any time ?
GST only arises if an enterprise exists. If your PPOR construction had no profit making intent it should be OK. Personal advice would be wise.

 

Thank you.

 

Not really worse from a tax frahd/underpaymrnt pov, I'm sure the ATO would prefer if more people were like your relative than the initial example, in the event of misunderstanding how GST works.

 

As per above answers the intent is ultimately key, not just that it was lived in as PPOR. Ultimately if built as a project with the initial intention of selling at completion to make a profit then even if you end up living in it for a while, as sometimes happens if say develepor is struggling to get the price they were looking for, it's still an enterprise.

If intention was always to build to live in but you ended up selling after 3 years due to circumstances changing then GST likely wouldnt be payable

Ultimately the ATO is pretty reasonable and clear, IMO it isnt generally the ogre it's often made out to be, unless you really take the ****

 

The harder ones are when you build three and live in one then sell off all three over the 5 years. IMO its hard to argue its a main residence.

A main residence must be a CGT asset. A construction that is part of an enterprise to making a profit cant be a CGT asset and so cannot be exempt. The main residence rule doesnt say its exempt just because you lived in it. This mistake is so common and a nasty one often detected by the ATO and then the taxpayer goes to a tax adviser seeking assistance. Its generally too late. Its better to start with advice and a tax plan and minimise tax (legally) than the learn the traps afterwards