Sam the Developers has to repay GST he claimed

Sam the property developer finds out he needs to pay back GST he claimed during the development. Noone ever told Sam about this. His cashflows are now all wrong.

What did Sam do ?

Sam finished doing a 3 storey residential block in Adelaide and the market was performing poorly. Fortunately Sam had some good cashflows and didn't really need to sell the properties.

In fact the Adelaide rental market was doing really well as some Government infrastructure projects had led to demand for workers and rental supplies were really tight.

"No problem i'll rent them out" says Sam "I should get a good rental yield on the properties over the next few years"

What Sam later found out was that he needed to make an adjustment to the GST he had claimed during the development process. "What !!! You mean i need to pay back some of the GST i have claimed"

That's right Sam. And the calculation is complex as well.

If you are a developer and start renting out your properties make sure you plan for any GST adjustments in your cashflow projections.

 

Can this be overcome by selling to a different entity? Income tax applies to profit on sale.

 

massive stamp duty on transfer.

You will bring forward a taxing event.

GST Act also has some anti avoidance provisions.

Would probably be an even worse outcome

 

Yeah this issue is very common. Sam really should have sought quality advice early. Mike / Paul would have advised this potential issue as part of the development tax planning. Sam may have chosen to avoid the cashflow impact of a repayment by deferring the GST claim or reviewing it continually. I often encourage uncertain clients to not claim the GST but to ensure they maintain records for it. Then no overclaim occurs.

If Sam were to sell the properties after say 12mths the GST reduction for the mixed use as input taxed rental property AND sale would occur and then with contracted sales he could claim the balance of GST against the GST on sale which may even occur using the margin scheme for a minor net outlay. With GST withholding on sale Sam will most likely receive a decent refund.

Sam also needs to be aware through advice of the time limit to the construction and land GST. Tax credits expire after 4 years. The precise date is 28 days after 48 months following the payment of the tax invoice in many cases.

 

2 things my accountant advised me, may or may not be correct, he has since retired.

1) As long as the properties are for sale whilst rented, GST doesn’t need to be repaid.

2) If you are in the business of renting, you can claim the GST back.

Is this correct?

 

the gst to pay back is relatively small, as you only need to payback the percentage of rent over cost claimed in credits.
So if your yield is 5% (over cost), you need to pay back 5% of GST, for 2, 5 or 10 years depending how big your development was (the size of costs).
As long as your intentions are to still sell and not rent in the future.
I think that's the simplified way of looking at it.

 

Sort of....Obviously the rent over 4 years will be a higher % than over three months. The value of both the rent, the sale price and time both have an effect.

And tax credits expire. The tax invoice can only be creditable up to 4 years. This is based on the date that is 4 years and 28 days after the end date of the quarter the tax invoice was paid or issued in (depending on the GST basis being cash or accrual)

And depending on the adjustment value it may need to be backdated rather than corrected in a present BAS. Interest can arise.

 

1. No. It means an adjustment must be made. Also the 5 years doesnt commence until the sale and marketing ceases !!!!! Yikes.
2. No. The rent is input taxed and may mean if the sole activity is renting no GST whatsoever can be claimed if the rent is residential rental income. If its commercial residential it can be more complicated.

 

The 5% yield example was per year, so 4 years would be 20% needs to be paid back. Still a lot better then paying the full GST credit back.

If your intentions have always been to sell, there would be no reason why you would not claim the GST credits in the quarter you receive the invoice.

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My posts are general in nature and do not constitute professional (financial, legal, etc) advice

 

The value may be higher if SIC is (correctly) applied to vary each BAS for the overclaim. The compound effect of this reflecting on each BAS would be decent. As may the tax agent costs if they are tasked to assist.

At any time in the 4 years the ATO can and may ask for evidence of a enterprise to sell and where no GST is reported for sales this can become quite a elevated issue with time. Absence of OTP sales isnt a good idea for a 100% claim unless past history of sales and completion are available. This is not always evident and the ATO may decline the tax credits and apply penalties + SIC. A mere intention to sell may be too uncertain v's a committed plan to sell some and uncertainty for the remainder. This issue is attracting a high focus these days with a higher % of OTP contracts being terminated and resale or continued efforts of marketing frustrated by market conditions.

I find that a well documented tax strategy assists. Its not unusual for a client to indicate two of four will most certainly sell and then the other two may be uncertain. Or OTP sales that are known. The tax credits may be claimed at 50% and continually monitored. If it later becomes three as a third unit is marketed for sale then a sale contract would support a refocus to 3/4 tax credits being claimed etc. I'm all for claiming as soon as possible, just not too early.

 

I agree.

Lots of factors to determine if you have rental or development assets.

A lot harder to say you plan to sell, if you haven't sold anything at all.
Also, how are the assets treated on the books, inventory or PPE.
Are you claiming depreciation, etc.