Tax Tip 376: GST When a Developer Keeps a Property

Sometimes people build with the intention of selling the properties they have developed. When a property is sold by a developer GST will usually apply on the sale. This means they can register for GST and claim GST during on construction on materials and labour.

But what happens if they claim GST during construction and then change their mind about selling and end up keeping one or more properties?

In that case they would gain an unfair advantage of having claimed all the GST during the project so they will have to do a GST adjustment and give back all or some of the GST. This is known as a “Change in Creditable Purpose’.

The relevant legislation is Division 129 of the A New Tax System (Goods and Services Tax) Act 1999 A NEW TAX SYSTEM (GOODS AND SERVICES TAX) ACT 1999

(what a strange name for this act – just call it the GST Act)


Example

Homer is a developer and he is building 4 units each the exact replica of each other.

During construction he claims $200,000 in GST - $40,000 per unit.

When he finishes the project, he sells 3 units and has to charge GST on the sale of these.

But the 4th unit he will keep and rent out.

Homer will basically have to give back $40,000 in GST that he claimed in relation to this unit that he is keeping. He will need to do this before the end of 30 June of the year in which he decided to keep the unit.

 

Homer actually should probably have sought advice BEFORE he prepared the BAS. If he had known of the issue he may have deferred a decision to claim 100% of the GST on the build. Then he wouldnt have a debt to repay. Instead he would have GST he is owed that hasnt been claimed yet. The issue occurs with keeping OR renting them out. If you change your mind and hold property to rent the same adjustment event also occurs. The thing is GST can only be CREDITABLE if asale is expected. Not a mere thought. ATO can seek evidence a supply is to be made and if its not available for sale they may cancel the GST credit anyway. They can even impose penalties for lodging the BAS. Ideally advice may have suggested Homer wait until he markets it for sale. And even to when its actually sold. Perhaps even defer the GST claim until GST is paid on the sale soi its one final washup. Many do this when they arent sure.

If he later sells he can still claim that GST if he has the right records BUT... GST tax credits expire 4 years after that relevant quarter. They erode. Through time and also if he rents it. The rental use erodes the GST faster.

There are also a load of issues if a developer entity decides to keep it and use it OR sell it below market to an associate etc. Common question - Can he sell it to his smsf ? No. (Homer isnt in business. But if he was thats different) Can he transfer it for $1 to his wife. Yes but market value has to be used for the transfer and GST and tax purposes.

And... If Homer the individual keeps it and resides there and later sells he gets the main residence exemption doesnt he ?? No. Read TD 92/135. The ATO would find his intention at the time of build changed and hold him to the profit making idea. And the GST registration would be a fatal element of the enterprise held against him. We see this a lot.

 

Don't you get multiple GST periods to pay back adjustments due to change in intention?

 

I am not sure, that would be a question for an accountant.

 

No. You may even need to amend the overclaimed tax periods and also may incur interest. You shouldnt have claimed it in the first place. GST is creditable for expected supplies that are taxable. Not just because you have a tax invoice. The ATO expect the property will be available for sale and may ask for evidence of marketing or other plans for sale.

 

I'm 99% sure you guys are incorrect.

I'm referring to a div129 GST adjustment due to change in creditable purpose.

There's definitely circumstances where the GST is paid back over multiple periods rather than paying it all back by June as Terry claimed or amending prior BAS as Paul claimed.

 

You may misunderstand.There are two methods

1. Is the amount under $1,000 ? If so, adjust in the present BAS
2. Is it more than $1,000, adjust each prior BAS based on the requred period/s
For GST credits relating to property construction and change of creditable purpose it would rarely be under $1,000.
Its well explained in GSTR 2009/4. The period that is amended triggers the due date for the amount that becomes due.

There is no repayment arrangement basis that allows you to then delay payment. However a if paying the arrears poses a issue you could make a payment arrangement. GIC is still generally charged. Large adjustment events are also a concern for taxpayers with developer roles as the ATO can consider it an enhanced review risk.

 

So the adjustment periods under table 1 here are not relevant?
Making adjustments on your activity statements

 

The question wasnt about all those other forms of adjustment. It was relevant to property development and changed sale intentions which are specifically addressed in GSTR 2009/4 as well as a practice statement that cautions about claiming prior to being able to determine a intention. Claiming because you incur GST is not accepted by the ATO unless you have a BUSINESS of selling property where that assumption may be evident. The worst adjustment event of the lot isnt even listed on that website. It is "ATO denied credits"...

Timing and strategy around GST is just one of the elements given advice when a property tax plan is developed prior to commencement. I used to have the ATO developer GST audit checklist but they asked me to not post it aftre I posted it on somersoft once several years back. It actually would show how the ATO approach to claims made too early. I have seen taxpayers have tax credits cancelled and penalised despite them getting no refund !! All it takes is a reckless claim for GST with uncertainty about sale. IMO I still think its unfair to cancel and penalise.

Table 1 isnt as reevant as the table that applies in GSTR 2009/4. And its conditions. It takes a different entity to have adjustment events spanning up to 10 tax periods. The time period may limit the need to make an adjustmnet. But once adjusted it a amount due in that period with shortfall inteerst likely imposed.

 

what specific section are you referring to?

 

I'm referring to your original post where you claimed:

You have multiple adjustment periods to pay back the GST after a change in creditable purpose occurs. I posted a link earlier but apparently no one wants to read it.
Making adjustments on your activity statements

 

what section of the GST act?

 

SECT 129.20 deals with adjustment periods.

But I think the plain English explanation on the ATO site makes understanding the content easier. There's also a few GST tax rulings with useful worked examples.

 

Those are annual adjustments. s129-20(1)(b)(i) says 'ends 30 June'

 

Did you you read the part referencing multiple adjustment periods, or did you stop after 'an adjustment period ends 30 June'?

 

You might be right. The legislation is difficult to understand.
If anyone is in this situation they should seek tax advice.

 

you are correct. A divison 129 GST Adjustment for change of creditable purpose does not require amendment of previous BAS returns.

Making adjustments on your activity statements

PWC also has a good summary in their paper

https://www.pwc.com.au/tax/taxtalk/...new residential stock for rent - May 2019.pdf

 

Please check your maths - $200k / 4 = $50k.

So Homer sells 3 units using the margin scheme and pays 1/11th of the margin as GST.

A few years later Homer decides to sell the 4th unit, having repaid the GST claimed.

What happens then? Can the margin scheme still be applied? Can the GST which has been repaid be “claimed” against the GST payable on the sale? Does it depend on how many years have elapsed since the development was completed i.e. more than 4 but less than 5 years, or more than 5 years?

I understand the 4 years is relevant to claiming the GST on the construction cost, which was since repaid and the 5 years as the property is no longer considered “new” (meaning GST is not payable on the sale).

 

The margin scheme is independent of the adjustment event issue.

GST on sale by any means only applies to "new residential premises" (Ignoring commercial use etc for this purpose) . The 5 year rule is often badly understood. It is 5 continuous years of rental without the property also being marketed for sale during the period counted. ie If you are unsure and list the sale while its tenanted the clock doesnt start. If MORE than 5 continual years of lease apply then no GST applies of sale. There is a danger period. Without the 5 year rule the FIRST owner remains liable for GST on sale even after 5 years. (s40-75 GST Act) Its a risk to any strategy and something I always advise before they commence. It a high risk strategy to get it wrong. If you want to rely on the 5 years then expect to lose GST credits AND also ensure that AT LEAST 5 continual years of lease are me without any sale efforts. If you do consider sale efforts thaten consider selling before perhaps THREE years to avoid lost GST credits. Even then some dilution occurs.

The flow chart in GSTR 2003/3 is helpful has a dogleg to the 5 year rule. Its necessary to understand what the 5 year rule actually requires. s4-75 (2) requires that during the 5 years the ONLY use is leased input tax use as residential premises. So if its rented for two years then also marked for sale then left as leased the continual lease for 5 years is met but the "only" test isnt met.

Such a sale may mean GST is payable but GST has been reduced and or expired at the time of first sale.

GST credits expire after 4 years from the end of the relevant quarter they might have otherwise been claimed in. AND
If a property is leased the amount of GST UNDER the 4 years is diluted using the formula for mixed supplies.