If you have claimed input tax credits on construction costs and
then rented out residential apartments your GST affairs are on the
Tax Commissioner's target list, particularly where the property
has now been sold.
For many property developers tough economic times have meant
that apartments built for sale have been held onto and rented,
waiting for some glimpses of blue sky.
From a GST perspective, the basics are pretty simple – if
you build a residential apartment and rent it out you can't
claim input tax credits on the costs of construction. If you build
and sell a residential apartment you can claim input tax credits,
and you also will have to pay GST on the sale.
Where you develop an apartment intending to sell it and then
decide to rent it the GST treatment is a whole lot more
The Tax Commissioner issued a 184 paragraph GST ruling in 2009
setting out his view of how GST works in these circumstances.
Basically he says that you need to look at intention – if you
intend to make a taxable supply (like the sale of new residential
apartments) then you can claim full input tax credits. If that
intention changes to residential renting (which is an input taxed
supply) the law requires you to make an adjustment to the amount of
input tax credits (on construction costs, for example) that you
On the face of it, if you can't show that you ever had a
sale intention, or the ATO thinks that any expected sale was so far
in the future that you were just running a rental enterprise, you
would generally have to pay back all the input tax
credits originally claimed.
The rules about how much you may be required to pay back to the
Tax Commissioner are different if you change your intended use of a
residential apartment (from sale to rental), and different again if
you had two intentions at the same time (sale and rental) after you
correctly claimed input tax credits on construction costs.
The challenge for developers will be to work through very very
complicated tax rules to identify if they have to pay back any
input tax credits, and also to prove to the Tax Commissioner (or a
court) which rules in fact apply.
As with most tax complications evidence will be critical.
Telling the ATO that you had an intention to sell while you were
renting when you told the bank that you planned to rent for 10
years may not get you where you want to be.
It is always wise to understand the detailed consequences of a
particular tax position before you spend all your energy pursuing
it. For example, if you rent a residential apartment for more than
5 years the sale may not attract GST, provided the sole intention
during the required period was rental and there is no evidence of a
concurrent intention to sell during that time. Proving a "sole
intention" may be very hard to do unless evidence has been
kept along the way. Keep in mind that if you did form the sole
intention to rent you may have triggered an obligation to pay back
input tax credits claimed on the construction costs in any
To make life even more difficult, the actual adjustment steps
that need to be worked through can be hugely complex, and the Tax
Commissioner has been successful in court when he has disputed the
calculations developers have used to work out how much input tax
credits they needed to pay back.
That doesn't mean that the Tax Commissioner is always right,
however it is important to be aware of these GST traps before you
get caught in the glare of the ATO audit spotlight.
As a first step, you should look at the input tax credits that
were claimed during the construction phase of residential apartment
developments. This is the starting figure that the Tax Office will
be looking at. Depending on how big this number is, and the
prospect that the Commissioner may want to charge penalties and
interest, you can then make a decision about how important it is
for you to drill down into the detail before the Tax Office knocks
on the door.
Rockwell Olivier's tax experts have been dealing with GST in
the property sector since GST was invented. If you need to do
something now to deal with your GST "too hard basket"
please contact one of our team.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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The income tax treatment of any property lease incentive will vary, depending on the nature of the inducement provided.
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