Australia: Input Tax Credits Not So Easy

Last Updated: 26 August 2008
Article by Stephen Rosenstrauss

The current interest rate climate makes borrowing to buy a property harder. The natural consequence to this is that property is getting harder to sell.

Occasionally, a property developer may find it difficult to sell their stock. With rising interest rate cost and falling property prices, some developers can only hope of makinga sale before the holding costs erode their profit margin. Pressure from financiers may exacerbate this need of a quick sale.

A strategy of some developers has been to lease the properties they had built for sale. This could be a short-term strategy, with a view to obtaining an income stream tobear the holding costs, or it couldbe a long-term change on purpose.Either way, there are GST implications which need to be considered as they can significantly affect the developer's cash flow position.

Under the GST Legislation, input tax credits (ITCs) can only be claimed where an acquisition is made for the purposes of making a taxable supply. Selling 'new residential premises' is a taxable supply, therefore, the developer would have claimed the ITCs throughout the development phase for the costs of construction, consultants, marketing and possibly the original land purchase.

The supply of residential rental property, however, is an 'input-taxed supply'. Accordingly, acquisition and the ITCs previously claimed would need to be 'clawed back' by the Australian Taxation Office (ATO).

In assessing the liability to GST, the ATO looks at the actual supply that is being made, not the supply that was contemplated. Thus, if the supply is input-taxed (e.g. because it is residential rent) ITCs would not be allowed and it will be necessary for the developer to calculate an 'increasing adjustment' under the terms of Division 129 of the GST Act. Each acquisition needs to be separately considered.

An 'adjustment period' commencesno sooner than 12 months after the tax period in which the input tax credit was originally claimed and ends on 30 June. For a developer reporting for GST on a monthly basis, the adjustment periods for each month would be as indicated in the following table:

Original GST Period

Adjustment period

January 2007

June 2008

February 2007

June 2008

March 2007

June 2008

April 2007

June 2008

May 2007

June 2008

June 2007

June 2009

July 2007

June 2009

August 2007

June 2009

September 2007

June 2009

October 2007

June 2009

November 2007

June 2009

December 2007

June 2009

Thus, in the adjustment period ending on 30 June 2008 the developer would have to include any adjustments to be made in respect of input tax credits originally claimed during the period1 June 2006 to 31 May 2007.

The increasing adjustment is calculated as:

Input Tax Credit X (Former creditable percentage - Actual creditable percentage )

In other words, the developer would have an increasing adjustment equal to the input tax credits previously claimed in respect of making the supply, which would include costs attributable to the particular property. As noted above, the requirement to refund the GST to the ATO can be deferred by as much as 23 months, so the cash flow consequence of the change of use may not necessarily be immediate. That in itself could lead to problems if adequate provision is not made to pay the GST adjustment when it becomes due.

If and when the property is ultimately sold, it will be necessary to ascertain whether or not there is a taxable supply for GST purposes at that time. As mentioned above, a sale of residential premises is input taxed unless the premises are 'new residential premises'. A property is considered to be 'new residential premises' unless it has either previously been sold as a taxable supply or has been used for a period of five years for making input taxed supplies.

Therefore, if a property is sold after having been rented out for more than five years, it would not be a taxable supply and no GST would be charged by the developer. No further adjustments would be required.

However, if the property is sold within that five year period, it would stillbe regarded as 'new residential premises' and be subject to GST on sale.This means that it would be appropriate for the developer to reclaim a portion of the input tax credits that had previously been clawed backby the ATO. The same formula as shown above would be applied to calculate the decreasing adjustment. In this instance, the 'Former Creditable Percentage' would be zero percentage (as the property was used for making input taxed (i.e. rental supplies) whilst the 'Actual Creditable Percentage' would have to be determined.

Whilst the legislation indicates that any reasonable apportionment calculation would be acceptable to ascertain the actual creditable percentage, the ATO have stated that in the case of a change in the case of new residential premises that were constructed, an apportionment based on time factors alone would distort the outcome and not be acceptable. To this end, the ATO has published the following formula in their Property and Construction Issues Register, which they will accept as a basis for calculating a new 'actual creditable percentage', apportioning the ITCs on the basis of consideration received.

Consideration for the taxable supply of the premises

(Consideration for the taxable supply of the premises + Total rents received)

The adjustment period for the calculation of this decreasing adjustment would be based on the same time periods as indicated above for increasing adjustments. Thus, there could be a delay (of up to 23 months) before the developer would receive the GST refunds that they may be entitled to.

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.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Mondaq Advice Centre (MACs)
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.