The ATO's recent release of ATO ID 2008/114 provides
a favourable result for developers of new residential premises
who are experiencing difficulties in selling their
The ATO's revised view relates to how Division 129
applies in circumstances where new residential premises are
constructed for sale, but are rented prior to sale. Division
129 applies to require an increasing or decreasing adjustment
where there is a change in the extent of creditable purpose,
i.e. where the actual use of a thing is different from the
intended or former use of it. The following example explains
how the ATO's revised view benefits developers.
An entity that is carrying on an enterprise of property
development constructs new residential premises with a sole
intention of selling those premises on completion. The entity
is registered for GST and is entitled to input tax credits for
acquisitions related to the construction of the premises as the
acquisitions were made for a creditable purpose. The completed
premises are then listed with a real estate agent for sale at
After a period of time, the premises remain unsold and the
entity decides to rent out the premises to a residential tenant
to assist with cash flows. The supply of renting the property
is an input taxed supply under section 40-35 of the GST Act.
Input tax credits cannot be claimed for acquisitions related to
input taxed supplies.
The premises remains listed and advertised for sale with a
real estate agent while receiving rental income at the end of
the first adjustment period under Division 129.
Under the old view, if at the end of the first adjustment
period the premises remain unsold the entity will have a 100%
increasing adjustment for the input tax credits as there is no
application of the premises for a creditable purpose. This
means property developers that have rented out the premises
during this period despite their efforts to sell will have to
repay all of the GST credits that had previously been claimed
for the costs of construction.
Under the ATO's revised view, if the new residential
premises are actively marketed for sale, there will be an
application of new residential premises for a creditable
purpose to some extent. Therefore the entity will only need to
repay a proportion of the GST credits claimed previously.
The extent to which the premises are applied for a
creditable purpose is calculated using the fair and reasonable
basis of apportionment referred to in GST Ruling GSTR 2006/4.
The ruling states that where residential premises are being
rented and actively marketed for sale for the entire period up
to the end of the adjustment period, a fair and reasonable
basis of apportionment can be determined by the following
= Estimated consideration for the taxable supply of the new
residential premises when sold Estimated consideration for the
taxable supply of the new residential premises when sold
+ consideration for the input taxed supplies of residential
rent i.e. if a property developer is marketing the property for
$400,000 and has received $30,000 over the period the house was
rented, the extent to which the premises are applied for a
creditable purpose will be:
= 400,000 400,000 + 30,000
Hence, rather than having to repay 100% of GST credits
claimed on construction costs, the property developer only
needs to repay 6.98% of the GST credits claimed.
Determining whether or not new residential premises have
been actively marketed for sale will require consideration of
all the relevant facts and circumstances. The following factors
may indicate that the property is actively marketed –
listing the property for sale with a real estate agent,
advertising the premises for sale in relevant publications or
via internet advertising websites and arranging 'open
for inspection times'.
The ATO is also examining the effect of active marketing on
the 5 year rule relating to residential rental outlined in
subsection 40-75(2). The ATO has suggested that periods of
active marketing of new residential premises would be a
disqualifying use for the purposes of the five year rule in
The ATO is expected to release a draft GST Determination for
comment within the next three months on these issues. We
support the ATO's revised view and believe it would
provide a favourable outcome for property developers. Please
contact Stephen O'Flynn if you would like any further
information regarding this.
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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