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 properties.

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.

Example

Facts

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 market price.

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.

Old view

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.

Revised view

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 formula:

= 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

= 93.02%

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 subsection 40-75(2).

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.