The ATO recently released GSTR 2009/4: New residential premises
and adjustments for change in creditable purpose. The ruling
provided relief for property developers providing them with the
opportunity to claim a portion of input tax credits on construction
costs while renting out new residential premises so long as the
properties were being held for sale. However, the recent AAT Case,
GXCX and Commissioner of Taxation ("GXCX"),
highlights that developers still need to be cautious when applying
In GXCX, the taxpayer developed approximately 91 apartments in
2000 and 2001. The apartments were marketed for sale before and
during construction. In December 2001, when the development was
completed, 22 apartments remained unsold and were rented. A further
10 apartments were then sold in 2008 and 2009. The taxpayer claimed
input tax credits on the full construction costs. The issue which
was the subject of the Tribunal decision was whether they were
required to make an adjustment under Division 129 of the GST Act
when they made the decision to rent out the 22 unsold
The Tribunal decision
The Tribunal held that in their view the 22 unsold apartments
were not available for sale. They held that "there were no
overt acts demonstrating the fact that the apartments were
available for sale and the evidence of the directors, demonstrates
that the intention was not to sell in the short term. The intention
to sell was predicated upon the market reaching a level where the
capital growth could be realised". The Tribunal held that the
construction of section 129-55 of the GST Act requires an analysis
of the present application of the premises.
Hence, in their view the application of the premises during the
period questioned was entirely for the non-creditable purpose of
leasing. They held that the intention to sell the properties at
some time in the future, without more, did not amount to an
application of the premises for a creditable purpose. Therefore,
the Tribunal concluded that an increasing adjustment was required.
The Tribunal did not consider whether a different approach would be
taken if the developers had taken steps to market/sell the property
contemporaneously with the rental of the property.
The Tribunal's decision in GXCX highlights the need for
developers to be cautious when claiming input tax credits with
respect to construction costs on the establishment of residential
premises which are rented. Developers intending to claim input tax
credits should ensure the following:
The residential premises are "held for sale" as
described in GSTR 2009/4. Factors that will assist in demonstrating
that the premises are held for sale include business plans, finance
documents supporting the planned sale, past activities of the
entity that demonstrate they carry on an enterprise of selling
residential premises and marketing of the property for sale;
The calculation of the amount of input tax credits that can be
claimed should be performed in accordance with the reasonable
methodologies set out in GSTR 2009/4.
Developers requiring assistance in performing this analysis
should contact their Moore Stephens relationship partner.
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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