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 this approach.

The Facts

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 apartments.

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:

1. 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; and
2. 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.
   

If you require assistance in performing this analysis please contact your Moore Stephens relationship partner for more information.