Ordinarily a property developer constructs new residential premises for the purpose of sale, and the sale is part of the enterprise that the developer is carrying on. Where they are registered for GST, they would be entitled to input tax credits for any acquisitions they make that relate to the construction of those new residential premises.

The reason is that the expected sale of the new residential premises will be a taxable supply, and the extent to which the acquisition is for a creditable purpose will determine the amount of input tax credits claimed.

During these uncertain times, circumstances may arise such that the new residential premises may not be sold after being built but, rather are, leased. For example, a developer has completed the new premises but is unable to find a buyer so they may decide to lease the premises until a buyer is found, to get some return.

Previously, if the property had been constructed for disposal but was instead leased prior to being sold, it was the opinion of the Commissioner, that the premises had only ever been applied for a purpose of making input tax supplies of residential rent. Accordingly this meant that the input tax credits claimed associated with the development of the property had to be returned to the Australian Taxation Office. If the property is sold, within five years, a proportion of those input tax credits could then be claimed back.

This was considered to be very harsh on property developers who were already suffering cash flow issues due to the slowing property market. In response, the Australian Taxation Office issued ruling GSTR 2009/4, which provides guidance. This ruling outlines how to determine the extent to which an acquisition made in constructing new residential premises is applied for a creditable purpose i.e. prior to the sale the new residential premises was leased for a period of time.

The ruling considers three different circumstances that may arise when a property developer constructs new residential premises. These must be considered with an objective assessment of the facts and circumstances:

• (i) The developer will be entitled to the input tax credits where the developer intends to sell the residential premises, by way of a taxable supply, as part of its enterprise.
  
  
• (ii) If the new residential premises are solely to be used as a rental property, the costs associated with this property will relate solely to making supplies that would be input taxed. Accordingly, the developer would not be entitled to claim the input tax credits associated with the development of the property.
  
  
• (iii) At the time of construction the developer plans to lease the new residential premises for a period of time prior to sale. The developer will accordingly only be entitled to claim a proportion of the full input tax credit.

However, if circumstance (ii) above were to apply, the new residential premises would not be precluded from being applied for a creditable purpose in the future, if the developer subsequently decided to sell the new residential premises as part of its enterprise.

Accordingly, an apportionment will be necessary to determine the extent to which the new residential premises have been applied for a creditable purpose. Where an apportionment is necessary, the Australian Taxation Office requires that the developer will have to apply a “fair and reasonable method of apportionment”.

If you are a property developer and the above applies to your enterprise, contact your Moore Stephens property industry contact. They can assist you with the appropriate method of apportionment where new residential premises have been applied to both a creditable purpose of sale and a non-creditable purpose of rental during the relevant ownership period.


Peppe Fusco, Adelaide
pfusco@moorestepehens.com.au


Contact

Peppe Fusco
T +61 8 8205 6243
pfusco@moorestephens.com.au

www.moorestephens.com.au