As the end of financial year looms closer, now is the time to review residential property development projects and determine whether there has been a “change of intended or actual use of the property”, which may require a GST adjustment.
Property developers and their advisors should review projects where new residential property has been built for the purpose of immediate sale, but instead have now had to be leased due to changes in market conditions.
This represents a change of intended or actual use of residential property which requires a GST adjustment.
Essentially, with the ATO continuing to actively pursue property developers who are required to repay input tax credits (“ITC”) under the adjustment provisions of Division 129 of the GST Act, now is the time to make adjustments.
The ATO requires that property developers periodically review their circumstances to determine whether there has been a change of use in property and if so, to repay ITCs based on a complicated series of adjustments. Failure to make these adjustments, or incorrectly doing so, for the change of use can result in unplanned cash flow issues, interest charges and/or penalties from the ATO.
Basis for Division 129 Adjustment
Developers intending to sell new residential premises are generally eligible to claim the GST incurred on their costs during the project. However, ITCs are not claimable where there is a supply of residential rental service as this is considered an input taxed supply of residential premises. Consequently, where at the conclusion of a development project, there is a supply of residential rental of some or all of the premises/apartments built, instead of supplies of the property for sale, the developer is considered to have over-claimed their ITCs.
In these circumstances, Division 129 of the GST Act applies and the developer has effected a “change of intended use of the residential property”.
An adjustment will arise to result in the partial/full repayment of ITC’s previously claimed insofar as it reflects the actual use of the property. Where a developer is renting the property but is also holding the property for the purposes of selling, a “dual purpose” arises for the property thus held which will require a partial repayment of the ITCs.
A developer is required to make the first adjustment on 30 June, in the tax period that commences at least 12 months after the end of the tax period in which the purchase is attributed.
What to do?
Prior to the lodgement of the June 2019 quarter or monthly BAS, developers and their advisors should review their projects to determine where a change of intended use has occurred to ensure any GST adjustments are accounted for. Any Division 129 adjustments will need to be made on a “per invoice basis” following the guidelines provided in GSTR 2009/4 Goods and services tax: new residential premises and adjustments for changes in extent of creditable purpose.
They should also ensure that they have appropriate evidentiary documentation to support their intention to make a taxable supply (ie. to sell the apartments/property) in the near future.
If you require assistance in these matters, please contact Mimi Ngo.