• GST and property adjustments

    An adjustment is a change that increases or decreases your net GST liability for a reporting period. There are two types of adjustments:

    • increasing adjustments; which increase your net GST liability for a reporting period
    • decreasing adjustments; which decrease your net GST liability for a reporting period.

    Find out about:

    When to make an adjustment for a property transaction

    You may need to make an adjustment on your activity statement if you have recently bought, sold or rented a property and you have:

    • changed how you actually use the property from how you intended to use the property - for example, you rent out, rather than sell, new residential premises; this is known as a change in creditable purpose
    • purchased the property as part of a business sold to you GST-free as a going concern
    • purchased farm land for farming GST-free.

    You may also need to make an adjustment if you have ceased your enterprise and cancelled your GST registration.

    New residential premises and a change in creditable purpose

    You may need to make an adjustment, generally on your June activity statement in relation to GST credits you have previously claimed if you use the premises differently from the way you originally planned. If you build residential premises with the sole intention of selling, the things you purchase in building the premises will be solely for a creditable purpose as you will be purchasing these things in carrying on your enterprise to make a taxable sale of new residential premises. However, if you instead rent out the premises, you will be using the premises to make input-taxed supplies of renting residential premises.

    If you change your use of the premises between selling and renting, you will have a change in creditable purpose and will need to make an adjustment.

    Example: making an increasing adjustment on a property transaction

    Bob constructs six residential units to sell as part of his business. Bob claims GST credits for all his purchases that relate to constructing the six units.

    Bob sells four of the units shortly after they are completed but is unable to sell the other two. Bob decides to start renting out the two units he is unable to sell.

    Bob must make an increasing adjustment in relation to the GST credits he claimed for the purchases he made to construct the two rented units. This is because he has changed the way he used the two units by renting them out rather than selling them as originally intended.

    Example: making a decreasing adjustment on a property transaction

    Kevin is a GST registered carpenter. Kevin decides to build residential premises that he intends to rent out for at least 10 years. As he has always planned to rent the property, Kevin does not claim any GST credits on his costs to construct the premises.

    Three months after Kevin originally rents the property he gets an offer from a prospective purchaser to buy the property that is too good to refuse. Kevin decides to sell the property rather than rent it out for the long term. GST will be payable on the sale of the premises as they are still considered 'new residential premises'. By making a taxable sale of the premise, Kevin has used the premises differently to using the premises to make an input taxed supply as he originally planned, and accordingly, he will need to make a decreasing adjustment for some of the GST credits he did not claim.

    End of example

    Information you need to work out 'change in use' adjustments

    To be able to calculate 'change in use' adjustments, you will need certain information including:

    • when you made your purchases
    • the GST-exclusive value of each of your purchases
    • what GST credits you claimed when you made the purchases
    • the tax period in which you claimed the GST credits on your purchase
    • any previous adjustments you have made relating to the purchases
    • any details of you holding or marketing the property for sale (for example the listing agreement with your real estate agent or advertising material)
    • a reasonable estimation of the selling price (if the property has not sold)
    • what you have used the residential property for, including the period for which you have rented the premises or used the premises for private purposes
    • the amount of any rent you received (if they have been rented)
    • the date you sold the property, and the amount you sold it for.

    Adjustments for going concerns and farmland

    You may need to make an adjustment for property that is sold to you as either:

    • part of a GST-free sale of a going concern, or
    • GST-free farm land for farming.

    GST-free sale of a going concern

    If you purchase a going concern (enterprise) and the sale to you is GST-free, you may have an increasing adjustment if you intend that some or all of the sales that you will subsequently make through that enterprise will be sales that are not taxable or GST-free - for example, you purchase a new residential unit as part of a GST-free sale of a leasing enterprise as going concern and intend to rent it out by granting a new lease on the property to the tenant (existing or new). The amount of your increasing adjustment is usually worked out by using the following formula:

    1/10 x the sale price x the proportion of non-creditable use

    You may also need to make subsequent increasing or decreasing adjustments if this proportion of non-creditable use changes over time.

    Example

    Michael, who is registered for GST, buys a new investment unit for $495,000 in the Seabreeze Resort Complex as part of a GST-free sale of a leasing enterprise as a going concern. The unit has been leased to the operator of the resort complex by the vendor. This lease is due for expiry soon after the sale. Michael has made a written agreement with the vendor that:

    • the sale would be a GST-free sale of a going concern
    • the lease would be assigned to Michael who, upon expiry of the lease, would grant a new lease under varied terms, to the operator.

    As Michael will be making an input-taxed supply of the residential unit to the operator, his use of the unit is for a fully non-creditable purpose. Michael will have an increasing adjustment. Using the above formula, the adjustment will be:

    1/10 x $495,000 (sale price) x 100% (non creditable use) = $49,500

    End of example

    GST-free sale of farm land

    Farm land supplied for farming can be sold GST-free if:

    • the land has been used for a farming business for at least the five years preceding the sale, and
    • the purchaser intends to carry on a farming business on the land.

    Land includes all fixtures attached to the land, including residential premises, fences, shearing sheds, workers cottages and dams. Since fixtures form part of the land, they will form part of a GST-free supply of farm land, including a residence (provided the private use of the residence is not so significant that this causes the land to lose the essential characteristics of farm land).

    If, in purchasing the property, the purchaser also intends to use part of the land for an activity which involves making supplies that are not solely taxable or GST-free, the purchaser will be required to make an increasing adjustment.

    Example

    Bill purchases farm land GST-free for $500,000. In addition to his intention to use the land to carry on a farming business, Bill also intends to build a new residential house on part of the land for rent. Proportionally, the rent of the house is expected to represent 20% of Bill’s entire supplies. Bill therefore has an increasing adjustment worked out as follows:

    1/10 x $500,000 x 20% = $10,000.

    End of example

    Adjustments for assets you hold after cancelling your GST registration

    When you cancel your GST registration, you may still hold some business assets (such as property) for which you previously claimed GST credits. If so, you may need to repay some of those credits by making an increasing adjustment.

    Find out about:

    Reporting a mistake

    If you find you have an adjustment for a property transaction that you did not report, you can let us know by making a voluntary disclosure rather than revising your activity statement.

    Record keeping

    If you purchase property that is for business use you must keep records that show and explain all transactions that are relevant to that purchase, such as:

    • sales contract
    • settlement statement
    • tax invoices (for creditable acquisitions)
    • other agreements entered into between seller and purchaser.

    See also:

    GSTR 2009/4 Goods and services tax: new residential premises and adjustments for changes in extent of creditable purpose.

    GSTR 2002/5 Goods and services tax: when is a 'supply of a going concern' GST-free?

    See also:

      Last modified: 06 Jul 2016QC 23508