ATO Interpretative Decision
ATO ID 2008/114 (Withdrawn)
Goods and Services Tax
GST and change in extent of creditable purpose where new residential premises are constructed for sale but subsequently rentedFOI status: may be released
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This ATO ID is withdrawn as it is superseded by Draft Goods and Services Tax Ruling GSTR 2008/D5 'Goods and services tax: new residential premises and adjustments for changes in extent of creditable purpose'.This document incorporates revisions made since original publication. View its history and amending notices, if applicable.
This ATOID provides you with the following level of protection:
If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.
Issue
Does the entity, a property developer, apply new residential premises for a creditable purpose to any extent, for the purposes of Division 129 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), when it actively markets new residential premises for sale whilst also using the new residential premises for making input taxed supplies of residential rent?
Decision
Yes, the entity does apply the new residential premises for a creditable purpose to some extent, for the purposes of Division 129 of the GST Act, when it actively markets new residential premises for sale whilst also using the new residential premises for making input taxed supplies of residential rent.
Facts
The entity is carrying on an enterprise of property development and is registered for goods and services tax (GST).
The entity constructs new residential premises as part of its property development enterprise with the sole intention of selling those premises on completion.
The entity is entitled to input tax credits for acquisitions related to the construction of the premises in accordance with Division 11 of the GST Act.
The entity lists the completed premises for sale with a real estate agent. The premises are widely advertised at a price that is comparable to prices being sought by other entities for similar premises on the market.
Despite the entity's efforts to sell the premises, after a period of time the premises remain unsold. The entity commences renting the premises to a residential tenant to assist with meeting the holding costs of the premises. The supply of the premises to the residential tenant by way of rental is an input taxed supply under section 40-35 of the GST Act.
While the premises are being rented the entity continues to market the premises for sale. The premises remain listed with a real estate agent. The premises continue to be widely advertised and prospective buyers continue to inspect the premises.
The premises remain unsold at the end of the first adjustment period under Division 129 of the GST Act for acquisitions related to the construction of the premises. The entity is continuing to rent the premises while marketing the premises for sale.
Reasons for Decision
An adjustment under Division 129 of the GST Act arises for an acquisition in an adjustment period where:
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- there is a difference between the actual application and the planned (or intended) application of the thing for a creditable purpose, or
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- there is a difference between the actual application of the thing up to the end of one adjustment period and the actual application of the thing up to the end of the previous adjustment period.
In this case, the acquisitions made by the entity in constructing the new residential premises with the sole intention of sale (making a taxable supply of new residential premises) were acquisitions solely for a creditable purpose for which the entity claimed an input tax credit. However since constructing the new residential premises, the entity has also used the premises for the purpose of making input taxed supplies of residential rent.
Subsection 129-40(1) of the GST Act sets out a method statement for determining whether an entity has an increasing or decreasing adjustment under Division 129 of the GST Act. Step 1 of the method statement requires an entity to work out the extent (if any) to which it has applied the thing acquired or imported for a creditable purpose during the period of time:
- (a)
- starting when it acquired or imported the thing; and
- (b)
- ending at the end of the adjustment period.
Subsection 129-50(1) of the GST Act provides that an entity applies a thing for a creditable purpose to the extent that the entity applies it in carrying on its enterprise. However, subsection 129-50(2) of the GST Act provides that an entity does not apply a thing for a creditable purpose to the extent that the application relates to making supplies that are input taxed or the application is of a private or domestic nature.
Subsections 129-50(1) and 129-50(2) of the GST Act, referred to above, include the term 'apply'.
The meaning of 'apply' in relation to a thing acquired or imported is set out in section 129-55 of the GST Act as including:
- (a)
- supply the thing; and
- (b)
- consume, dispose of or destroy the thing; and
- (c)
- allow another entity to consume, dispose of or destroy the thing.
The definition of 'apply' in section 129-55 of the GST Act is an inclusive definition and therefore also incorporates the ordinary meaning of the term 'apply'. The Macquarie Dictionary, 2001, rev. 3rd edn, The Macquarie Library Pty Ltd, NSW relevantly defines 'apply' to mean 'to put to use; employ' or 'to devote to some specific purpose'. The inclusions to the meaning of 'apply' in section 129-55 and the ordinary meaning of 'apply' suggest that some evidence of use towards a particular purpose is necessary for a thing to be applied for that particular purpose. As such a mere intention to put something to a particular use in the future would not be sufficient for a thing to be applied to that purpose.
In the case of new residential premises, actively marketing the premises for sale will be evidence of use of the premises that demonstrates that the premises have been applied to some extent for the creditable purpose of sale.
Determining whether or not new residential premises have been actively marketed for sale will require consideration of all the relevant facts and circumstances. Although no single factor by itself is conclusive, the active marketing of new residential premises for sale may encompass activities such as listing the property for sale with a real estate agent or agents, advertising the premises for sale in relevant publications or via Internet advertising websites for real property, arranging 'open for inspection' times and/or showing prospective buyers through the premises. In the case of stratum units, actual arm's length sales of some of the listed units would be further evidence of active marketing. Listing premises for sale at a price that is significantly above market value may be an indicator that the premises are not being actively marketed for sale.
In the circumstances of this case the entity has actively marketed the premises for sale while also making input taxed supplies of residential rent. The premises have therefore been applied for a creditable purpose to some extent under section 129-50 of the GST Act. The extent that the premises have been applied for a creditable purpose between when the relevant acquisition was acquired and the end of the adjustment period is the actual application of the thing for step 1 of the method statement in subsection 129-40(1) of the GST Act.
Estimated consideration for the taxable supply of the new residential premises when sold
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Estimated consideration for the taxable supply of the new residential premises when sold plus consideration for the input taxed supplies of residential rent
Legislative References:
A New Tax System (Goods and Services Tax) Act 1999
Division 11
section 40-35
Division 129
subsection 129-40(1)
section 129-50
subsection 129-50(1)
subsection 129-50(2)
section 129-55
Related Public Rulings (including Determinations)
Goods and Services Tax Ruling GSTR 2000/24
Goods and Services Tax Ruling GSTR 2006/4
Other References:
The Macquarie Dictionary, 2001, rev. 3rd edn, The Macquarie Library Pty Ltd, NSW
Keywords
Goods and services tax
GST new residential premises
GST property & construction
GST supplies & acquisitions
Adjustments
Creditable purpose
ISSN: 1445-2782
| Date: | Version: | |
| 15 August 2008 | Original statement | |
| You are here | 17 December 2008 | Archived |