Edited version of private ruling

Authorisation Number: 1011575127991

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Ruling

Subject: GST and changes in creditable purpose due to the cessation of your enterprise

Question

Are you required to make any adjustments as a result of ceasing your property development enterprise?

Answer

Yes, you are required to make adjustments as set out in Division 129 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) as a result of ceasing your property development enterprise. (Please refer to reasons for decision)

Relevant facts

You are a partnership made up of two individuals. You are registered for GST and this registration relates to a leasing and a property development enterprise.

You acquired X parcels of land over a number of years and have used them in your leasing enterprise and for making input taxed supplies as well as for your private purposes.

In the early parts of a specified year after 1 July 2000, you considered starting a property development enterprise on part of your property. The proposition of subdividing was motivated by the need to, amongst other things, shed some of the responsibilities of looking after a large property and also to provide for your retirement.

To that end, surveyors were consulted and over a period of time they, and other consultants, provided you with advice in relation to the subdivision of this property. Consulting engineers were also contracted at a later stage. That consulting firm of engineers progressed the matter and a development approval was issued by local Council on a specified date.

This development approval came a number of months after one of the partners became ill. The decision also came after the onslaught of the global financial crisis. You have sought the advice of your tax agent in relation to the position you now find yourselves in.

You believe you will not proceed with the development as has been approved by the Council. Instead of proceeding with the development you plan to realign the boundaries on the lots and you will continue to reside on the lot where your principle place of residence is located. You will continue to rent out the other lot as you had prior to the development enterprise. Your cattle will continue to graze on the balance area. You have outlaid a considerable amount of money in the pursuit of the development of Y lots. That pursuit, subject to your agent's advice, is likely to cease.

Your agent has prepared an analysis of the GST claims that have been made going back for the various periods and it is his view that there will be a clawback due to the change of use. The amount has been calculated by him.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Division 11

A New Tax System (Goods and Services Tax) Act 1999 Division 15

A New Tax System (Goods and Services Tax) Act 1999 Division 129

Reasons for decision

You embarked upon an enterprise of property development in a specified year. At this time you were already registered for GST and advised you were reporting your GST obligations in regards to other taxable activities. From the information supplied you have incurred costs associated with this property development enterprise and we understand that you have claimed some of these GST credits. However you have advised that you may cease your development activity and have asked how you treat the amounts you previously claimed in relation to the development enterprise if you cease.

If you are registered or required to be registered, GST is payable on the taxable supplies you make in a tax period. However, you are entitled to a GST credit for the GST included in the price of things you acquire for carrying on your enterprise.

The amount of the input tax credit depends on the extent to which the acquisition or importation is for a creditable purpose. In order to claim the correct amount of input tax credits, you will need to determine the extent of creditable purpose for your acquisitions on a reasonable basis that reflects your planned use of the acquisition.

Divisions 11 and 15 of the GST Act provide that it is your planned extent of creditable purpose for that acquisition or importation which is relevant for claiming input tax credits.

After an acquisition or importation is made, the extent to which it is actually applied or used for a creditable purpose may be different from the planned use. This means that the original input tax credit claimed may have been too much or not enough. Adjustments for such changes in the extent of creditable purpose are subject to the provisions of Division 129 of the GST Act.

The operation of Division 129 is explained in Goods and Services Tax Ruling GSTR2000/24 Goods and Services Tax: Division 129 - making adjustments for changes in extent of creditable purpose. This ruling addresses the following topics and therefore they will not be expanded on in this general explanation:

· when an adjustment arises under Division 129 (see paragraph 12)

· the acquisitions or importations to which the Division applies (see paragraphs 13 to 14)

· acquisitions or importations for which an adjustment does not arise (see paragraphs 15 to 27)

· what are the adjustment periods for an acquisition or importation (see paragraphs 28 to 44)

· how to work out if an adjustment arises for the acquisition or importation in an adjustment period (see paragraphs 45 to 67)

· how to work out the amount of that adjustment for the acquisition or importation (see paragraphs 68 to 82)

· in what tax period you must attribute the adjustment (see paragraph 83)

· pooling where you have a large number of acquisitions or importations (see paragraphs 84 to 87)

· treatment of consumables (see paragraph 88), and

· record keeping (see paragraphs 89 to 91).

When you made a purchase of a service or a good for use in your property development enterprise, we accept based on the facts you have advised, that you were applying those acquisitions for a creditable purpose. However you have advised that you may cease this activity and apply your property for both your private purposes that is your private residence your hobby of grazing cattle and to making other supplies unrelated to the property development.

Paragraph 129-50 (2)(b) of the GST Act provides that you will no longer be applying acquisitions for a creditable purpose to the extent that you will be making supplies that are input taxed supplies or the application is of a private or domestic nature.

Conclusion

Therefore in your case if you cease your property development enterprise and use the property for private purposes or input taxed supplies as per the facts you supplied you will need to make adjustments to take into account the change in extent of creditable purpose for any remaining adjustment periods for the things you have acquired. The method of calculating your adjustments is set out below.

Methodology

Adjustment periods, and the number of adjustment periods relating to an acquisition, are detailed in section 129-20 of the GST Act, which provide that:

(1) An adjustment period for an acquisition or importation is a tax period applying to you that:

(a) starts at least 12 months after the end of the tax period to which the acquisition or importation is attributable (or would be attributable if it were a creditable acquisition or creditable importation); and

(b) ends:

(i) on 30 June in any year; or

(ii) if none of the tax periods applying to you in a particular year ends on 30 June - closer to 30 June than any of the other tax periods applying to you in that year.

For example, if you make an acquisition in the form of a progress payment of $22,000 in the tax period ended 31 March 2004, there will be five adjustments relating to this acquisition. The first adjustment period will be your tax period that ends on 30 June 2005; the last will be your tax period that ends on 30 June 2009.

If, in any adjustment period, there is an adjustment to be made as a result of a change in creditable purpose, it will be shown in your business activity statement (BAS) for that period.

The methodology for determining if you have adjustment is contained in section 129-40 of the GST Act, which provides that:

(1) This is how to work out whether you have an increasing adjustment or a decreasing adjustment under this Division, for an adjustment period, for an acquisition or importation:

Step 1 Work out the extent (if any) to which you have *applied the thing acquired or imported for a *creditable purpose during the period of time:

(a) starting when you acquired or imported the thing; and

(b) ending at the end of the *adjustment period.

This is the actual application of the thing.

Step 2 Work out:

(a) if you have not previously had an *adjustment under this Division for the acquisition or importation - the extent (if any) to which you acquired or imported the thing for a *creditable purpose: or

(b) if you have previously had an *adjustment under this Division for the acquisition or importation - the *actual application of the thing in respect of the last adjustment.

This is the intended or former application of the thing.

Step 3 If the *actual application of the thing is less than its *intended or former application, you have an increasing adjustment, for the *adjustment period, for the acquisition or importation.

Step 4 If the *actual application of the thing is greater than its *intended or former application, you have a decreasing adjustment, for the *adjustment period, for the acquisition or importation.

Step 5 If the *actual application of the thing is the same as its *intended or former application, you have neither an increasing adjustment nor a decreasing adjustment, for the *adjustment period, for the acquisition or importation.

(2) Actual applications and intended or former applications are to be expressed as percentages.

The calculation of the increasing adjustment is contained in section 129-70 of the GST Act, which provides that:

The amount of an increasing adjustment that you have under Step 3 of the Method statement in section 129-40 for the thing acquired or imported is worked out as follows:

where:

full input tax credit is the amount of the input tax credit to which you would have been entitled for acquiring or importing the thing for the purpose of your *enterprise if:

a) the acquisition or importation had been solely for a *creditable purpose; and

b) in the case where the supply to you was a *taxable supply only because of section 72-5 or 84-5 - the supply had been a *taxable supply under section 9-5.

Please note:

the acquisition of the land and each progress payment are treated as separate acquisitions. You will need to be aware of, and keep track of, the adjustment periods relating to each of these acquisitions in excess of $1,000.

We understand that you have already applied this methodology and have calculated that you will be paying back a specified amount. We are unable to comment on the accuracy of your calculations.

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