Edited version of private ruling

Authorisation Number: 1011721009159

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Ruling

Subject: Goods and services tax (GST) and adjustments for change in creditable purpose

Question 1

Is your calculation of the margin affected by the leasing of the unit prior to sale?

Answer

No, your calculation of the margin is not affected by the leasing of the unit prior to sale.

Question 2

Are you entitled to reclaim 100% of the input tax credits that you repaid when you decided to rent the unit?

Answer

Yes, the amount of the input tax credits that you can claim on acquisitions relating to the construction of a residential unit is reduced because it was leased for a period of time prior to its sale.

Question 3

Are you entitled to input tax credits for acquisitions that you make after you stop leasing the premises and begin to market them as new residential premises?

Answers

Yes, you are entitled to GST credits for acquisitions that you make after you stop leasing the premises and begin to market them as new residential premises

Relevant facts

Some time ago, you acquired vacant land, under the margin scheme for $XXX. You did not claim any credits on the purchase of the land.

You contracted a builder to construct units on the property with the intention of selling those units. As construction proceeded you claimed the GST credits on the construction costs.

After construction was completed, you decided to rent the units because of the poor sales market. You consequently amended your BAS to return the GST credits that you had claimed for the construction costs.

After one of the units was vacated, you decided to sell the unit. It was subsequently sold for $XXX. You applied the margin scheme to the supply.

You supplied the following details in relation to the units:

Sale price: $XXX.

Rent derived: $XXX

Land cost per unit: $XXX

Original GST credits repaid: $XXX

You plan to continue to rent each of the other four units until the tenants vacate them and then market each of the vacant units one at a time and sell them at the appropriate time.

You do not plan to begin marketing them until they are vacant.

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 9

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

Reasons for decision

1 Is your calculation of the margin affected by the leasing of the unit prior to sale?

The margin scheme is a GST concession to be used to calculate the amount of GST payable on the supply of real property. The amount of GST you must normally pay on a property sale is equal to one-eleventh of the total sale price.

However, as explained at paragraph 45 of Goods and Services Tax Ruling GSTR 2006/8 the margin scheme for supplies of real property acquired on or after 1 July 2000 (GSTR 2006/8), the margin is the amount by which the consideration for the supply exceeds the consideration for the acquisition of the real property. The margin is not affected by the use to which the property has been applied.

2 Are you entitled to reclaim 100% of the input tax credits that you repaid when you decided to rent the unit?

You constructed the unit with the intention of making taxable supplies of new residential premises - a100% creditable purpose. Consistent with this intention, you claimed 100% of the input tax credits for the associated acquisitions, in accordance with Division 11 of the GST Act.

Upon completion of construction, you applied the completed unit to the purpose of making input taxed supplies of residential rent - a 0% creditable purpose. As the acquisitions relating to the construction of the unit were no longer made for a creditable purpose, you repaid the associated credits of $XXX. You rented the property 2009 to 2010, deriving rental income of $XXX.

From 2010, you again began holding the property for the purpose of making taxable supplies of new residential premises - a100% creditable purpose. The property sold (settled) later in 2010 for $XXX.

Division 129 of the GST Act provides for adjustments for changes in extent in creditable purpose. Section 129-40 of the GST Act provides a method statement to work out whether you have an increasing or decreasing adjustment, for an adjustment period, for each acquisition that you are required to make an adjustment for. In repaying the GST credits of $XXX, you were effectively stating that the acquisitions were acquired for a 0% creditable purpose.

When the unit was ultimately sold as a taxable supply, the actual application of the acquisitions was greater than the previous intended application (0%). Therefore, as explained in section 129-40 of the GST Act, you are entitled to a decreasing adjustment. However, because the unit had been applied to a non creditable purpose in addition to the creditable purpose, you are not entitled to receive 100% of the input tax credits that you repaid.

Goods and Services Tax Ruling GSTR 2009/4: new residential premises and adjustments for changes in extent of creditable purpose (GSTR 2009/4) provides guidance on how to determine the extent to which an acquisition made in constructing new residential premises is applied for a creditable purpose where the new residential premises are being held for sale as part of an entity's enterprise, but prior to their sale the premises are rented for a period of time.

Paragraph 83 of GSTR 2009/4 describes a formula which the Commissioner accepts as a reasonable method of determining your extent of creditable purpose. The formula assumes that the unit has at all times been applied, at least to some extent, to a creditable purpose.

83. If the premises have been applied in relation to the creditable purpose of sale and the non-creditable purpose of making input taxed supplies during the relevant period and the premises have been sold prior to the end of the relevant adjustment period, one reasonable method of apportionment is an output based indirect method.49 This method is based on the consideration50 received or liable to be received in respect of any taxable supply as compared to any input taxed supply. Thus, the extent to which new residential premises were applied for a creditable purpose under Division 129 can be determined by the following formula:

However, from completion of construction in January to June 2010, when you began marketing the unit, the unit was not applied, to any extent, to a creditable purpose. In this circumstance, as explained in paragraph 97 of GSTR 2009/4, the percentage calculated in accordance with paragraph 83 of GSTR 2009/4 needs to be modified on a time basis to reflect the fact that the premises have been applied for a creditable purpose for only part of the relevant period. Example 12 at paragraphs 98 to 107 demonstrates how to make a time based apportionment.

Please note that in repaying all the credits on all your acquisitions in January 2009 you were not following the methodology of reviewing each eligible acquisition for each adjustment period. GSTR 2009/4 provides a number of examples to assist taxpayers to calculate the adjustments that they are required to make. You are advised to review examples 10, 11 and 12 and calculate your final adjustment in June 2011 by using these examples.

3 Are you entitled to input tax credits for acquisitions that you make after you stop leasing the premises and begin to market them as new residential premises

Under Division 11 of the GST Act, an entity is entitled to an input tax credit for any creditable acquisition that it makes. Section 11-5 provides that:

You make a creditable acquisition if:

(a) you acquire anything solely or partly for a *creditable purpose; and

(b) the supply of the thing to you is a *taxable supply; and

(c) you provide, or are liable to provide, *consideration for the supply; and

(d) you are *registered, or *required to be registered.

Section 11-15 discusses the meaning of creditable purpose and states that:

Meaning of creditable purpose

(1) You acquire a thing for a creditable purpose to the extent that you acquire it in *carrying on your *enterprise.

(2) However, you do not acquire the thing for a creditable purpose to the extent that:

(a) the acquisition relates to making supplies that would be *input taxed; or

(b) the acquisition is of a private or domestic nature.

* denotes a term defined in section 195-1.

In your case the supply of new residential premises was a taxable supply made by you in the course of your enterprise. You are registered for GST therefore provided that the acquisitions you acquired while selling the units

· were a taxable supply to you

· you provided consideration for these goods or services and

· you did not acquire the goods or service for making input taxed supplies or were of a private or domestic nature,

your acquisitions will be creditable acquisitions and you will be entitled to GST credits on these purchases.

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