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Ruling

Subject: GST and adjustment under Division 129 of the GST Act

Question

Do you have an increasing adjustment under Division 129 of the GST Act when you lease the property for a peppercorn consideration?

Answer

No

Relevant facts and circumstances

You are responsible for facilitating the provision of housing and accommodation to Australians experiencing housing needs.

One way you achieve this is by entering into agreements with various Community Housing Organisations (CHOs) to increase the supply of residential premises available for the accommodation of disadvantaged Australians and strengthen the community housing sector.

Under a particular project, you entered into a project agreement to construct units (the property) and transfer legal title to a CHO.

You are and have been the registered proprietor of the property.

You acquired and applied construction services from independent third party suppliers to construct the property, which comprises residential premises and a small commercial unit, on land that you owned.

When you engaged the contractors to construct residential housing on the properties, you intended to transfer legal title of the properties to the CHO upon practical completion.

At practical completion, you were unable to transfer legal title to the properties due to the absence of the required legal documentation. Therefore you leased the premises to CHO from the day after practical completion, for a peppercorn consideration in the interim.

Leasing the premises to CHO enabled them to have access to the premises at the time that was originally intended for example completion date.

During the period of the lease, you maintained your intention to transfer legal title to the properties to CHO upon practical completion, sub-division approval and completion of legal documentation.

Legal title was transferred within a number of months of the completion date.

The market value of the properties is $Mxx.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 subsection 11-15(1)

A New Tax System (Goods and Services Tax) Act 1999 subsection 11-15(2)

A New Tax System (Goods and Services Tax) Act 1999 section 11-20

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

Tax Administration Act section 388-85

Reasons for decision

Section 11-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that you are entitled to the input tax credit for any creditable acquisition that you make.

Subsections 11-15 (1) and (2) of the GST Act provides that:

You conduct an enterprise with activities which include funding and regulating the provision of community housing. Your activities also include:

In this instance, you were not intending to make any input taxed supplies of residential premises or residential rent as part of the project. CHO was to hold the properties which are the subject of the Project Agreement and, in accordance with the agreement, will lease these directly to eligible tenants, collect rents, and manage and maintain the premises. Your activities in regard to the project relate to building the premises for CHO to operate.

Therefore, your acquisitions did not meet the negative limb of paragraph 11-15(2)(a) of the GST Act and accordingly were regarded as being made for a wholly creditable purpose.

Under Division 129 of the GST Act, you are required to monitor the extent to which your acquisition continues to be applied to a creditable purpose. Where there is a change in the extent to which you have applied a thing to a creditable purpose, you may be required to make an adjustment.

When you began to lease the premises the day after completion date, the premises began to be applied partially to input taxed purposes. Therefore you were required to review your application of the "things" that were acquired in the construction of your premises.

As legal title to the premises was transferred on ddmmyyyy, there are two possible adjustments periods, being the tax periods ending 30 June yyyy and 30 June yyyz.

Goods and services tax ruling 2009/4: new residential premises and adjustments for changes in extent of creditable purpose (2009/4) is concerned with new residential premises and a change in creditable purpose. In particular, GSTR 2009/4 addresses the calculation of the extent of creditable purpose where the new residential premises are subject to a 'dual application', ie the supplier leases the residential premises, while at the same time making the new residential premises available for sale under a taxable supply.

The principle set out in GSTR 2009/4 is that the acquisitions in relation to the new residential premises are made for a creditable purpose to the extent that they relate to the subsequent taxable supply. The quantification of that extent is calculated using the following output based indirect formula:

Consideration for the taxable supply of the premises

GSTR 2009/4 contemplates that there is a taxable supply of the new residential premises. When you engaged the contractors to construct residential housing on the properties, you intended to transfer legal title to the properties to CHO upon practical completion. Normally the supply of new residential premises by a GST registered entity would be a taxable supply. However, in your case you received no consideration in relation to the supply of legal title to the premises. Therefore, your supply of legal title to the premises was not a taxable supply. Therefore, a strict application of the above formula will result in a NIL result.

In paragraphs 121 to 123 of GSTR 2009/4 discussion is made of a variation to the above calculation method when the supplier occupies the new residential premises prior to sale for no consideration. In effect the market value of rent payable is substituted for the consideration. It is reasonable therefore to substitute the market value of the new residential premises in this case for the consideration. The calculation would therefore be:

Market value of the new residential premises

Market value of the new residential premises plus a peppercorn

The residential premises consist of xx by one, two or three bedroom detached housing units. You advised that the market value is $Mxx. It is anticipated that the value of a peppercorn is in the order of one cent.

Therefore extent of creditable purpose = $Mxx / $Mxx + $0.01 = 99.9999999%

In applying this percentage to the input tax credits previously claimed in relation, the resulting adjustment is probably less than one cent and therefore immaterial.

Under section 388-85 of the Tax Administration Act 1953, where an approved form requires amounts to be expressed in whole dollars, the amounts are to be truncated to the nearest whole dollar.

The Business Activity Statement does not provide for the inclusion of cents. Therefore, the adjustment amount would be rounded to zero. Accordingly, you are not required to make an adjustment under Division 129 of the GST Act.

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