Edited version of your written advice

Authorisation Number: 1012987991964

Date of advice: 23 March 2016

Ruling

Subject: GST and the sale of property

Question

Are you required, pursuant to Division 129 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), to repay the input tax credits claimed on the construction costs for Units B and C?

Answer

Yes, pursuant to Division 129 of the GST Act, you are required to repay some of the input tax credits claimed on the construction costs for Units B and C.

Relevant facts and circumstances

You are registered for GST.

In mmyy, you purchased a residential property located in Australia. The property was rented until finance for construction was approved.

Your intention was to subdivide the land and build three properties (Units A, B and C). Upon commencement of construction, you decided to rent Unit A and sell the remaining two properties on completion.

In accordance with your intentions, you claimed input tax credits on the construction of units B and C only.

Unit A

On completion of the properties in mmyy, you rented Unit A immediately as intended.

Unit B

The launch date for the sale was ddmmyy. The initial asking price was $xxx.

You decided to reduce the asking price, but continued to receive very little interest for the property. Accordingly, on ddmmyy, you decided to advertise the Unit for rent as you could not maintain two vacant properties for an extended period of time. The Unit also continued to be marketed for sale during this time.

On ddmmyy, you received an application for rent for Unit B and subsequently accepted it, removing the property from the market for sale.

Unit C

The launch date for the sale was ddmmyy. The initial asking price was between $xxx.

At the end of mmyy, you received an offer of $xxx subject to sale. After 30 days, the offer contract expired and it was extended for a further 30 days. It expired again as the purchaser did not sell their property. The decision was then made to reduce the asking price and continue to actively advertise the property for sale each weekend. However, no further offers were made.

Marketing for the sale of the unit finished, on ddmmyy. Currently, the property is vacant.

You have just refinanced the loan to enable you to hold and rent the unit. You intend to advertise Unit C for rent shortly.

You expect market conditions to further decline in the short term, before recovering in two to three years' time. You then propose to recommence the sale process for Units B and C.

You have provided copies of various documents:

• emails to your previous accountant advising their intentions

• the Real Estate Agent Exclusive Agency Agreement for Units B & C

• the Offer and Acceptance for Unit C (which subsequently fell through)

• a tax invoice for advertising costs for the sale of Units B and C.

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 section 40-65

A New Tax System (Goods and Services Tax) Act 1999 section 40-75

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

Reasons for decision

In this reasoning;

• unless otherwise stated, all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)

• all legislative terms of the GST Act marked with an asterisk are defined in section 195-1 of the GST Act

Under section 11-20, you are entitled to the input tax credit for any creditable acquisition that you make.

Section 11-5 explains that you have made a creditable acquisition for GST purposes if:

• you acquire anything solely or partly for a creditable purpose

• the supply of the thing to you is a taxable supply

• you provide, or are liable to provide, consideration for the supply, and

• you are registered, or required to be registered, for GST.

In your case, the relevant issue is whether your acquisitions were solely or partly for a creditable purpose.

Section 11-15 of the GST Act explains that you have acquired a thing for a creditable purpose to the extent that you acquire it in carrying on your enterprise. However you do not acquire it for a creditable purpose to the extent that the acquisition relates to making supplies that would be input taxed, or the acquisition is of a private or domestic nature. The tests focus on your planned or intended use of the new residential premises that you constructed.

Paragraphs 44 to 47 of Goods and Services Tax Ruling GSTR 2009/4 Goods and services tax: new residential premises and adjustments for changes in extent of creditable purpose (GSTR 2009/4) explain the factors that demonstrate that new residential premises are being held for sale. The relevant principles are summarised as follows:

• An objective assessment of the facts and circumstances is required. This requires a weighing up of the evidence that supports a finding that the premises are being held for sale.

• There must be satisfactory evidence to support a conclusion that the premises were held for sale. A single piece of evidence may not be sufficient where there is other evidence to suggest a contrary purpose.

• The following factors would generally evidence that the premises are being held for sale (although any one factor may not be sufficient on its own):

• marketing or listing of the premises for sale

• income tax treatment of the development as trading stock

• finance documents (including loan application supporting the planned sale of the premises)

• business plans, feasibility studies or minutes of meetings supporting the holding of the premises for sale

• accounting reports and financial statements supporting the holding of the premises for sale

• past activities of the entity in carrying on an enterprise of selling new residential premises

• actual arm's length sales of some of the listed units

• the period of time - if the premises are intended to be sold within a short timeframe this supports a finding that they were held for sale.

On the evidence provided, the Commissioner is satisfied that your planned use of Units B and C was to make a taxable supply of new residential premises. In accordance with this planned use, you claimed input tax credits on the acquisitions associated with the construction of the premises.

Further, your actual use of the Units A and B, until ddmmyy and ddmmyy was to make taxable supplies by way of sale of new residential premises.

Paragraph 8 of GSTR 2009/4 explains that the extent to which an acquisition is applied to a creditable purpose may be different to the planned use. In such cases, an adjustment for this change in extent of creditable purpose may arise in accordance with Division 129.

As explained in paragraph 14 of GSTR 2009/4, Division 129 of the GST Act (section 129-20) provides for adjustments in relation to things in tax periods that are adjustment periods, with the number of periods being determined by the GST-exclusive value of the acquisition, as per the following table:

From ddmmyy and ddmmyy respectively, the purpose for which Units B and C were held changed from a single purpose of making taxable supplies of new residential premises, to a dual purpose of making input taxed supplies (rent) and making taxable supplies of new residential premises.

As Units B and C are no longer being applied solely for a creditable purpose, you are required to make annual increasing adjustments in accordance with Division 129. Paragraphs 87 to 96 of GSTR 2009/4 provide guidance in the calculation of the increasing adjustments.

In the event that you cease to hold the units for a wholly or partly creditable purpose, paragraphs 97 to 107 of GSTR 2009/4 provide guidance in the calculation of the increasing adjustments.

Sale of premises

Under subsection 40-65(1), a sale of real property is input taxed, but only to the extent that the property is residential premises to be used predominantly for residential accommodation. However, under subsection 40-65(2), the sale is not input taxed to the extent that the residential premises are commercial residential premises or new residential premises, other than those used for residential accommodation before 2 December 1998.

New residential premises is defined in subsection 40-75(1). The definition includes residential premises that have not previously been sold as residential premises.

However, under paragraph 40-75(2)(a), premises are not new residential premises if, for a period of at least five years since the premises first became residential premises, the premises have only been used for making input taxed supplies by way of lease, hire or licence.

Goods and Services Tax Ruling GSTR 2003/3 Goods and service tax: when is a sale of real property a sale of new residential premises? (GSTR 2003/3) provides guidance in relation to the five year requirement. It states in paragraph 91:

We consider the five year period must be a continuous period. A continuous period is not broken by short periods between tenancies where the premises are actively marketed for rent following the departure by a previous tenant.

GSTR 2003/3 also states at paragraph 92:

However a continuous period would not include periods when the premises are used for a private purpose or left vacant with no attempt to lease, hire or licence. …

Therefore, if you sell Units B and/or C while they are being held for the dual purposes of making input taxed supplies (rent) and making taxable supplies of new residential premises, your supplies of the units will be taxable supplies.

Further, if you sell Units B and/or C before they have been used solely for making input taxed supplies by way of lease, hire or licence, for a period of at least five years since they first became residential premises, your supplies of the units will be taxable supplies.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).