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Ruling

Subject: GST and property development

Questions

1. Are you carrying on an enterprise for GST purposes when you develop new premises on an Australian property (the property) for the purpose of leasing them after the construction?

2. Are you entitled to claim input tax credits on the costs of constructing the premises?

3. Will the sale of the premises be a taxable supply?

Answers

1. Yes, you are carrying on an enterprise for GST purposes when you develop the property for the purpose of leasing them after the construction.

2. No, you are not entitled to claim input tax credits on the costs of constructing the premises.

3. The sale of the premises after their construction and where they have not been used for making input taxed supplies for a period of at least 5 years since they were built, will be a taxable supply under section 9-5 of the GST Act.

Relevant facts and circumstances

You are registered for goods and services tax (GST).

Recently, you purchased a vacant land located in Australia. The property is zoned residential.

You purchased the property for the purpose of subdividing it and constructing new premises.

You lodged an application for development approval (DA) shortly after you purchased the property.

You intend to lease the premises for at least five years upon completion.

You took out a loan from a financial institution when you purchased the property and will apply for further loan to cover construction costs.

You have not previously been engaged in buying, developing and selling properties and you do not intend to buy, develop and sell other properties in the future. However, you have previously bought a property which you are now leasing.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 section 9-20,

A New Tax System (Goods and Services Tax) Act 1999 section 11-5,

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

A New Tax System (Goods and Services Tax) Act 1999 section 40-35.

Reasons for decisions

Question 1

'Carrying on an enterprise' is defined in section 195-1 of the A New Tax System (Goods and Services tax) Act 1999 (GST Act) to include doing anything in the course of the commencement or termination of the enterprise.

According to section 9-20 of the GST Act, an enterprise is an activity, or series of activities done:

· in the form of a business, or

· in the form of an adventure or concern in the nature of trade, or

· on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property.

You advised that you previously purchased a property which you are now leasing. As leasing a property is an enterprise for GST purposes, you are already carrying on a leasing enterprise.

The reason for the purchase of the property is to construct the premises and lease them after completion. Accordingly, your recent purchase of the property and construction of the premises to be leased are things done in the course of carrying on your leasing enterprise since the purpose of this transaction is to expand your leasing enterprise.

Therefore, you are carrying on an enterprise for GST purposes when you develop and lease the property.

Question 2

An entitlement to input tax credits arises on creditable acquisitions and creditable importations.

Section 11-5 of the GST Act states:

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.

(*denotes a defined term in section 195-1 of the GST Act)

All the requirements above must be satisfied for an acquisition to be a creditable acquisition.

For the purpose of paragraph 11-5(a) of the GST Act, section 11-15 of the GST Act provides that you acquire a thing for a creditable purpose to the extent that you acquire it in carrying on your enterprise. 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.

Under paragraph 40-35(1)(a) of the GST Act, the supply of residential premises by way of lease, hire or licence (including a renewal or extension of a lease, hire or licence) is input taxed.

Goods and Services Tax Ruling 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. Paragraphs 24 to 29 of GSTR 2009/4 state:

24. If an entity constructs new residential premises and the entity plans, as evidenced by an objective assessment of the facts and circumstances, to only sell those premises by way of a taxable supply as part of its enterprise, the acquisitions made in constructing the premises will be for a creditable purpose. Assuming all of the other requirements in section 11-5 are satisfied, the acquisitions will be creditable acquisitions and the entity will be entitled to input tax credits.

25. Alternatively, if an entity constructs new residential premises for the purpose of sale but intends to lease the premises for a period of time prior to the sale, and an objective assessment of the facts and circumstances supports this dual planned use, the entity's acquisitions will be partly creditable. The entity will therefore be entitled to only a proportion of the full input tax credit.

Example 1 - partly input taxed and partly creditable planned use

26. Kim is a property developer. Kim recognises that the market for selling new residential premises has slowed significantly but is expected to pick-up in approximately two years. She decides to build new residential premises for sale as part of her property development enterprise but makes a decision to lease the premises for 2 years in order to allow the market to improve. An objective assessment of the facts and circumstances supports this dual planned use. In particular, Kim's business plan at the time of making the acquisition and the loan application documents reflect this intended use of the premises.

27. The acquisitions Kim makes in constructing the new residential premises are for two purposes - being the making of an input taxed supply of residential premises by way of lease and a taxable supply of new residential premises.

28. Kim's acquisitions are made in carrying on her enterprise and are for a creditable purpose except to the extent they relate to the making of the input taxed supplies. That is, the acquisitions are partly creditable. Kim will need to determine the extent of creditable purpose using a fair and reasonable method of apportionment.

29. If an entity constructs new residential premises to use solely by way of leasing the residential premises, and this planned use is supported by an objective assessment of the surrounding facts and circumstances, the entity's acquisitions will relate solely to making supplies that would be input taxed, and will not be made for a creditable purpose. The entity will not be entitled to input tax credits in relation to the acquisitions. Although the acquisitions in these circumstances are not creditable acquisitions, adjustments can still arise under Division 129 if the entity subsequently applies the residential premises for a creditable purpose.

You intend to lease the premises for at least five years when completed; therefore your acquisitions for the construction of the premises relate to making input taxed supplies and are not for creditable purpose. Paragraph 11-5(a) of the GST Act is not satisfied.

As you do not make a creditable acquisition, you are not entitled to claim input tax credits on the costs of the construction of the premises.

Question 3

GST is payable on a taxable supply.

A supply is a taxable supply under section 9-5 of the GST Act if:

a) you make the supply for consideration;

b) the supply is made in the course or furtherance of an enterprise that you carry on;

c) the supply is connected with Australia; and

d) you are registered or required to be registered for GST.

However, the supply is not a taxable supply to the extent that it is GST-free or input taxed.

From the information received you will satisfy paragraphs 9-5(a) to 9-5(d) of the GST Act when you sell the premises. However, the sale of the residential premises will not be a taxable supply to the extent that they are GST-free or input taxed.

There is no provision in the GST Act that will make a sale of residential premises GST-free.

Input taxed supply

Under subsection 40-65(1) of the GST Act the sale of residential premises is input taxed but only to the extent that the property is residential premises to be used predominantly for residential accommodation. If a supply is input taxed you do not charge GST on the supply, but neither are you entitled to claim input tax credits for anything acquired or imported to make the supply.

However, under subsection 40-65(2) of the GST Act the sale of residential premises is not input taxed to the extent that the residential premises are:

a) commercial residential premises; or

b) new residential premises other than those used for residential accommodation before 2 December 1998.

New residential premises are defined in section 40-75 of the GST Act to include new residential premises that have not been solely used for making input taxed supplies for a period of at least 5 years since the premises were built.

Accordingly, the sale of the new premises after the construction and where they have not been used for making input taxed supplies for a period of at least 5 years since they were built, will be a taxable supply under section 9-5 of the GST Act. GST will be payable on the sale.

However, where the new premises are to be leased for a period of at least 5 years since they were built, the sale of the new premises will be input taxed under subsection 40-65(1) of the GST Act as these new units will no longer be new residential premises under subsection 40-75(2) of the GST Act. GST will not be payable on the sale.

For more information on new residential premises and their sale please refer to Goods and Services Tax Rulings GSTR 2009/4 and GSTR 2003/3 (available at www.ato.gov.au)