Edited version of private advice

Authorisation Number: 1052202462935

Date of advice: 18 December 2024

Ruling

Subject:GST - adjustment events

Question 1

Did you acquire the property located at address (the Property) for a fully creditable purpose as defined in section 11-15 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No.

Question 2

Will Division 129 of the GST Act apply in respect of your acquisition of the Property?

Answer

Yes.

Question 3

If Division 129 of the GST Act will apply, what is the date the first adjustment period (1st Adjustment Period) ends and how many adjustment periods will apply pursuant to section 129-20 of the GST Act?

Answer

The 1st Adjustment Period is the tax period ending DDMMYYYY.

Ten adjustment periods will apply to your acquisition of the Property.

Question 4

Are you required to make an adjustment pursuant to Division 129 of the GST Act in the 1st Adjustment Period?

Answer

We are unable to provide a definitive answer - please see 'Reasons for decision' for explanation.

Question 5

Are you required to make adjustments pursuant to Division 129 of the GST Act in the following nine Adjustment Periods?

Answer

We are unable to provide a definitive answer - please see 'Reasons for decision' for explanation.

Relevant facts and circumstances

Entity A is wholly owned by Entity B.

The Trustee of Entity A is Entity C.

Entity A is registered for GST effective from DDMMYYYY, accounts for GST on accounting method basis and reports on lodgement cycle basis.

The principal activities of Entity A are investing in Australian real property, specifically Build to Rent projects. This includes the acquisition, development and leasing of real property.

On DDMMYYYY, Entity A entered into a contract (Contract) for the purchase of address (the Property) from Entity D (Vendor).

The Property contains a commercial office building.

The Purchase Price under the Contract was $X (inclusive of GST). The Vendor provided Entity C [as trustee for Entity A] with a tax invoice dated DDMMYYYY.

A clause in the Contract provides that the sale of the Property is conditional on the Purchaser (Entity A) granting a lease to the Vendor to commence the day following settlement.

On DDMMYYYY, Entity A (as Landlord) entered into a lease (Office Lease) of the Property with Entity D (Tenant). The key features of the Office Lease are as follows:

(a)          the Office Lease commenced on DDMMYYYY (the day after Completion of the Contract)

(b)          the Expiry Date of the Office Lease is DDMMYYYY unless otherwise agreed

(c)          the Office Lease is drafted on standard commercial terms with per annum rent of $X (plus GST).

Settlement occurred on DDMMYYYY.

The parties did not treat the sale of the Property under the Contract as a supply of a GST-free going concern.

On DDMMYYYY, Entity A (as Principal) entered into a development management agreement (DMA) with the Development Manager.

The Development Manager is required to undertake the activities as detailed in the DMA relating to a development on the Property (Development).

Pursuant to the DMA, Entity A is required to give the Development Manager such access to the Property as is sufficient to enable the Development Manager to carry out the Development Manager's obligations under the DMA.

The Development Manager will not commence delivery of its obligations under the DMA, nor will it exercise its rights of access under the DMA, until after the expiry of the Office Lease, which is expected to occur on DDMMYYYY.

Upon completion, the Development is intended to contain a multi-storey residential rental community providing long-term rental housing options with a range of unit types and resident amenities.

The expected date for practical completion of the Development is MMYYYY.

The residences making up the Development will then be leased from MMYYYY.

All leases of residences (Residential Leases) in the completed Development are expected to be granted for terms of less than 50 years.

Relevant legislative provisions

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

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

A New Tax System (Goods and Services Tax) Act 1999 section 129-20

A New Tax System (Goods and Services Tax) Act 1999 section 129-40

Reasons for decision

Question 1

Section 11-15 provides in part that you acquire a thing for a creditable purpose to the extent that you acquire it in carrying on your enterprise (subsection 11-15(1)).

However, subsection 11-15(2) provides that you do not acquire the thing 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.

It is common ground that you acquired the Property in carrying on your enterprise thus satisfying the positive limb in subsection 11-15(1).

The Commissioner's view on the meaning of the term 'creditable purpose' and the phrase 'extent of creditable purpose' is discussed in Goods and Services Tax Ruling GSTR 2006/4 Goods and services tax: determining the extent of creditable purpose for claiming input tax credits and for making adjustments for changes in extent of creditable purpose (GSTR 2006/4).

Paragraph 17 of GSTR 2006/4 discusses that when you make an acquisition, the extent of your creditable purpose is based on your planned use of the acquisition in your enterprise, expressed as a percentage of its total use. Paragraph 18 continues, stating the use of the expression 'to the extent that' in the context of input tax credit recoverability in the GST legislation contemplates the apportionment of acquisitions between multiple uses, as well as exclusive allocation to specific uses.

The issue in this case is whether your acquisition of the Property relates to making supplies that would be input taxed, to any extent.

Determining a connection between an acquisition and the making of supplies that would be input taxed is discussed in Goods and Services Tax Ruling GSTR 2008/1 Goods and services tax: when do you acquire anything or import goods solely or partly for a creditable purpose? (GSTR 2008/1).

If an entity makes, has made, or intends to make, input taxed supplies, it needs to consider whether paragraph 11-15(2)(a) will apply. Paragraph 104 of GSTR 2008/1 states in part:

104. ..., paragraph 11-15(2)(a) specifically focuses on the relationship between an acquisition and the making of supplies. The purpose of subsection 11-15(2) can be ascertained by its relationship with the other provisions of the GST Act. When viewed in the context of the adjustment provisions such as Division 129, it can be seen that the purpose of subsection 11-15(2) is to focus on the intended usage of an acquisition in so far as the acquisition relates to supplies that are to be made in the future.

GSTR 2008/1 discusses the interpretation of paragraph 11-15(2)(a) with reference to the decision of Hill J in HP Mercantile Pty Limited v. Commissioner of Taxation (2005) FCAFC 126 (HP Mercantile).

Paragraph 113 of GSTR 2008/1 refers to the comments of Hill J [at 35] in HP Mercantile regarding the phrase 'relates to making supplies that would be input taxed' in paragraph 11-15(2)(a):

... the words 'relates to' are wide words signifying some connection between 2 subject matters. The connection or association signified by the words may be direct or indirect, substantial or real. It must be relevant and usually a remote connection would not suffice. The sufficiency of the connection or association will be a matter for judgment which will depend, among other things, upon the subject matter of the inquiry, the legislative history, and the facts of the case. Put simply, the degree of relationship implied by the necessity to find a relationship will depend upon the context in which the words are found. So much appears from the various cases referred to by the tribunal when discussing the meaning of these words...

In light of the above, paragraph 118 of GSTR 2008/1 discusses that there must be a connection between an acquisition and the making of input taxed supplies. The connection or association signified by the words may be direct, or indirect, substantial or real. It must be relevant and usually a remote connection would not suffice.

For the purposes of paragraph 11-15(2)(a), the Commissioner considers a sufficient connection is established if, on an objective assessment of the surrounding facts and circumstances, the acquisition is used, or intended to be used, solely or to some extent for the making of supplies that would be input taxed (paragraph 119 of GSTR 2008/1).

In this case, your acquisition of the Property was conditional upon a leaseback arrangement whereby you were obligated to grant the Office Lease to the Vendor which commenced the day following the settlement of the Property. The supply of the Property pursuant to the Office Lease will be a taxable supply.

However, we consider that this was not your sole purpose or intention in acquiring the Property.

You were established for the principal purpose of investing in Australian real property, specifically Build to Rent projects such as the Development proposed on the Property.

Settlement of the Property occurred on DDMMYYYY, and on the same day, you entered into the development management agreement (DMA) with the Development Manager that would undertake activities in respect of the Development on the Property.

The Office Lease will expire on DDMMYYYY (unless otherwise agreed) and at that time the Development Manager will commence activities as provided for in the DMA. Upon completion of the Development (anticipated to be MMYYYY) you will commence to lease the residences making up the Development. Your supplies of the residences will be input taxed.

Given the above, we consider that at the time you acquired the Property you had a dual purpose for the use of the Property:

1.            commercial lease to the vendor (the Office Lease), commencing one day following settlement. This is a creditable purpose; and

2.            development, that is, construction of residential apartments, for ongoing residential leasing, (excluding long-term leases of more than 50 years). The supplies would be input taxed supplies, and this is a non-creditable purpose.

The two purposes are considered to be concurrent uses during the Office Lease period.

Further to this, we consider your acquisition of the Property, together with the specific purpose for which you were established and the fact you entered into the DMA on the day of settlement, establishes a direct and substantial relationship with the input taxed supplies you intend to make following completion of the Development.

The Office Lease is an intended interim (i.e. incidental) use whereas the development is the main or predominant use going forward.

Given the facts of this case, we would not consider such a connection between your acquisition of the Property and the input taxed supplies intended to be made in the future as remote.

Therefore, we consider you did not acquire the Property for a fully creditable purpose as defined in section 11-15. That is, we consider your acquisition of the Property was made for a 'partly creditable' purpose.

Apportionment

Paragraph 28 of GSTR 2006/4 provides that if the planned extent of creditable purpose is 100% (that is the acquisition is solely for a creditable purpose) no apportionment is necessary. However, paragraph 30 of GSTR 2006/4 provides that if the planned extent of creditable purpose is less than 100% but greater than zero, you need to apportion the total purpose between that which, on your estimate, is creditable and that which is not.

Applying paragraph 11-15(2)(a), you did not acquire the Property for a creditable purpose to the extent that the acquisition related to making supplies that would be input taxed. While the Office Lease is a supply for a creditable purpose (i.e. done as part of an enterprise and no exclusion applies), the development is the construction and leasing of residential premises, which is input-taxed pursuant to paragraph 40-35(1)(a). The Property was therefore not acquired for a creditable purpose to the extent its acquisition relates to the development.

As you have acquired the Property for a partly creditable purpose, you need to apportion your planned 'extent of creditable purpose' on a basis that is fair and reasonable. Such a determination is required in order to calculate the amount of input tax credit you may be entitled to.

Discussion on the general principles of apportionment are discussed in GSTR 2006/4 commencing at paragraph 97.

Paragraph 100 of GSTR 2006/4 provides that the method of apportionment you choose to allocate or apportion acquisitions between creditable and non-creditable purposes needs to:

•                     be fair and reasonable;

•                     reflect the planned use of that acquisition; and

•                     be appropriately documented in your individual circumstances.

Discussion around choosing a method of apportionment and types of methods of apportionment are contained in paragraphs 101 to 123 of GSTR 2006/4, noting that you are not required to use the methods as set out in GSTR 2006/4. However, whatever alternative method you do use must be fair and reasonable having regard to the principles above.

Question 2

As discussed above, the extent of your creditable purpose is based on your intended or planned use of the acquisition in your enterprise, expressed as a percentage of its total use.

Where the actual application of the acquisition (in your case, the Property) differs from the intended use, adjustments must be made if required under Division 129.

In the Office Lease period, there is both creditable and non-creditable application of the acquisition. Following expiry of the Office Lease, the acquisition will be applied only for a non-creditable purpose.

Where apportionment is necessary to determine the extent to which the acquisition has been applied, the entity will have to apply a fair and reasonable method of apportionment.

For this purpose, there must be sufficient evidence to support the actual application of the acquisition to creditable or non-creditable purposes, or both. Determining the increasing or decreasing adjustments required will require comparison of the 'intended' or 'former application of the thing' (at Step 2, subsection 129-40(1)) with the 'actual application'. The 'actual application' takes into account the creditable and non-creditable application of the acquisition up to the end of the relevant adjustment period.

Question 3

Section 129-20 contains provisions regarding the number of 'adjustment periods' that will apply to an acquisition and also the timing of those adjustment periods.

In this case, subsection 129-20(3) is relevant in determining the number of adjustment periods applicable to your acquisition of the Property. In this case, the GST exclusive value of the Property was more than $500,000. Pursuant to paragraph 129-20(3)(c), the number of adjustments periods that will apply in respect of your acquisition of the Property is ten (10).

Subsection 129-20(1) provides that an adjustment period applying to an acquisition:

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

(b)          ends:

(i)           on 30 June in any year; or

(ii)           ...

In this case, you acquired the Property on DDMMYYYY. The Vendor issued you a tax invoice dated DDMMYYYY in respect of the purchase of the Property. As such, in accordance with section 29-10, any input tax credit in respect of the acquisition would be attributed to your tax period ending DDMMYYYY.

Applying subsection 129-20(1), the first adjustment period applying to the acquisition of the Property is the tax period ending 30 June YYYY.

Summary

The 1st adjustment period will be the tax period ending 30 June YYYY.

Number of adjustment periods are ten (10).

Question 4

Section 129-40 contains a 5-step method statement to determine whether you will have an adjustment for the purposes of Division 129:

Step 1 - Determine the extent you have applied the Property for a creditable purpose from the time you acquired the Property (DDMMYYYY) until the end of the 1st Adjustment Period (30 June YYYY). This is the 'actual application' of the Property.

Step 2 - Being the 1st Adjustment Period, note the planned extent of creditable purpose determined at the time you acquired the Property (see Question 1 above). This is the 'intended application' of the Property.

Step 3 - If the actual application of the Property is less than the intended application, you will have an increasing adjustment.

Step 4 - If the actual application of the Property is greater than the intended application, you will have a decreasing adjustment.

Step 5 - If the actual application of the Property is the same as the intended application, you will have neither an increasing adjustment nor a decreasing adjustment.

The actual application and the intended application are to be expressed as percentages.

Whether you are required to make an adjustment pursuant to Division 129 will depend on a number of factors; primarily, the method you have chosen to determine your extent of creditable purpose when you initially acquired the Property (and calculated an amount of input tax credit attributed to your MMYYYY tax period), together with the method of apportionment you choose to determine the actual application or use of the Property for the period from the time you acquired the Property in MMYYYY to the end of an adjustment period in each relevant year.

Question 5

The method statement in section 129-40 is slightly modified in the situation where you have previously had a Division 129 adjustment in respect of the acquisition in question (in this case the Property).

In such situations, the percentage used in Step 2 of the method statement uses the actual application as determined in the previous adjustment period.

As such, the method statement used for the 2^nd Adjustment Period (tax period ending 30 June YYYY) is as follows:

Step 1 - Determine the extent you have applied the Property for a creditable purpose from the time you acquired the Property until the end of the 2nd> Adjustment Period (30 June YYYY). This is the 'actual application' of the Property.

Step 2 - Being the 2nd Adjustment Period, note the actual application as determined in Step 1 of the 1st Adjustment Period. This is the 'former application' of the Property [note: the former application in the 3rd Adjustment period will be the actual application from Step 1 in the 2nd Adjustment Period, and so on for subsequent adjustment periods].

Step 3 - If the actual application of the Property is less than the former application, you will have an increasing adjustment.

Step 4 - If the actual application of the Property is greater than the former application, you will have a decreasing adjustment.

Step 5 - If the actual application of the Property is the same as the former application, you will have neither an increasing adjustment nor a decreasing adjustment.

Similarly, as discussed in Question 4, the requirement to make an adjustment in the remaining nine Adjustment Periods will depend on whether, in each successive adjustment period, your actual application of the Property for a creditable purpose differs from the former actual application for the previous adjustment period. If so, an adjustment pursuant to Division 129 will be required.