Edited version of private advice

Authorisation Number: 1052380155473

Date of advice: 11 April 2025

Ruling

Subject: GST - Adjustments under Division 135

Question 1

Do you have an increasing adjustment pursuant to section 135-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) and what is the proportion of non-creditable use in respect of your acquisition of the Property as a GST-free going concern?

Answer

Yes, you will have an increasing adjustment pursuant to section 135-5 to the extent you intend to use the going concern to make supplies that are not taxable or GST- free. At the time of acquisition, you intended that 100%, or close to 100% of the supplies made relating to the acquisition would be supplies that are neither taxable nor GST-free. The proportion of non-creditable use for section 135-5 purposes is 100% or close to 100% based on the information provided by you.

Question 2

Do you have increasing adjustments pursuant to section 135-10 of the GST Act in respect of your acquisition of the Property as a GST-free going concern?

Answer

Yes.

Question 3

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

Answer

Yes.

Question 4

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 your quarterly tax period ending 30 June 20YY.

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

Question 5

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

Answer

Yes.

Question 6

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

Answer

Yes.

This ruling applies for the following periods:

DD MM YYYY to DD MM YYYY

The scheme commenced on:

DD MM YYYY

Relevant facts and circumstances

The Trust was established as a special purpose trust in Australia.

Your Trust is registered for GST effective from DD MM YYYY accounts for GST on a cash basis and reports on a quarterly basis.

The principal activities of the Trust are investing in real property, specifically a Build to Rent (BTR) projects. This includes the acquisition, development, and leasing of real property.

The Trust (as Purchaser) entered into a contract of sale (Contract) to purchase the Property from the Vendor.

On DD MM YYYY, the Vendor entered into a lease with Third Party One (Initial Tenant) in respect of the Property (Initial Development Lease).

The Initial Development Lease commenced on DD MM YYYY and will expire on DD MM YYYY. The purpose of the Initial Development Lease was to enable access to the Property before and after Completion to carry out preliminary site investigations.

On DD MM YYYY, a development management agreement (DMA) was entered into between the Trust (as Principal) and Third Party Two (Development Manager).

The Development Manager is required to undertake activities relating to the preparation for, and management of, the construction of a BTR development on the Property (BTR Development).

On DD MM YYYY, the Trust (as Landlord) entered into a lease with the Development Manager (as Tenant) in respect of the Property (Development Lease).

The Development Lease commenced on DD MM YYYYand will expire on DD MM YYYY.

The reason for the expiry date of the Development Lease is that it is anticipated that, on or before the expiry date, possession of the Property will be provided to a builder appointed by the Trust and so the Development Manager will no longer be able to hold exclusive possession of the Property.

Once complete, the BTR Development is expected to contain a multi-storey residential rental community providing long term rental housing options with a range of unit configuration.

The BTR Development may include resident amenities such as a gym, landscaped gardens, communal outdoor BBQ facilities, pool with sundeck, resident lounge with kitchen area and business centre, management office, dog wash station and an electronic parcel locker system.

The expected date for practical completion of the BTR Development is DD MM YYYY.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 section 9-5.

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.

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

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

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

A New Tax System (Goods and Services Tax) Act 1999 Division 135.

Reasons for decision

Question 1

Do you have an increasing adjustment pursuant to section 135-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) and what is the proportion of non-creditable use in respect of your acquisition of the Property as a GST-free going concern?

Detailed reasoning

Section 9-5 provides that you make a taxable supply if:

(a)          you make the supply for consideration; and

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

(c)          the supply is connected with the indirect tax zone; and

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

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

Section 11-5 provides that you a 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(1) provides that you acquire a thing for a creditable purpose to the extent that you acquire it in carrying on your enterprise.

However, subsection 11-15(2) provides that 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

It is common ground that you acquired the Property with a dual intended purpose, namely:

(i)           to continue a commercial lease over the Property, the rights to which the Purchaser had acquired with the purchase of the Property, satisfying the positive limb in subsection 11-15(1), and

(ii)           to construct and operate a BTR development (input-taxed supply), satisfying the negative limb in subsection 11-15(2). At the time of acquisition, the following were in place:

•                    The Initial Development Lease to the Initial Tenant, for the purpose of 'preliminary site investigations', and

•                    DMA signed at settlement.

Section 11-20 provides that you are entitled to the input tax credit for any creditable acquisition that you make.

Section 40-35(1) provides that a supply of premises that is by way of lease, hire or license (including a renewal o or extension of a lease, hire or licence) is input taxed if:

(a)          the supply is of *residential premises (other than a supply of *commercial residential premises or a supply of accommodation in commercial residential premises provided to an individual by the entity that owns or controls the commercial residential premises); or

(b)          the supply is of *commercial accommodation and Division 87 (which is about long-term accommodation in commercial premises) would apply to the supply but for a choice made by the supplier under section 87-25.

However, subsection 40-35(2) provides that:

(a)          the supply is input taxed only to the extent that the premises are to be used predominantly for residential accommodation (regardless of the term of occupation); and

(b)          the supply is not input taxed under this section if the lease, hire or licence, or the renewal or extension of a lease, hire or licence, is a *long-term lease

The Initial Development Lease is a taxable supply as it is done as part of an enterprise; none of the exclusions at section 9-20(2) apply. However, the BTR development involves the construction and leasing of residential premises, which is input-taxed under section 40-35(1)(a).

Section 135-5(1) provides that you will have an increasing adjustment if:

(a)          you are the recipient of a supply of a going concern, or a supply that is GST-free under section 38-480; and

(b)          you intend that some or all of the supplies made through the enterprise to which the supply relates will be supplies that are neither taxable supplies nor GST-free supplies.

It is common ground that you were the recipient of a supply of a going concern when you acquired the Property subject to the Initial Development Lease. Therefore, paragraph 135-5(1)(a) was satisfied.

Paragraph 135-5(b) asks an entity to consider the supplies it intends to make 'through the enterprise' it has acquired as a going concern. The entity will have an increasing adjustment where the entity has the intention to make supplies that will be neither taxable supplies nor GST-free supplies.

Goods and Services Tax Determination GSTD 2012/1 Goods and services tax: what are the goods and services tax consequences following the sale of residential premises that are subject to a lease? (GSTD 2012/1) sets out the GST consequences following the sale of residential premises that are subject to a lease. Although that scenario differs from the facts in our current matter, the Determination provides insights into the operation of Division 135 within the context of the GST Act and in particular, with respect to Division 11. GSTD 2012/1 states:

26. Under section 11-20, a taxpayer is entitled to input tax credits for any 'creditable acquisition' they make. Section 11-5 contains the requirements for an acquisition to be a creditable acquisition.

27. Paragraph 11-5(a) requires that, for an acquisition to be a creditable acquisition, the acquisition must be solely or partly for a 'creditable purpose'. Paragraph 11-5(b) requires that the supply of the thing, for which an input taxed credit is claimed, be a taxable supply ...

28. Paragraph 11-15(2)(a) provides that an acquisition is not for a creditable purpose to the extent that the acquisition relates to making supplies that would be input taxed. A supply of residential premises by way of lease is an input taxed supply under section 40-35.

29. As decided in MBI [1], the purchaser of leased residential premises makes an input taxed supply of the premises by way of lease. Acquisition of the leased residential premises and acquisitions relating to the continuing lease of the premises - like management services, repairs and maintenance - have a sufficient relationship with the making of a supply that is input taxed for the purposes of paragraph 11-15(2)(a)[2].

30. Consequently, the purchaser of the reversion in residential premises is not entitled to input tax credits for acquisition of the reversion or acquisitions relating to the continuing supply of the residential premises by way of lease.

GSTD 2012/1 then provides information as to how Division 135 applies to this type of scenario:

33. The supply of a going concern is GST-free where the requirements of subsection 38-325(1) are satisfied ...

34. Under subsection 135-5(1) the recipient of a supply of a going concern ... has an increasing adjustment if the condition in paragraph 135-5(1)(b) is satisfied.

35. For this to occur, paragraph 135-5(1)(b) requires that the recipient intends that some or all of the supplies, made through the enterprise to which the supply of the going concern ... relates, will be supplies that are neither taxable supplies nor GST-free supplies.

That is, the test of intended use of the supply for paragraph 135-5(1)(b) purposes is analogous to the test of creditable purpose at paragraph 11-15(2)(a). GSTD 2012/1 continues:

38. Since the supply of residential premises by way of lease is input taxed, it is neither a taxable supply nor a GST-free supply. Consequently, if the sale of residential premises subject to a lease is GST-free under section 38-325 or section 38-480, the purchaser has an increasing adjustment under Division 135 where the lease is to continue. The amount of the adjustment is calculated in accordance with subsection 135-5(2).

This 'initial adjustment' under section 135-5 is calculated and applied in much the same way as the extent of creditable purpose at subsection 11-15(2).

The purpose of section 135-5 was explained in the Explanatory Memorandum as being:

... to ensure that you account for GST in proportion to the... input taxed use of a going concern that you acquire" by being subjected to an adjustment which increases your net amount by an amount equal to the GST you would bear on the acquisition if it had been a taxable supply to you ...

... with the result that

you only get a going concern GST-free to the extent that you intend to make taxable supplies with it.

You acquired the Property, GST-free, as a supply of a going concern. On the facts, from, and prior to the day of acquisition, you held an intention to apply the Property for a BTR Development purpose. This is the relevant time period from which the BTR purpose relates to making input-taxed supplies. The facts outlined also establish a second intended purpose for the property, that is for the supply of a commercial lease (which was in place at the time of supply) for a number of months after the supply is made.

On the facts, it is established that you intended that some or all of the supplies made were to be supplies that are neither taxable supplies nor GST-free supplies. Therefore, you would be required to make an increasing adjustment under paragraph 135-5(1)(b).

The increasing adjustment arising under section 135-5 is attributable to the tax period in which you acquired the GST-free supply of the going concern. The increasing adjustment represents the extent of the intended non-creditable use (i.e. residential leasing of the BTR Development), calculated in accordance with subsection 135-5(2).

A possible approach for determining the extent of non-creditable use for Division 135 purposes is:

•                     to recognise the intended concurrent use of the property for the months after acquisition for both the Initial Development Lease and the BTR development during that time; and

•                     at the end of the Initial Development Lease period, to recognise that the planned or intended non-creditable use going forward is for BTR purposes only.

This provides a basis for understanding the extent to which the acquisition is intended to be used to make input-taxed supplies for section 135-5 purposes. That is, the acquisition is intended to be used substantially for a non-creditable purpose, and only minimally for a creditable purpose. For the purpose of calculating the adjustment under subsection 135-5(2), this purpose must be expressed as a percentage worked out on the basis of the prices of those intended supplies.

It would be expected on a fair and reasonable basis that the months of the Initial Development Lease is appropriately apportioned against the estimated total revenue from both the BTR development residential leasing and the Initial Development Lease. Given the relatively nominal Initial Development Lease income, the resulting calculation will be an increasing adjustment of 100%, or close to 100%, for the input-taxed use.

Question 2

Do you have increasing adjustments pursuant to section 135-10 of the GST Act in respect of your acquisition of the Property as a GST-free going concern?

Detailed reasoning

Subsection 135-10 provides that Division 129 will apply where an entity is the recipient of a going concern (or GST-free farmland pursuant to section 38-480).

Subsection 135-10 states:

(1)          If you are the *recipient of a *supply of a going concern, or a supply that is *GST-free under section 38-480, Division 129 (which is about changes in the extent of creditable purpose) applies to that acquisition, in relation to:

(a)         the proportion of all the supplies made through the *enterprise that you intend will be supplies that are neither *taxable supplies nor *GST-free supplies; and

(b)         the proportion of all the supplies made through the *enterprise that are supplies that are neither taxable supplies nor GST-free supplies;

in the same way as that Division applies:

(c)         in relation to the extent to which you made an acquisition for a *creditable purpose; and

(d)         in relation to the extent to which a thing acquired is *applied for a creditable purpose.

(2)          For the purposes of applying Division 129, the proportions referred to in paragraphs (1)(a) and (b) are to be expressed as percentage worked out on the basis of the *prices of the supplies in question.

(3)          This section applies in relation to any *supply of a going concern, or a supply that is *GST- free under section 38-480, whether or not it is a supply in respect of which you have had an increasing adjustment under section 135-5.

As discussed above, Division 135-5 is applicable to your situation. In subsequent periods, Division 135-10 will measure the actual application of the acquisition over time and adjustments may need to be made. For this to occur, there must be sufficient evidence to support the actual application of the acquisition to creditable or non-creditable purposes, or both. In these circumstances, when the only application of the Property is for BTR (input-taxed) purposes, increasing or decreasing adjustments may be made. This will be determined by comparing the 'intended' or 'former application of the thing' (at Step 2, section 129-40(1)) with its '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. Again, for the purpose of calculating a later adjustment under subsection 135-10(2), the calculation must be expressed as a percentage worked out on the basis of the prices of those supplies.

In your situation, further adjustments are required pursuant to section 135-10 due to there being a creditable purpose (even if relatively insignificant). Acquisition of a going concern is only GST-free to the extent that the intended purpose is to make taxable supplies with it. Section 135-10 provides that, where the actual use of the going concern is different to intended use at the time of acquisition, further adjustments will be required for the change in creditable purpose under Division 129.

If you acquire a going concern and do not use it 100% for a creditable purpose, you will have an increasing adjustment to the extent it is not used for a creditable purpose. If events occur which further reduce the extent of creditable use, then you have an increasing adjustment under s 135-10. Alternatively, if events occur which increase the extent of creditable use, then you have a decreasing adjustment under Division 129.

Question 3

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

Detailed reasoning

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 DD MM YYYY period of the commercial leasing, there is both creditable and non-creditable application of the acquisition. The non-creditable application is the BTR. Following the expiry of the commercial lease on DD MM YYYY, 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 4

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

Detailed reasoning

Section 129-20 contains provisions in regard to 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 going concern. In this case, the price of the going concern was $XXXX Pursuant to paragraph 129-20(3)(c), the number of adjustments periods that will apply in respect of your acquisition of the going concern 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 as a GST-free going concern on DD MM YYYY. In applying subsection 129-20(1), the first adjustment period that will apply will be the tax period ending on DD MM YYYY. Pursuant to subsection 129-20(3), the number of adjustment periods that may apply are ten (10).

Question 5

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

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 DD MM YYYY until the end of the 1st Adjustment Period DD MM 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 <date> quarterly 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 <date> to the end of an adjustment period in each relevant year.

Question 6

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

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 2nd Adjustment Period (tax period ending DD MM 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(DD MM YYYY) until the end of the 2nd Adjustment Period(DD MM 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 5, 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.

[1] Commissioner of Taxation v MBI Properties Pty Ltd [2014] HCA 49; 2014.

[2] HP Mercantile Pty Ltd v. Commissioner of Taxation [2005] FCAFC 126; (2005)]. See also Rio Tinto Services Ltd v. Commissioner of Taxation [2015] FCA 94.