Key issues:
- Developers that choose to retain and lease newly constructed premises should be aware of the potential GST implications and the possibility of repaying the ATO previously claimed input tax credits.
- Where there is a change of use of residential premises, Division 129 GST adjustments may require you to repay some or all of the input tax credits previously claimed.
- Apart from repaying the input tax credits, developers may also be liable to penalties and interest if they do not manage their obligations effectively.
As the level of sales of new residence appears to be uncertain, developers may choose to retain and lease newly constructed premises until the market improves. If so, developers should be aware of the potential GST implications and the possibility of repaying previously claimed input tax credits to the ATO.
The sale of new residential premises is a taxable supply and a developer is entitled to claim input tax credits for creditable acquisitions for the construction costs. However, if a developer chooses to rent out the premises until the market improves, the use of the premises (compared to the prior intended use) changes and Division 129 GST adjustments may be required to repay some or all of the input tax credits previously claimed. Each acquisition is considered individually, which can make Division 129 adjustments complex over the course of construction.
Adjustments for changes in intended use are made annually, with the first adjustment period being the tax period that ends on 30 June and commences at least 12 month after the end of the tax period in which the acquisition was made. For example, the adjustment period for an acquisition made in August 2019 will not be until 30 June 2021. So, there can be a long tail-end to any adjustments.
The number of adjustment periods required is based on the GST-exclusive value of the relevant acquisition. In relation to construction, the most common are:
| GST-exclusive value of the acquisition | Adjustment periods |
|---|---|
| $5,001 to $499,999 | 5 |
| $500,000 or more | 10 |
Acquisitions which relate to the development (such as the purchase of the land and the progressive contract price paid to a builder) may be required to be apportioned to determine the extent the expenditure relates to the intended sale of the property.
Generally, each adjustment will be calculated using the following formula:
Adjustment = full input tax credit x (intended application for creditable purpose expressed as a % - actual application for creditable purpose expressed as a %)
With the ATO using data matching tools, including real property transactions (Land Titles Office, Offices of State Revenue) and rental bond data, it is important that developers are aware of their obligations to make Division 129 adjustments when there is a change in the use of residential premises. As noted above, this can be a complex undertaking. Apart from repaying the input tax credits, developers may also be liable to penalties and interest if they do not manage their obligations effectively.
If you have any questions or require assistance with any Division 129 adjustments, please contact HopgoodGanim Lawyers’ Taxation team.