By Kim Sceriha, CA, Principal, WMS Chartered Accountants
In today’s market it is not uncommon for plans to change. What we initially set out to build and sell may now be a longer term hold and perhaps a partial rental / investment until property sales in the market pick up.
Whilst renting out a residential tower, unit/s, apartment/s or house may seem like a wise move to generate some cashflow in the short term, the decision to change your intentions may come with some unintended tax consequences.
GSTR2009/4 ‘Goods and Services Tax: New Residential Premises and Adjustments for Change in Extent of Creditable Purpose’ was released in final version in mid 2009 and takes effect from when GST was first introduced with the New Tax System on 1 July 2000. GSTR2009/4 explains that where a GST registered entity ie a property developer commences development work to construct and sell new residential premises, and then subsequently changes that intention, a GST adjustment can be created which will result in some GST being repaid to the Australian Taxation Office (ATO).
A GST registered entity who has the intention of constructing/developing and selling new residential property, can generally claim input tax credits on the costs they incur in constructing the residential premises. The basis for allowing the GST credits to be claimed along the way is that the end product, being the sale of the new residential property, will be a taxable supply. That is, upon the property being sold after completion, GST would be liable to the ATO of 1/11th of the sale price (or less if sold under the Margin Scheme).
Where there is a change to the ‘application’ of the property, and it is not sold or marketed for sale at the end of the development, a GST adjustment liability can be created. The amount of the liability depends on how the property is ‘applied’ after completion. Ie whether it is actively marketed for sale or simply rented with no sale efforts or a combination of both. There are other factors which also determine the amount of GST to be repaid to the ATO, ie the timing of when the GST was first claimed on the construction costs and the value of each supply on which GST was claimed.
Its important to note that the decision to hold the property for investment purposes may also change the tax character of the property from being held as trading stock to being as a capital asset. This is an implication that affects the income tax treat of the property, which is separate matter for consideration in itself.
When it comes to GST be cautious when changing your intention or application of a product. Where you may be considering renting out a newly constructed/developed residential property, make sure you seek tax advice to ensure you are aware of the consequences. Depending on your circumstances, the GST adjustment liability may be small in terms of the rental revenue expected to be returned. Your tax advisor can assist with quantifying your GST adjustment liability so you are aware of your position before you make the decision to rent the premises out.
At WMS Chartered Accountants, we have a team of specialists who primarily work with property developers and other consultants in the industry. We are up to date with current GST rulings and legislation that surrounds the property industry. Should you wish to contact a property specialist, our Ms Kim Sceriha is one of the team who would be happy to assist with your matter.