The decision to buy a property, improve it by adding a house or units and sell them is a risky decision at best. The time taken to source, buy, build and put them on the market can often exceed 2 years. 24 months is a long time in any market to be subject to the vagaries of political developments, economic downturns, budget blow outs, interest rate changes or changes in consumer confidence.
Because of the nature of the project, there is often a lot of capital involved. Whether the project is backed by bank debt or personal assets, some sort of return at the end would be a good thing. However, because of the factors mentioned above, when the project is completed, selling may not be the best option to get that elusive good return on investment.
So the decision changes – Take them off the market. Throw some tenants in the property(s). Go into a holding pattern until value starts to accumulate, the market starts to recover, rates drop, or whatever is required to get the sale price you originally expected, or counted on. The properties become, give or take a couple of thousand dollars, self sustaining.
Probably not ideal, but certainly not disastrous. But what about the GST?
The original intent, and up to the point of completion, was to buy, build and sell. In GST vernacular, all creditable acquisitions and taxable supplies, aside from margin scheme considerations, pretty simple and straightforward.
Change of purpose – But with the change in purpose from sell to rent it’s not so simple anymore. A while ago, the ATO changed the rules for adjusting past BAS’ where the intent, or creditable use had changed. In this case, the use has changed from taxable supply to input taxed supply, and GST is not technically claimable on the purchases made to construct the properties. So you have to give the GST back. It would be nice if you could just add up all the GST and send it back, but unfortunately you can’t. There is a process and a set of rules, and a very long time frame under which you have to do this.
Under Division 129 of the GST ACT, when your intent, or use changes, you have an adjustment event. An adjustment arises when there is a difference between the planned and actual use (ie – from sell, to rent). So the time that you decide to rent rather than sell is the starting point for calculation how much and when you give the GST back
Based on the time of the original transactions, you have different timelines to amend your claim in past, current or future BAS’s. These timelines refer to adjustment periods. An adjustment period, per GSTR 2000/24 is defined as a tax period applying to you that:
- starts at least 12 months after the tax period to which an input tax for the acquisition is attributable; and
- ends on 30 June.
However, depending on the size of the acquisitions (GST exclusive value) there are limits to the number of adjustment periods you have to amend BAS’s:
- For acquisitions less than $1,000 – no adjustment is necessary
- For acquisitions between $1,001 and $5,000, two adjustment periods
- For acquisitions between $5,001 and $500,000, five adjustment periods
- For acquisitions over $500,001 ten adjustment periods.
Note that where you contract a builder to build the properties, the transactions will normally be few and large (progress payments). But where you are an owner builder, there are a lot more transactions of smaller value. And hence more complicated in working out the GST to give back
However, it doesn’t stop there. To calculate the amount of GST to give back, you don’t just add it up. You apply a formula based on time that the purchases were creditable (the time up until the change in use), and time that they were input taxed (the time from the decision was made to rent the property(s)). And then apply that percentage to the input tax credit under the timelines and value rules above.
Remember also that under subsection 40-75(2) of the GST Act, there is a five year time frame to be aware of in relation to calculating GST on the sale of the property. This five year time frame starts when you make the decision to rent the property, not from commencement of construction if your original intent was to build and sell. However, if you rent the property(s), but still hold them for sale, the five year time frame doesn’t kick in. It’s unlikely you’ll hold a property for sale for more than 5 years after commencing renting the property(s), but if you do, the sale will still attract GST.
There are good reasons for the development of these rules and when you dig down, they make sense. But it is complicated and easy to get wrong. And they don’t apply to just property developments. Think of items such as changing business use on motor vehicles, plant and equipment or office furniture (computers).
If you find yourself in this situation, contact LBW to help you work through the minefield of GST adjustments.