1. There is the possibility to change the nature of newly constructed residential developments from new residential premises which are taxable supplies to non-new residential premises which are input taxed supplies however there will be adjustments to input tax credits that were claimed on the development:

Five-year rule

1.1. Residential premises are not new residential premises, if after five years, the premises have “only” been used for making supplies that are input taxed because they have been the subject of a lease (40.35(1)(a))^[1]. Essentially if you rent the apartment for five years the commissioner will, by default, assume that your creditable purpose is the renting of apartments not the construction and sale of new apartments and you are not able to claim any input tax credits. If you had previously claimed these input tax credits you may have to make adjustments that effectively reverse these credits, as you are not entitled to GST credits for things purchased to make input taxed supplies.

Commencement and Duration of the Five-year period

1.2. Subsection 40-75(2) provides an exception to the meaning of new residential premises in 40-75(1). Subsection 40-75(2) requires that for the period of at least 5 years the premises have been used only for making input taxed supplies under paragraph 40-35(1)(a). This requirement will be satisfied where the premises have been leased for a continuous period of at least 5 years[2] between when they were built and when they were sold.

1.3. The period must be a continuous period. A continuous period is not broken by short periods between tenancies where the premises are actively marketed for rent following the departure by a previous tenant. However, a continuous period is broken when the premises are used for a private purpose or left vacant with no attempt to lease the premises.[3]

Holding for Sale

1.4. New residential premises will not be applied for a creditable purpose, to any extent, when they are being used exclusively as part of an enterprise of leasing residential premises. However, the new residential premises would not be precluded from being applied for a creditable purpose if the entity commenced holding the new residential premises for the purpose of sale in the future.[4]

1.5. The concept of holding a thing for the purpose of sale as part of an enterprise is similar to holding a thing for the purpose of trade[5]. An objective assessment of the facts and circumstances will demonstrate whether or not new residential premises are being held for the purpose of sale as part of an entity’s enterprise. There must be satisfactory evidence to support a conclusion that the premises are being held for the purpose of sale. A single piece of evidence may not be sufficient where there is other evidence which suggests a contrary purpose. In such cases all of the evidence must be considered and weighed up in reaching a decision.

1.6. Although any one factor may not be sufficient on its own, the following are some examples of objective facts and circumstances that the Commissioner would expect to be present to conclude that premises are being held for the purposes of sale:

1.6.1. Marketing of the premises for sale, such as listing the premises for sale with a real estate agent, publishing advertisements or arranging ‘open inspections’;

1.6.2. Income tax treatment of the development as trading stock rather than as a capital asset;

1.6.3. Finance documents including loan applications provided as part of the loan application process;

1.6.4. Business plans, feasibility studies or minutes of meetings which support the holding of the premises for sale;

1.6.5. Accounting reports and financial statements;

1.6.6. Past activities of the entity; and

1.6.7. In the case of building multiple premises, the sale of some of those apartments at arms length; (although in some cases there may be evidence to show that only some of the premises were intended for sale whilst the rest were intended to lease).

1.7. On the other hand, evidence that the premises have been applied, to some extent for lease include:

1.7.1. Marketing the premises for lease;

1.7.2. Business plans, minutes of meetings, finance documents etc. demonstrating the entity has determined to use the premises for lease; and

1.7.3. Periods of actual leasing of the premises.

1.8. The actual time between constructions and sale is a relevant factor in determining whether the premises are being held for the purposes of sale. A short time would strengthen this position whilst a long time this may suggest that the entity is holding the premise for investment purposes not for the purpose of sale.

Dual creditable purpose

1.9. If the property is held for a dual creditable purpose, sale and lease, an apportionment will occur if the property is sold within the five-year time period.

1.10. For this purpose it is necessary to:

1.10.1. Identify the relevant adjustment periods if there are multiple acquisitions

1.10.2. Identify the changes in the extent of the creditable purpose

1.10.3. Calculate the adjustments while premises are leased

1.10.4. Calculate the final adjustment when the property is sold.

1.11. Multiple adjustments will be classified as separate acquisitions under the Act[6] for Division 129 purposes

1.12. The extent of the creditable purpose is calculated with the following formula:

1.12.1. Market Value(Market Value + Rent Revenue) = x%

1.12.2. E.g. $550,000 ($550,000 + $22,000) = 96.15%

1.13. Section 129-40 of the Act[7] must then be applied to each acquisition. This involves comparing the intended and actual application of the asset. If the figures differ, then an increasing or decreasing adjustment will be required.

1.14. The adjustments must be included in the Business Activity Statement for the periods that they occur in.

1.15. There are some interesting examples in GSTR 2009/4.

Example 17 – premises applied for the purpose of sale which do not satisfy the requirements of the ‘5 year rule’

Matthew constructs new residential premises for the purpose of sale and is entitled to input tax credits on his acquisitions. On completion of the premises Matthew decides to lease the premises because of a downturn in the property market. Matthew continues to hold the premises for the purpose of sale as part of his enterprise and does so until the premises are ultimately sold.[54] He is therefore applying the premises for two purposes under Division 129. He is required to make an increasing adjustment at the end of the first adjustment period because the actual application is less than the intended application. He will also need to consider whether further adjustments are necessary in each of the relevant adjustment periods.

Matthew sells the premises six years after they were completed. He has been leasing the premises for this whole period. However, the requirements of subsection 40-75(2) are not satisfied because the premises have not only been used for making supplies that are input taxed because of paragraph 40-35(1)(a). The premises have also been used for the purpose of sale because Matthew has been holding the premises for sale as part of his enterprise.

The premises are new residential premises and, provided all the requirements of section 9-5 are satisfied, Matthew makes a taxable supply of new residential premises when the premises are sold.

Example 18 – premises held for the purpose of sale for a period of time and then used only to make input taxed supplies by way of lease

Assume the same facts as for Example 17 of this Ruling. However, after continuing to hold the premises for the purpose of sale for six months after starting to lease the premises, Matthew decides to hold the premises as an investment asset to be used only for the purpose of leasing. Matthew continues to make increasing adjustments under Division 129 in each relevant adjustment period on the basis that he is now holding the premises solely for a non-creditable purpose.

Matthew sells the premises six years after they were completed. He has been leasing the premises for this whole period. For the first six months of this period Matthew was applying the premises for a dual purpose. Therefore this period does not count towards a continuous 5 year period of using the premises only for making input taxed supplies by way of lease. However, after this time there is a continuous 5 year period which satisfies the requirements of subsection 40-75(2).

Therefore, while Matthew will have made increasing adjustments under Division 129 for the majority of the input tax credits to which he was entitled on the relevant acquisitions made in constructing the residential premises, the sale of the residential premises will be an input taxed supply of residential premises under section 40-65.

Summary

2. There are three main ways in which the commissioner will deal with properties for the purpose of GST. This treatment is dependent on your objective actions.

2.1. If the properties are constructed for sale and held only for sale i.e. not leased, then

2.1.1. the properties will be treated as new residential premises;

2.1.2. you will be able to claim 100% of your input tax credits;

2.1.3. you will need to collect GST on sale; and

2.1.4. the 5-year period will not commence.

2.2. If the properties are acquired or built for the purpose of leasing the premises, then:

2.2.1. the properties will be treated as not-new residential premises;

2.2.2. you will not be able to claim input tax credits;

2.2.3. you will not need to collect GST on sale; and

2.2.4. there is no need to apply the 5-year rule.

2.3. If the properties are constructed for sale and held for sale, but are leased for a noncontinuous period of 5 years, then:

2.3.1. the properties will be treated as new residential premises;

2.3.2. you will be able to claim an apportionment of your input tax credits;

2.3.3. you will need to collect GST on sale; and

2.3.4. the 5-year period will commence from when you begin to lease the premises but will end once you cease to lease the premises (and may begin again…).

Note: that the period of 5 years will never be satisfied until leased continuously for 5 years, in theory the premises could be considered new residential premises for an indefinite period. However, the commissioner may factor in the time period between construction and sale and determine that the creditable purpose of the premises has been for investment not for sale.

[1] Section 40.75(2) A New Tax System (Goods and Services Tax) Act 1999

[2] GSTR 2003/3 paragraph 90

[3] GSTR 2003/3 paragraph 91

[4] GSTR 2009/4 – paragraph 38

[5] Refer to comments of Bowen CJ in Re Ku-ring-gai Co-operative Building Society (No. 12) Ltd (1978) 36 FLR 134 at 139.

[6] Section 156-20, A New Tax System (Goods and Services Act) 1999

[7] A New Tax System (Goods and Services Act) 1999