Navigating the complexities of the Australian property market is challenging enough, and recent shifts are adding new layers of complexity, especially when it comes to tax obligations. If you have been keeping up with our blog, you might recall our detailed discussions on GST and how to correctly complete Business Activity Statements (BAS). These topics are particularly relevant now, given the changing landscape of property development and investment.
In a recent article, Miranda Brownlee from the Accounting Times spoke to Darren Wynen from Insyt about the hidden GST pitfalls that property developers need to be aware of, especially when changing their plans for property developments.
Here were our key takeaways:
Why Developers Are Changing Course
Recent changes in the property market are prompting some developers to take their properties off the market after originally intending to sell. Delays in sourcing builders, contractors, and building materials often mean long delays and for some developers, where there is a rentable dwelling on the land in question, the temptation to collect short term rent in an environment where rental rates are soaring may be too strong to resist.
What Creates the GST & BAS Pitfalls
Where a developer has registered for GST, and claimed all the credits in relation to the development with the intention to sell but then has then taken that property off the market there is often not a full understanding about how the adjustment periods operate to adjust the GST previously claimed. The common misconception is that you can just go back and amend the relevant BAS statement but there are year-end adjustments that need to be made in the 30 June BAS.
What the ATO Says About GST Adjustments
The ATO sets out its guidance on this issue in Tax Ruling GSTR 2009/4. The tax ruling explains the Commissioner’s view of when an adjustment for a change in the extent of creditable purposes arises under Division 129 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) in relation to acquisitions made in constructing new residential premises.
The Five-Year Rule: Not as Simple as It Sounds
Another common area of misunderstanding, and a crucial part of the GST pitfalls, is the five-year rule which states that if a newly constructed residential property has been rented for more than five years it will be input taxed (no GST on sale). The property will only be input taxed if there is a clear intention to rent and that rental period is continuous for five years. The owner, however, can’t have his cake and eat it as well. If the new residential property is on the market for sale the five-year clock does not begin until there is a clear intention for long term rental, ie- the property is taken off the market