GST ADJUSTMENT FOR CHANGING INTENT – PROPERTY DEVELOPMENT

Posted on 9th March 2017 by Tom Francis

For our clients in the building and construction industry times are tough; the State Government is forecasting a 26% decline in project commencements compared to last year and prices in some suburbs have decreased sharply. For many this means projects can’t be sold for the price they need to make a profit or break even on their project and as a result many are looking to rent out houses over the short to medium term.

However, it is important to factor in the GST consequences before doing so. The legislation covering GST and property developments is complex but broadly speaking a change of intent from ‘build and sell’ to ‘build and rent’ means the developer is no longer entitled to claim back all of the GST on the costs. The entitlement to GST credits reduces each year for five years or until the property is sold, whichever is shorter, and each year the developer must remit the difference to the ATO. The majority of the GST remitted is paid back in the first year meaning short term rentals also incur a significant adjustment.

On a large scale development this can involve paying tens of thousands of dollars to the ATO each year, sometimes leaving clients worse off than if they had sold the property at a discounted price.

Let us consider the following example:

• Tim and Monica have just finished a three-unit development in their trust, TM Property Trust. The trust is registered for GST
• The land cost them $450,000 including duties and legal fees and they have elected to apply the margin scheme
• The build cost was $550,000 and they claimed $50,000 in GST credits over the 12 months it took to finish construction, bringing their total outlay to $950,000
• A recent valuation by an agent suggested an average sale price of $330,000 per unit
• After paying GST of $16,364 on each unit and agent selling costs, Tim and Monica would receive approximately $305,000 per unit and make a loss of $35,000
• Instead they choose to rent the properties and receive $360 per week for each unit as this will cover their loan repayments.

Over the years the ATO have released a substantial number of rulings on how to reasonably calculate your adjusted GST entitlement, with different methods applicable to different circumstances. In Tim & Monica’s case the most appropriate method is based on how long the intention was to ‘build and sell’ vs how long the intention is to “build and rent”, resulting in over $32,744 being remitted to the ATO after the first year and $44,583 being remitted over the full five years. After 1 year of renting Tim & Monica would need to achieve a sale price of $341,000 per unit to be better off than they would have been selling immediately and $352,581 to break even on the development.

Once a property has been leased it is too late to avoid making an adjustment to GST, even where it is only rented for a short time, and as you can see from the above example the consequences of doing so are complex and costly. We therefore strongly encourage any of our clients who are considering a decision like the above to contact us beforehand to discuss your situation.