1 Will you need to make an increasing adjustment under Division 129 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) where you decide to lease instead of sell a newly constructed residential property at xxxx (Property)?
1 Yes. There has been a change in creditable purpose which affects your entitlement to input tax credits previously claimed. This will lead to an increasing adjustment arising under Division 129 of the GST Act. This ruling applies for the following period : 1 July 20XX to 30 June 20XX The scheme commenced on: 1 July 20XX
On xxxx, you entered into a contract to purchase vacant land xxxx (Property). After acquiring the vacant land, you constructed a residential dwelling at the Property. Both owners registered for ABNs and for GST in relation to the development activities undertaken at the Property. Your intention at the time of purchase and throughout construction was to sell the Property upon completion of the development. As your intention was to sell the Property upon completion of the development, you considered that the sale of the Property would be considered a taxable supply of new residential premises for GST purposes. Consequently, you claimed input tax credits (ITCs) on the GST incurred on acquisitions made during the land purchase and building process. Both owners claimed the same amount of ITCs as each other under their own BAS submissions under their own ABNs. After the Property was completed and a market appraisal was conducted, it became clear that selling would not result in a meaningful profit once all costs were considered. Therefore, you made the decision to retain the Property as a long term residential rental investment.
You have since entered into a leasing agreement for the Property to be leased.
A New Tax System (Goods and Services Tax) Act 1999 section 11-5 A New Tax System (Goods and Services Tax) Act 1999 section 11-15 A New Tax System (Goods and Services Tax) Act 1999 section 40-35 A New Tax System (Goods and Services Tax) Act 1999 Division 129
Under section 11-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), you make a creditable acquisition if: • you acquire anything solely or partly for a creditable purpose • the thing supplied to you is a taxable supply • you provide consideration, or are liable to provide consideration, and • you are registered or required to be registered for the GST. Under subsection 11-15(1) of the GST Act, you acquire a thing for a creditable purpose to the extent that you acquire it in carrying on your enterprise. However, under subsection 11-15(2) of the GST Act you do not acquire the thing for a creditable purpose to the extent that the acquisition relates to making supplies that would be input taxed or the acquisition is for private or domestic use. You have advised that at the time you claimed input tax credits on the construction costs of the property and acquisition of the vacant land, the intention was to sell the property upon completion as a taxable supply of new residential premises. This satisfied the requirements of creditable acquisitions under section 11-5 of the GST Act.
However, upon completion of the construction of the Property, you decided to lease the Property instead of selling it due to unfavourable property market conditions. This meant there was a change in the creditable purpose. The supply of rented residential premises is an input taxed supply under section 40-35 of the GST Act. Therefore, the input tax credits you claimed for the construction costs of the unit and the purchase of the vacant land relate to making an input taxed supply of rented residential premises instead of a taxable supply of new residential premises. Changes in the extent of creditable purpose Under Division 129 of the GST Act, you are required to make an adjustment when the extent of creditable purpose is changed by later events which affect your entitlement to input tax credits. There are two types of adjustments: • increasing adjustments , which increase how much GST you must pay for a reporting period • decreasing adjustments , which decrease how much GST you must pay for a reporting period.
In your case, given that the change in creditable purpose will lead you to increase how much GST you must pay, you will need to make an increasing adjustment for the amount of input tax credits previously claimed. Adjustments under Division 129 of the GST Act are made in subsequent tax periods, which are called adjustment events. Adjustment periods Goods and Services TaxRulingGSTR 2000/24 Goods and services tax: Division 129 - making adjustments for changes in extent of creditable purpose (GSTR 2000/24) explains the ATO's view on adjustment periods. Paragraphs 29 to 31 of GSTR 2000/24 state the following: What is an adjustment period 29. An adjustment period for an acquisition or importation is a tax period applying to you that: • starts at least 12 months after the end of the tax period to which an input tax credit for the acquisition or importation is attributable; and • ends on 30 June, or, if none of your tax periods end on 30 June, the tax period which ends closer to the 30 June than any other tax period. Example
30. Farmco Ltd is registered and has quarterly tax periods. It acquires some machinery on 15 March 2001 for its agricultural business. The GST exclusive value of the machinery was $100,000. An input tax credit of $10,000 was attributable to the tax period ending 31 March 2001. 31. Farmco's first adjustment period is the tax period 1 April to 30 June 2002. This is the first tax period that ends on the 30 June and starts at least 12 months after the end of the tax period to which the input tax credit for the acquisition is attributable. Number of adjustment periods for an acquisition Goods and Services TaxRulingGSTR 2009/4 Goods and services tax: new residential premises and adjustments for changes in extent of creditable purpose (GSTR 2009/4) explains the Commissioner's view of when an adjustment for a change in extent of creditable purpose arises under Division 129 of the GST Act in relation to acquisitions made in constructing new residential premises. Paragraphs 13 to 15 of GSTR 2009/4 states: 13. An adjustment under Division 129 arises for an acquisition in an adjustment period where:
• there is a difference between the actual application and the planned (or intended) application of the thing for a creditable purpose, or • there is a difference between the actual application of the thing up to the end of one adjustment period and the actual application of the thing up to the end of the previous adjustment period. 14. Division 129 provides for adjustments in relation to things in tax periods that are adjustment periods. The number of adjustment periods that relate to a thing are determined by the GST-exclusive value of the acquisition. 15. However, an adjustment cannot arise under Division 129 for an acquisition (that does not relate to business finance) unless the acquisition had a GST-exclusive value of more than $1,000. Working out adjustments for changes in creditable purpose Section 129-40 of the GST Act contains a 5-step method statement to determine whether you will have an adjustment for the purposes of Division 129. To work out the adjustment amount, follow the steps below:
Step 1: Work out the extent (if any) to which you have * applied the thing acquired or imported for a * creditable purpose during the period of time: (a) starting when you acquired or imported the thing; and (b) ending at the end of the * adjustment period. This is the actual application of the thing. Step 2: Work out: (a) if you have not previously had an * adjustment under this Division for the acquisition or importation--the extent (if any) to which you acquired or imported the thing for a * creditable purpose; or (b) if you have previously had an * adjustment under this Division for the acquisition or importation--the • actual application of the thing in respect of the last adjustment. This is the intended or former application of the thing. Step 3: If the * actual application of the thing is less than its * intended or former application, you have an increasing adjustment , for the * adjustment period, for the acquisition or importation. Step 4: If the * actual application of the thing is greater than its * intended or former application, you have a decreasing adjustment , for the * adjustment period, for the acquisition or importation.
Step 5: If the * actual application of the thing is the same as its * intended or former application, you have neither an increasing adjustment nor a decreasing adjustment, for the * adjustment period, for the acquisition or importation. (* denotes a term defined in section 195-1 of the GST Act Paragraphs 92 to 102 of GSTR 2009/4 provides two examples which outlines how to calculate the extent to which a premises has been applied for a creditable purpose. It states: Example 11 - premises applied for a creditable purpose, to some extent, for the entire relevant period 92.
John is registered for GST and has quarterly tax periods. He constructed new residential premises for the purpose of sale and was entitled to full input tax credits on his acquisitions. One particular acquisition of construction services was made on 1 October 2006 for $55,000 (GST inclusive). The premises were completed on 1 February 2007. John continued to hold the premises for the purpose of sale but also commenced leasing the premises for residential accommodation on 1 April 2007. John received rental income of $2,500 per month and expected to sell the premises for $500,000. John has continued to retain the dual concurrent application since 1 April 2007. 93. The first adjustment period in relation to the acquisition of construction services is the period ending 30 June 2008. There are 21 months in the relevant period between the time of the acquisition on 1 October 2006 and the end of the first adjustment period on 30 June 2008. 94. For the six months from 1 October 2006 to 31 March 2007 John applied the premises solely for a creditable purpose, that is, an extent of creditable purpose of 100%. 95.
For the 15 months from 1 April 2007 to 30 June 2008 John has applied the premises for both a creditable purpose and a non-creditable purpose. John works out the extent of creditable purpose for the relevant period by using an output based indirect method (using estimated sales consideration) as follows: $500,000 / ($500,000 + $37,500) = 93.02% 96. This percentage is the actual application of the thing for the purposes of step 1 of the method statement in subsection 129-40(1). 97. In circumstances where the premises have not been applied for a creditable purpose, to some extent, for the entire period, the output based indirect method (using estimated sales consideration) would be one possible fair and reasonable basis of apportionment. However, it would need to be modified with an additional time-based apportionment to reflect the fact that the premises have been applied for a creditable purpose for only part of the relevant period. The measure of time used should be appropriate for the circumstances of each case. For example, using either days or months may be appropriate to provide a fair and reasonable basis of apportionment depending on the circumstances.
Example 12 - premises applied for 100% creditable purpose for part of the relevant period, and then subsequently applied for 0% creditable purpose for the remainder of the period 98. Assume the facts are the same as for Example 11 of this Ruling. However, rather than continuing to hold the premises for sale as part of the enterprise John decided on 1 April 2007 to hold the premises solely for the purpose of leasing. 99. As in paragraph 94 of this Ruling, for the six months from 1 October 2006 to 31 March 2007 John applied the premises solely for a creditable purpose, that is, an extent of creditable purpose of 100%. 100. For the 15 months from 1 April 2007 to 30 June 2008 John has applied the premises solely in relation to making input taxed supplies, that is, an extent of creditable purpose of 0%. 101. John applies a time-based apportionment to the application for a creditable purpose to ascertain the extent of creditable purpose for the relevant period (this is because for the rest of the period the extent of creditable purpose is 0%): (6 mths / 21 mths x 100%) = 28.57% 102.
This percentage is the actual application of the thing for the purposes of step 1 of the method statement in subsection 129-40(1). Conclusion Division 129 operates in respect of the thing acquired. In the construction of the Property there would be many acquisitions including the land. You will need to make an increasing adjustment under Division 129 of the GST Act due to changes in the extent of creditable purpose, for each of the acquisitions made in relation to the purchase of vacant land and construction of the Property. The 5-step method statement outlined in section 129-40 of the GST Act will assist you in determining the increasing adjustment amount.