- Developers Face Gst Questions -

MEDIA RELEASE

Developers face GST questions
Property downturn delays sales

Sydney, 7 October 2008: Property developers who lease completed properties rather than sell them in a soft property market will be required to repay goods and services tax (GST) previously claimed as a tax credit, according to GMK Centric Taxation Director, Eugene Berkovic.

A recent Interpretative Decision from the Australian Taxation Office makes clear that where a property developer with the intention of selling subsequently leases the new residential premises, the developer may need to repay GST credits.

"This deals with the situation where a property developer builds a property to be sold soon after completion, but due to a downturn in the property market or other circumstances, decides to rent out the property, whilst maintaining it for sale to the public. Given the current state of property markets, this is becoming a more common issue," said Mr Berkovic.

"Generally speaking, during the construction of the premises, developers would claim back input credits on construction costs. If the developer then retains the property for rental purposes, they would be required to repay the GST previously claimed as an input credit," he said.

GST is charged on the sale of new homes - meaning new homebuyers need to pay the tax. As such, input tax credits may be claimed by developers who have paid GST on construction expenses.

In contrast, GST is not charged on residential rents and leases of new residential premises are input taxed. Accordingly, if the developer was always going to hold the developed properties for rental purposes, input tax credits could not be claimed by developers on construction costs.

"However, so long as the property is still being actively marketed for sale, there is no requirement to repay all of the GST, although some apportionment is required," he said.

"The issue, therefore, is what constitutes 'actively marketed for sale'. The Commissioner of Taxation says this will include activities such as listing the property for sale, advertising and arranging open for inspection times. Property developers should keep this in mind, when faced in this situation, as it may affect their business opportunities," said Mr Berkovic.

"The Interpretative Decision states there must be a reasonable apportionment of the extent to which the input credits relate to the creditable purpose of selling the premises. One possible method divides the expected consideration upon sale over the total consideration received for sale and rent," he said.

For further information, please see attached media release.