GST and changes to intended use of residential property

Division 129 of the GST Act explained

Division 129 of the GST Act applies in circumstances where there is a change in intended or actual use of a property – commonly residential premises. 

Where a property developer intends to sell new residential premises, it will be a taxable supply for GST purposes and the property developer will be eligible to claim the GST on costs incurred throughout the development phase. However, in contrast, where a property developer intends to rent residential premises, it will be an input taxed supply for GST purposes, and the property developer will not be eligible to claim GST on costs incurred throughout the development phase.  

Where there is a change in intended or actual use as a result of later events (e.g. a downturn or upturn in the market), property developers may be required to make adjustments to their GST recovery. Depending on the initial intention, these adjustments may result in GST being claimable from or repayable to the ATO.

Where required, the first adjustment under Division 129 must be made in the June tax period that commences at least 12 months after the end of the tax period in which the purchase is attributed. As we approach lodgement deadline for the June 2023 BAS, we recommend that property developers consider whether they have a requirement to make adjustments under Division 129.

Division 129 example

To assist developers in understanding the GST implications of Division 129, we have included an example below of how it may apply. 

ABC Pty Ltd began building a complex of apartments with the intention of selling them as new residential properties. All GST incurred on the construction costs of the apartment complex was recovered, as ABC Pty Ltd intended to make taxable supplies. Once the project was completed, ABC Pty Ltd sold 75 per cent of the apartments as new residential premises, and the outstanding 25 per cent of apartments were leased out.

As 25 per cent of the apartments were retained and leased out, there was a change of intended use of the property. ABC Pty Ltd are no longer entitled to fully recover the GST incurred on the cost of construction of the entire apartment development project and are required to make a GST adjustment under Division 129. This is to reflect the actual use of the 25 per cent of apartments retained for lease.

Why is Division 129 important for property developers

It is essential that developers determine whether there has been a change in the use of the property and make any adjustments accordingly. Under the 2023 Federal Budget announcement, the ATO has received funding to develop more sophisticated data analysis tools and extend its GST compliance program. The ATO is aware that failure to consider adjustments due to adjustment events under Division 129, is a key risk in the real estate and construction industry. 

Failing to make adjustments for change in use can result in unplanned cash flow issues, as well as interest charges and/or penalties being imposed by the ATO. In the current climate of the property development industry, safeguarding against these risks should be prioritised by property developers.

What should you do?

Property developers should review their projects to determine whether a change of intended or actual use has occurred to ensure any GST adjustments are accounted for. 

Property developers should also ensure that they have appropriate documentation in place which shows their intention in respect of the development, which will support their claim of GST on costs incurred during the development phase.

If you believe your intended or actual use of the property has changed, please reach out to our GST experts at Grant Thornton who can assist you in determining the application of Division 129 of the GST Act.