GST and changes to the intended use of residential property

As the financial year draws to a close, now is the time for property developers to review their projects and determine whether there has been a "change of intended or actual use of the property", which may require a GST adjustment.

It is essential that property developers periodically review their circumstances to determine whether there has been a change of use in property, as the Australian Taxation Office ("ATO") continues to actively pursue developers who are required to repay input tax credits ("ITC") under Division 129 of the GST Act. 

Failing to make adjustments for change of use can result in unplanned cash flow issues, interest charges or penalties from the ATO.

What is Division 129 of the GST Act?

Where a developer intends to sell new residential premises, it is eligible to claim GST incurred on the costs throughout the development phase. However, a supply of residential leasing results in GST leakage as the GST incurred on the development cannot be claimed.

Division 129 of the GST Act applies to circumstances where a developer, who constructs or develops property with the intention of selling as new residential premises (e.g. units), subsequently changes their intention or actual use to retain a proportion or all of the new units as rental investments (i.e. residential leasing).

A GST adjustment will arise to effect repayment of GST previously claimed insofar as it reflects the actual use of the property.

Similarly, Division 129 applies to scenarios where no GST has been claimed on the development phase due to an intention to "Build to Rent", but the units have subsequently been sold. In this scenario, there is an opportunity to recover GST incurred on the development that has previously been blocked.

When does a developer have to start adjusting?

A developer is required to make the first adjustment on 30 June, in the tax period that commences at least 12 months after the end of the tax period in which the purchase is attributed.

What should you do?

Developers should review their projects to determine where a change of intended use has occurred to ensure any GST adjustments are accounted for. Developers should also have appropriate documentation to support the intention to make a taxable supply upon completing the development.

If you believe your intended or actual use of the property has changed, you should seek assistance in determining the application of Division 129 of the GST Act.

How can we help?

Division 129 is a complex area of GST law and Grant Thornton can assist in managing and potentially minimising the adjustments for developers who have a change in use of property, both in respect of payments and refunds.