Key GST issues currently impacting developers

I’ve noticed a consistent uptick in requests for GST advice this year regarding real property issues. Some are arising through increased ATO audit activity, catching developers and their advisors by surprise, and some are arising by finding out that your competition is getting GST refunds when you’re not. Some examples include:

• Refunds of GST that are not being claimed when rental guarantees are paid out
• Thinking that simply cancelling your GST registration will make GST liabilities go away
• How GST liabilities can go away by not selling new residential premises within 5 years of achieving occupancy, but simply marketing it just a week too early can make your plan come completely undone

Note that the GST principles involved are not necessarily restricted to the property sector- see below.

Property Developers: GST Refunds For Sales Incentive Programs

As a developer, you’d already be aware of the significant costs associated with offering incentives like rental guarantees to encourage sales of new residential premises, particularly apartments.

You might not realise that you could be missing out on substantial GST refunds. Getting your documentation in order from the start could significantly reduce the net cost of these incentives by the 1/11th ‘hidden GST component’.

For example, suppose you’ve paid out $550,000 in rental guarantees on past sales of new residential premises. Did you know there’s a potential $50,000 GST refund waiting for you, and it’s not hard to comply. You can claim retrospective GST refunds for guarantees paid out up to 4 years after paying the guarantees, even if the sales of the new residential premises were made well over 4 years prior.

Don’t limit yourself to the above property dealings:

• The same GST refund principles can apply to other normal business dealings, like giving retrospective volume rebates, settlement discounts or negotiated post-sale price offsets to purchasers, even if well after the original sales were made.
• Claiming GST refunds are also possible in respect of lost or forfeited ‘deposits’ where property or other major deals did not proceed. Don’t fall into the trap of thinking that such can’t arise because you might have incorrectly assumed that the ‘deposits’, ‘instalments’, ‘first right of refusal fee’ or ‘holding payments’ you paid do not include GST.

The Myth of Escaping GST: What Property Owners Need to Know

The belief that simply cancelling your GST registration can help you escape GST on property sales is widely held by many property owners and advisors. This notion is far from reality.

On April 5, 2022, the Administrative Appeals Tribunal (AAT) delivered a landmark ruling on a case involving the sale of subdivided property lots by a Superfund, after ceasing its farming activities. The vendor, having cancelled its GST registration before completing the sales, assumed it was no longer liable for GST. However, the AAT ruled that GST was still payable despite the cancellation of registration because it was still ‘required' to be registered for GST. Even though this case is well over 2 years old, many are still not aware of it.

The case also provided a very definitive outline of the GST meaning of ‘capital’, which is very different to what it means for income tax. Indeed, even though you might still achieve the status of the sale being capital for income tax and CGT purposes, it does not mean that it is capital for GST purposes.

The ATO can go back four years to reinstate GST registrations and issue assessments to collect past GST, along with penalties and interest. The key takeaway here is that GST outcome in property sales is highly fact-dependent and varies on a case-by-case basis

Don’t limit yourself to the above property dealings:

• As the definition of ‘turnover’ for GST purposes looks back 12 months, and projects forward for 12 months, even though you’ve ‘closed your business’ by ceasing to trade, you might still have ongoing GST liabilities, and still be able to claim GST input tax credits. Note that the GST definition of ‘carrying on an enterprise’ includes activities in the termination of the enterprise.

The 5-Year Rule for GST on New Residential Premises: Navigating the Fine Print

In the complex world of property development, understanding the nuances of GST is crucial to ensuring compliance and avoiding costly mistakes. One critical provision is the '5-year rule' concerning new residential premises

When a property developer constructs and rents out new residential premises, the property is "new" and is subject to GST when sold. However, if the property has been rented out exclusively for a continuous period of 5 years, during which no GST input tax credits were claimed, the property becomes input taxed and no GST is payable.

But here’s the catch: the 5-year rule only applies if the residence is ‘solely’ used for rental purposes for an uninterrupted 5-year period. This means no marketing, no listing for sale, and no sales activities during that time. If any attempt is made to sell the property before the 5 years is complete, such as by putting it in the hands of an agent a week before the 5 years to start marketing the property for sale, the clock resets and the 5-year period starts anew.

Wishing you a terrific end to a challenging 2024, with hopes of a positive 2025!