Private ruling: Goods and services tax (GST) and duplex development
Published: March 2014

Ruling: Q1: Will GST be payable on your sale of Y? | A1: GST will be payable on your sale of Y if you sell it on completion. GST will be payable on your sale of Y if you lease it out first and you are registered for GST when you sell it unless your sale of Y is a GST-free supply of a going concern. GST will not be payable on your sale of Y if you lease it out first and you are not registered for GST when you sell it. GST will not be payable on your sale of Y if you lease it out first and your sale of Y is a GST-free supply of a going concern. You will not be required to be registered for GST when you sell Y if you lease it out first. | Q2: If GST is payable on your sale of Y, could you use the margin scheme? | A2: If GST is payable on your sale of Y, you could use the margin scheme, provided that you and the purchaser agree in writing by the time of settlement, or within such further period as the Commissioner allows, that the margin scheme will be used. | Q3: Will you be entitled to input tax credits on your development costs? | A3: You will be entitled to input tax credits on your development costs if: • the supply of the thing acquired, to you, is a taxable supply, and • you are registered or required to be registered for GST when you make the acquisition. However, you will not be entitled to input tax credits on acquisitions to the extent that they relate to X. | Q4: Will you have GST adjustments under Division 129 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) for development costs? | A4: You will have increasing adjustments for development costs if you are entitled to input tax credits for development costs and you lease out Y (subject to certain time limits and a dollar threshold). If you lease out Y and later sell it, and you are initially required to make increasing adjustments as a result of leasing it out, you will have decreasing adjustments (subject to certain time limits).

Relevant facts and circumstances: Individual 1 and individual 2 (you) are not registered for GST as a partnership (made up of the both of you only). You are planning to purchase a property in Australia. The property would have an house on it. The sale of the property to you would not be subject to GST. You will demolish the old house. You will get DA approval to build a duplex in its place. You will build the duplex. The duplex will be comprised of unit X and unit Y. Each unit will each have its own separate torrens title. You will live in X. You will either: • sell Y on completion of construction or • lease it out for less than 5 years and sell it less than 5 years after completion of construction. You have not decided which of these two options you will take, but you will decide once construction is complete. You are very likely to sell Y on completion of construction. If you lease out Y, it would be on a regular or continuous basis. You expect that the sale price of Y would be over $75,000. Selling Y at a profit is a motivation behind developing it and a profit is expected to be made. You do not carry on any enterprise activities elsewhere.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 section 7-1 | A New Tax System (Goods and Services Tax) Act 1999 section 9-5 | A New Tax System (Goods and Services Tax) Act 1999 section 9-20 | 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 11-20 | A New Tax System (Goods and Services Tax) Act 1999 section 11-30 | A New Tax System (Goods and Services Tax) Act 1999 section 23-5 | A New Tax System (Goods and Services Tax) Act 1999 section 23-10 | A New Tax System (Goods and Services Tax) Act 1999 section 27-40 | A New Tax System (Goods and Services Tax) Act 1999 section 38-325 | A New Tax System (Goods and Services Tax) Act 1999 section 40-35 | A New Tax System (Goods and Services Tax) Act 1999 section 40-65 | A New Tax System (Goods and Services Tax) Act 1999 section 40-75 | A New Tax System (Goods and Services Tax) Act 1999 section 75-5 | A New Tax System (Goods and Services Tax) Act 1999 Division 129 | A New Tax System (Goods and Services Tax) Act 1999 section 129-10 | A New Tax System (Goods and Services Tax) Act 1999 section 129-20 | A New Tax System (Goods and Services Tax) Act 1999 section 129-25 | A New Tax System (Goods and Services Tax) Act 1999 section 129-40 | A New Tax System (Goods and Services Tax) Act 1999 section 129-50 | A New Tax System (Goods and Services Tax) Act 1999 section 129-55 | A New Tax System (Goods and Services Tax) Act 1999 section 129-70 | A New Tax System (Goods and Services Tax) Act 1999 section 129-75 | A New Tax System (Goods and Services Tax) Act 1999 section 138-5 | A New Tax System (Goods and Services Tax) Act 1999 section 188-10 | A New Tax System (Goods and Services Tax) Act 1999 section 188-15 | A New Tax System (Goods and Services Tax) Act 1999 section 188-20 | A New Tax System (Goods and Services Tax) Act 1999 section 188-25 | A New Tax System (Goods and Services Tax) Act 1999 section 195-1

Reasons for decision: Summary: GST will be payable on your sale of Y if you sell it on completion because under such circumstances: • you would be making the sale for consideration; • you would made the sale in the course or furtherance of an enterprise that you carry on; • the sale will be connected with Australia; • you would be required to be registered for GST; and • the sale would not be GST-free or input taxed. GST will be payable on your sale of Y if you lease it out first and you are registered for GST when you sell it unless the sale of Y is a GST-free supply of a going concern because under such circumstances; • you would be making the sale for consideration; • you would made the sale in the course or furtherance of an enterprise that you carry on; • the sale will be connected with Australia; • you would be registered for GST; and • the sale would not be GST-free or input taxed. GST will not be payable on your sale of Y if you lease it out first and you are not registered for GST when you sell it because you would not be registered or required to be registered for GST under such circumstances. GST will not be payable on your sale of Y if you lease it out first and your sale of Y is a GST-free supply of a going concern, because GST-free supplies are not taxable supplies. | Detailed Reasoning - Detailed reasoning: GST is payable by you on your taxable supplies. You make a taxable supply where you satisfy the requirements of section 9-5 of the GST Act, which states: You make a taxable supply if: (a) you make the supply for *consideration; and (b) the supply is made in the course or furtherance of an *enterprise that you *carry on; and (c) the supply is *connected with Australia; and (d) you are *registered, or *required to be registered. However, the supply is not a *taxable supply to the extent that it is *GST-free or *input taxed. (*Denotes a term defined in section 195-1 of the GST Act) You will meet the requirement of paragraph 9-5(a) of the GST Act, because you will supply the property for consideration when you sell it. The sale of the property will be connected with Australia, because the property will be located in Australia. Therefore, the requirement of paragraph 9-5(c) of the GST Act will be met. Sale in the course or furtherance of an enterprise Paragraph 9-20(1)(a) the GST Act provides that enterprise includes an activity or series of activities in the form of a business. Paragraph 9-20(1)(b) of the GST Act provides that enterprise includes an adventure or concern in the nature of trade. Paragraph 9-20(1)(c) of the GST Act provides that enterprise includes leasing out property on a regular or continuous basis. Miscellaneous Taxation Ruling MT 2006/1 provides guidance on the concept of enterprise for ABN purposes. MT 2006/1 can be found on the Australian Taxation Office website, www.ato.gov.au. Type in 'public rulings' in the search box. Goods and Services Tax Determination GSTD 2006/6 provides that MT 2006/1 can be relied on for GST purposes. Paragraph 234 of MT 2006/1 discusses adventures or concerns in the nature of trade. It states: 234. Ordinarily, the term 'business' would encompass trade engaged in, on a regular or continuous basis. However, an adventure or concern in the nature of trade may be an isolated or one-off transaction that does not amount to a business but which has the characteristics of a business deal. Paragraphs 273 to 276 of MT 206/1 provide an example of a one-off activity duplex development activity that is an enterprise. They state: 273. Tobias finds an ocean front block of land for sale in a popular beachside town. He devises a plan to enable him to afford to live there. He decides to purchase the land and to build a duplex. He plans to sell one of the units and retain and live in the other. The object of his plan is to enable him to obtain private residential premises in an area that would otherwise be unaffordable for him. 274. Tobias carries out his plan. He purchases the land, and lodges the necessary development application with the local council. The development application is approved by the council, Tobias engages a builder and has the duplex built. He sells one unit, and lives in the other. 275. Tobias is entitled to an ABN. His intentions and activities have the appearance of a business deal. They are an enterprise. 276. Further, there is a reasonable expectation of profit or gain (see paragraphs 378 to 405 of this Ruling) as his plan has enabled him to be able to keep and live in one of the units. Paragraph 46 of Goods and Services Tax Ruling GSTR 2001/7 gives an example of a one-off activity that consists of a dealing with a single asset. It states: 46. An enterprise may consist of an isolated transaction or a dealing with a single asset. For example, an enterprise may consist solely of the acquisition and refurbishment of a suburban shop for resale at a profit. Where an entity engages in acquiring a single asset for resale at a profit, the activity will be an enterprise under paragraph 9-20(1)(b), because it is an activity in the form of an adventure in the nature of trade. As discussed in paragraph 35 of this Ruling, the disposal of that single asset is not the transfer of a capital asset. Consequently, that supply is not excluded from your projected GST turnover. If you sell Y on completion of construction, your property development activity will have the same features as in the example in paragraphs 273 to 276 of MT 2006/1. Therefore, you would be carrying on a property development enterprise. More specifically, as this would be an isolated commercial transaction, it would be an adventure or concern in the nature of trade rather than a business. Therefore, if you sell Y on completion, the sale will be made in the course or furtherance of an enterprise that you carry on, specifically an adventure or concern in the nature of trade. If you lease out Y before selling it, the sale will be made in the course or furtherance of a leasing enterprise that you carry on. Therefore, the requirement of paragraph 9-5(b) of the GST Act will be met. GST registration You are not registered for GST. Subsection 23-10(1) of the GST Act provides that an entity is entitled to be registered for GST if it is carrying on an enterprise. Carrying on an enterprise includes doing anything in the course of commencement of the enterprise. You will be entitled to be registered for GST from the time you acquire the development site because you will be carrying on an enterprise from that time. If you are registered for GST at the time of sale of Y, you will meet the requirement of paragraph 9-5(d) of the GST Act. Section 23-5 of the GST Act provides that an entity is required to be registered for GST if: a. it is carrying on an enterprise, and b. the entity's GST turnover meets the registration turnover threshold of $75,000. You will be carrying on an enterprise. Therefore, the requirement of paragraph 23-5(a) of the GST Act will be met. Subsection 188-10(1) of the GST Act states: You have a GST turnover that meets a particular *turnover threshold if: a. your *current turnover is at or above the turnover threshold, and the Commissioner is not satisfied that your *projected GST turnover is below the turnover threshold; or b. your projected GST turnover is at or above the turnover threshold. Subsection 188-15(1) of the GST Act provides that your current GST turnover at a time during a particular month is the sum of the values of all the supplies that you have made, or are likely to make, during the 12 months ending at the end of that month, other than: supplies that are input taxed a. supplies that are not for consideration b. supplies that are not made in connection with an enterprise that you carry on. Subsection 188-20(1) of the GST Act provides that your projected GST turnover at a time during a particular month is the sum of the values of all the supplies that you made, or are likely to make, during that month and the next 11 months, other than a. supplies that are input taxed b. (b) supplies that are not for consideration c. (c) supplies that are not made in connection with an enterprise that you carry on. Section 188-25 of the GST Act states: In working out your *projected GST turnover, disregard: a. any supply made, or likely to be made, by you by way of transfer of ownership of a capital asset of yours; and b. any supply made, or likely to be made, by you solely as a c. consequence of: (i) ceasing to carry on an *enterprise; or (ii) substantially and permanently reducing the size or scale of an enterprise Leasing out residential premises is input taxed under subsection 40-35(1) of the GST Act. Therefore, your leasing income is excluded from the calculation of GST turnover. A sale of residential premises is input taxed under subsection 40-65(1) of the GST Act unless the premises are new residential premises other than those used for residential accommodation before 2 December 1998. In accordance with paragraph 40-75(1)(a) of the GST Act, residential premises are new residential premises if they have not previously been sold as residential premises (other than commercial residential premises) and have not previously been the subject of a long-term lease. A long term lease has an agreed term of at least 50 years. In accordance with paragraph 40-75(1)(c) of the GST Act, residential premises that have been built to replace demolished premises on the same land are new residential premises. Subsection 40-75(1) of the GST Act provides that paragraph 40-75(1)(b) and paragraph 40-75(1)(c) of the GST Act have effect subject to paragraph 40-75(1)(a) of the GST Act. Paragraph 28 of Goods and Services Tax Ruling GSTR 2003/3 provides that paragraph 40-75(1)(c) of the GST Act raises the question of what has been done to the building or the activity of building by the current owner and this will determine whether the residential premises are new residential premises. Paragraph 40-75(2)(c) of the GST Act overrides paragraph 40-75(1)(c) of the GST Act. It provides that residential premises that are new residential premises under paragraph 40-75(1)(c) of the GST Act cease to be new residential premises if for the period of at least 5 years since the premises were last built, the premises have only been leased out for use as residential premises. You will build residential premises to replace demolished premises on the same land. If you lease out Y, it would be for a period of less than 5 years. At the time you sell Y, these premises would not have previously been sold as residential premises and would not previously been the subject of a long-term lease. Therefore, your sale of Y will be a sale of new residential premises. Y will not have been used for residential accommodation before 2 December 1998. Hence, your sale of Y will not be input taxed under subsection 40-65(1) of the GST Act. There are no other provisions of the GST Act under which your sale of Y will be input taxed. Therefore, the exclusion from the calculation of GST turnover for input taxed supplies will not apply in regard to your sale of Y. Paragraph 32 of GSTR 2001/7 provides guidance on the meaning of capital assets. It states: 32. 'Capital assets' can include tangible assets such as your factory, shop or office, your land on which they stand, fixtures and fittings, plant, furniture, machinery and motor vehicles that are retained by you to produce income. 'Capital assets' can also include intangible assets, such as your goodwill. Paragraphs 46 and 47 of Goods and Services Tax Ruling GSTR 2001/7 discuss the situation where an enterprise consists of dealing with a single asset. They state: 46. An enterprise may consist of an isolated transaction or a dealing with a single asset. For example, an enterprise may consist solely of the acquisition and refurbishment of a suburban shop for resale at a profit. Where an entity engages in acquiring a single asset for resale at a profit, the activity will be an enterprise under paragraph 9-20(1)(b), because it is an activity in the form of an adventure in the nature of trade. As discussed in paragraph 35 of this Ruling, the disposal of that single asset is not the transfer of a capital asset. Consequently, that supply is not excluded from your projected GST turnover. 47. The disposal of that single asset, or the completion of that isolated transaction, is also not a transfer solely as a consequence of ceasing to carry on an enterprise. In such circumstances the enterprise ceases as a consequence of the disposal of the single asset, rather than the single asset being disposed of in consequence of the ceasing to carry on the enterprise. If you lease out Y, it will be a capital asset because you would be retaining it to produce income. Therefore, it you lease out Y, the sale of Y will be excluded from the calculation of projected GST turnover. Hence, under such circumstances, your GST turnover would be zero. Therefore, under such circumstances, you would not meet the requirement of paragraph 23-5(b) of the GST Act. Hence, under such circumstances, because you will not meet both requirements of section 23-5 of the GST Act, you would not be required to be registered for GST when you sell Y. Therefore, you would not meet the requirement of paragraph 9-5(d) of the GST Act under such circumstances unless you remained registered for GST. If you sell Y on completion of construction, you will be carrying on an enterprise that consists of dealing in a single asset. Therefore, your sale of Y will not be a sale of a capital asset if you sell it on completion and the sale would not be a supply made in consequence of ceasing to carry on your enterprise. Therefore, the exclusions in section 188-25 of the GST Act won't apply if you sell Y on completion of construction. If you sell Y on completion of construction, your GST turnover will be over $75,000 when you sell it. Therefore, you would meet the requirement of paragraph 23-5(b) of the GST Act under such circumstances. Hence, you would be required to be registered for GST when you sell Y under such circumstances because you would meet both requirements of section 23-5 of the GST Act. Therefore, under such circumstances, you would meet the requirement of paragraph 9-5(d) of the GST Act. You would be required to be registered for GST when your projected turnover reaches $75,000. Your projected turnover will reach $75,000 in a given month if you determine in that month that you will sell Y in that month or the following 11 calendar months. You will be required to be registered for GST when you begin construction if you determine at that point that it is likely you would sell Y in the following 11 calendar months. GST-free supplies of going concerns Section 38-325 of the GST Act provides that a supply of a going concern may be GST-free. Subsection 38-325(1) of the GST Act states: The *supply of a going concern is GST-free if: (a) the supply is for *consideration; and (b) the *recipient is *registered or *required to be registered; and (c) the supplier and the recipient have agreed in writing that the the supply is of a going concern. Subsection 38-325(2) of the GST Act states; A supply of a going concern is a supply under an arrangement under which (a) the supplier supplies to the *recipient all of the things that are necessary for the continued for the continued operation of an *enterprise; and (b) the supplier carries on, or will carry on, the enterprise until the day of the supply (whether or not as a part of a larger enterprise carried on by the supplier). A sale of a property that had been leased out by the vendor can be a GST-free supply of a going concern. In accordance with Goods and Services Tax Ruling GSTR 2002/5, for the sale to be a supply of a going concern, any lease intact at the time of settlement of sale must be transferred to the purchaser. If the property was formerly subject to a lease, but there is no lease intact at the time of settlement, then the vendor must have been actively marketing the property for lease up to the time of sale. This requirement will not apply where the property is unavailable for lease temporarily while repairs, refurbishments or other activities requiring vacancy take place. There are no other provisions of the GST under which your sale of Y could be GST-free. Conclusion If you sell Y on completion of construction, you will meet the requirements of section 9-5 of the GST Act. Therefore, if you sell Y on completion of construction you will make a taxable sale. Hence, under such circumstances, GST will be payable on your sale of Y. If you lease out Y before selling it; you are registered for GST at that time; and you do not make a GST-free supply of a going concern, you will meet the requirements of section 9-5 of the GST Act. Hence, under such circumstances, GST will be payable on your sale of Y. If you lease out Y before selling it and you are not registered for GST when you sell Y, you will not meet all of the requirements of section 9-5 of the GST Act. Therefore, under such circumstances, you will not make a taxable supply. Hence, under such circumstances, GST will not be payable on your sale of Y. If you make a GST-free supply of a going concern, you will not make a taxable sale of Y. Hence, under such circumstances, GST will not be payable on your sale of Y. | Detailed Reasoning - Question 2: Subsection 75-5(1) of the GST Act states: The *margin scheme applies in working out the amount of GST on a *taxable supply of *real property that you make by a. (a) selling a freehold interest in land; or b. (b) selling a*stratum unit; or c. (c) granting or selling a *long-term lease; if you and the *recipient of the supply have agreed in writing that the margin scheme is to apply. Subsection 75-5(1A) of the GST Act states: The agreement must be made: a. on or before the making of the supply; or b. within such further period as the Commissioner allows. Subsection 75-5(2) of the GST Act states: However, the *margin scheme does not apply if you acquired the entire freehold interest, *stratum unit or *long-term lease through a supply that was *ineligible for the margin scheme. Subsection 75-5(3) of the GST Act sets out the situations where a supply is ineligible for the margin scheme. You will sell real property. You will sell a freehold interest in land. The sale of the property will not be ineligible for the margin scheme. Therefore, if GST is payable on your sale of the property and you and the purchaser agree in writing by the time of settlement of sale of the property, or within such further period as the Commissioner allows, that the margin scheme will be used, you can use the margin scheme to calculate GST on your sale of the property. Goods and Services Tax Ruling GSTR 2006/8 contains guidance on the margin scheme. | Summary: You will be entitled to input tax credits on your development costs if: • the supply of the thing, you acquired, to you is a taxable supply, and • you are registered or required to be registered for GST when you make the acquisition. This is because under such circumstances: • you would acquire these acquisitions for a creditable purpose • the supplies of the things to you would be taxable • you would provide consideration for these supplies, and • you would be registered or required to be registered for GST. However, you will not be entitled to input tax credits on acquisitions to the extent that they relate to X because to that extent the acquisitions are of a private or domestic nature. | Detailed Reasoning - Detailed reasoning: You are entitled to input tax credits on your creditable acquisitions. Section 11-5 of the GST Act states: You make a creditable acquisition if: (a) you acquire anything solely or partly for a *creditable purpose; and (b) the supply of the thing to you is a taxable supply; and (c) you provide, or are liable to provide, consideration for the supply; and (d) you are *registered, or *required to be registered. Acquisition for creditable purpose Subsection 11-15(1) of the GST Act states: You acquire a thing for a creditable purpose to the extent that you acquire it in *carrying on your *enterprise. Subsection 11-15(2) of the GST Act states: However, you do not acquire a thing for a creditable purpose to the extent that : (a) the acquisition relates to making supplies that would be *input taxed; or (b) the acquisition is of a private or domestic nature. Paragraph 49 of Goods and Services Tax Ruling GSTR 2008/1 states: 49. An entity is often required to determine the extent to which an acquisition is for a creditable purpose, based on the entity's intended use of the acquisition. You will acquire the development related acquisitions in carrying on your enterprise to the extent that they relate to Y. You will not acquire the development related acquisitions in carrying on your enterprise to the extent that they relate to X, as you will live in X. If you intend to use a thing acquired in making an input taxed supply only, you do not acquire the thing for a creditable purpose at all. You have already decided that you will sell Y (either at the time of completion of construction or less than 5 years after this date). Therefore, you will be building Y to sell. The sale of Y will not be input taxed. Leasing out residential property is input taxed. You may lease out Y. However, you have not formed a definite intention to lease out Y and any decision to lease out Y would only be made once construction is complete. Furthermore, you advised that you are very likely to sell Y on completion. Therefore, your acquisition of development related acquisitions for Y do not relate to making supplies that would be input taxed for the purposes of paragraph 11-15(2)(a) of the GST Act to the extent that those acquisitions relate to Y. The development related acquisitions will not be of a private or domestic nature to the extent that they relate to Y. The development related acquisitions will be of a private or domestic nature to the extent that they relate to X. You will acquire the development related acquisitions for a creditable purpose to the extent that they relate to Y. Therefore, you will meet the requirement of paragraph 11-5(a) of the GST Act. Acquisition of taxable supplies You will meet the requirement of paragraph 11-5(b) of the GST Act where the supplies made to you are taxable supplies. Providing considering for supply acquired You will meet the requirement of paragraph 11-5(c) of the GST because you will provide consideration for the development related acquisitions. GST registration You will meet the requirement of paragraph 11-5(d) of the GST Act if you register for GST before you make the development related acquisitions. You would be required to be registered for GST when your projected turnover reaches $75,000. Your projected turnover will reach $75,000 in a given month if you determine in that month that you will sell Y in that month or the following 11 calendar months. You will be required to be registered for GST when you begin construction if you determine at that point that it is likely you would sell Y in the following 11 calendar months. If you are required to be registered for GST when you make a development related acquisition, you will meet the requirement of paragraph 11-5(d) of the GST Act at that time. Therefore, you will make a creditable acquisition of a development related acquisition if: • the supply of the thing acquired, to you, is a taxable supply, and • you are registered or required to be registered for GST when you make the acquisition. Hence, you will be entitled to input tax credits on your acquisitions of development related acquisitions if: • the supply of the thing acquired, to you is a taxable supply, and • you are registered or required to be registered for GST when you make the acquisition. If you make a creditable acquisition of a development related acquisition, it will be a partly creditable acquisition because you will acquire it only partly for a creditable purpose. Hence, in accordance with section 11-30 of the GST Act, you will need to apportion the GST component of each acquisition between X and Y. If you are entitled to an input tax credit, the input tax credit will be the part of the GST component of an expense that is reasonable apportionable to Y. | Summary: You will have increasing adjustments for development costs if you are entitled to input tax credits for development costs, and you lease out Y (subject to certain time limits and a dollar threshold). This is because you would have acquired the relevant development related acquisitions for a creditable purpose, but would later apply these things for a non-creditable purpose. If you lease out Y and later sell it, and you are initially required to make increasing adjustments as a result of leasing it out, you will have decreasing adjustments (subject to certain time limits). This is because there would be a change in creditable application. | Detailed Reasoning - Detailed reasoning: Under Division 129 of the GST Act, if an entity acquires something for a creditable purpose, but it applies it solely or partly for a non-creditable purpose, an increasing adjustment may arise, which effectively involves repaying the input tax credits (or part thereof). Where the first actual application is for a non-creditable purpose and there is a subsequent application for a creditable purpose, a decreasing adjustment may arise. No Division 129 adjustments can arise for acquisitions that do not relate to business finance, unless the acquisition has a GST exclusive value of more than $1,000. Subsection 129-50(1) of the GST Act states: You *apply a thing for a creditable purpose to the extent that you apply if in *carrying on your enterprise. Subsection 129-50(2) of the GST Act states: However, you do not *apply a thing for a creditable purpose to the extent that: (a) the application relates to making supplies that are input taxed; or (b) the application is of a private or domestic nature. Section 129-55 of the GST Act states: Apply , in relation to a thing acquired or imported, includes: (a) supply the thing; and (b) consume, dispose of or destroy the thing; and (c) allow another entity to consume, dispose of or destroy the thing. Where a property developer acquires development related acquisitions, we consider that these things are applied when it leases out or sells the completed property. Where a property developer leases out residential premises, this is an application of the development related acquisitions for a non-creditable purpose, because the property in which these inputs are incorporated is being used to make input taxed supplies. Where a property developer makes a sale of residential premises, this is an application of the development related inputs for a credible purpose if: • the sale of the property is in the course or furtherance of an enterprise the property developer carries on; • the sale of the property is not input taxed; and • the sale of the property is not a private or domestic application of the property by the developer. Division 129 adjustments are attributable to adjustment periods. In accordance with subsection 129-20(1) of the GST Act, an adjustment period for an acquisition is a tax period applying to you that: (a) starts at least 12 months after the end of the tax period to which the acquisition is attributable (or would be attributable if it were a creditable acquisition or); and (b) ends: (i) on 30 June in any year; or (ii) if none of the tax periods applying to you in a particular year ends on 30 June - closer to 30 June than any of theother tax periods applying to you in that year. If certain time limits as set out in subsection 129-20(3) of the GST Act have passed and a Division 129 adjustment has not already arisen, no Division 129 adjustment will arise. Subsection 129-20(3) of the GST Act provides that despite subsection 129-20(1) of the GST Act, for an acquisition that does not relate to business finance: (a) if the *GST exclusive value of the acquisition is $5,000 or less --- only the first 2 such tax periods are adjustment periods : (b) if the GST exclusive value of the acquisition is more than $5,000 but less than $500,000 --- only the first 5 such tax periods are adjustment periods ; or (c) if the GST exclusive value of the acquisition is $500,000 or more --- only the first 10 such tax periods are adjustment periods . In addition, concluding tax periods are adjustment periods. If your GST registration is cancelled in a given tax period, that tax period will be your concluding tax period. If you dispose of anything acquired, the next tax period applying to you that ends: (a) on 30 June in any year; or (b) if none of the tax periods applying to you in a particular year ends on 30 June - closer to 30 June that any of the other tax periods applying to you in that year; is the last adjustment period for the acquisition (provided that the last adjustment period provided for under 129-20(3) of the GST Act has not passed). In accordance with subsection 129-40(1) of the GST Act, you work out whether you have an adjustment as follows: Step 1 Work out the extent (if any) to which you have applied the thing acquired for a creditable purpose during the period of time: (a) starting when you acquire 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 Division 129 of the GST Act for the acquisition the extent (if any) to which you (b) if you have previously had an adjustment under Division 129 of the GST Act for the acquisition 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. 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. 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. In accordance with subsection 129-45(2) of the GST Act, actual applications or former applications are to be expressed as percentages. If you lease out Y as well as sell it within the period starting with the date you made a development related acquisition and ending at the end of a particular adjustment period, you can work out the extent of creditable application during that period as follows: Step 1 Add the leasing income earned over that period to the sale price of Y. Step 2 Divide the sale price of Y by the result of the Step 1 calculation. (This is provided that you lease out Y at market rates). Based on the formulas in section 129-70 and section 129-75 of the GST Act, and despite the method statement for working out whether you have an adjustment, a Division 129 adjustment would be zero if you did not make a creditable acquisition and your acquisition would not have been a creditable acquisition had you acquired it for a creditable purpose. For example, if you were not registered or required to be registered when you made an acquisition, you could not have a Division 129 adjustment. Section 129-70 of the GST Act provides that the amount of an increasing adjustment that you have under Step 3 of the Method statement in section 129-40 for the thing acquired is worked out as follows: Step 1 Determine the full input tax credit Step 2 Subtract the actual application from the intended or former application Step 3 Multiply the full input tax credit by the result of the Step 2 calculation Full input tax credit is the amount of the input tax credit to which you have been entitled for acquiring the thing for the purpose of your enterprise if the acquisition had been solely for a creditable purpose. Section 129-75 of the GST Act provides that the amount of a decreasing adjustment that you have under Step 4 of the Method statement in section 129-40 for the thing acquired is worked out as follows: Step 1 Determine the full input tax credit Step 2 Subtract the intended or former application from the actual application Step 3 Multiply the full input tax credit by the result of the Step 2 calculation If you are entitled to input tax credits on your acquisition of development related acquisitions and you lease out Y on completion, you will have increasing adjustments because you would have acquired the acquisitions for a creditable purpose, but you would be applying the development related acquisitions for a non-creditable purpose (subject to the time limitations and $1,000 threshold). If you lease out Y and later sell it, you will have decreasing adjustments as a result of the sale if you had made earlier increasing adjustments as a result of leasing out the property (subject to the time limitations). This is because you would initially be applying the acquisitions for a non-creditable purpose but would later apply the acquisitions for a creditable purpose. To the extent that your development related acquisitions relate to X, no Division 129 adjustment will arise because you will acquire these things, and apply them, to that extent for a non-creditable purpose (your private use) only. The ATO view on Division 129 adjustments is contained in Goods and Services Tax Ruling GSTR 2000/24 and Goods and Services Tax Ruling GSTR 2006/4.