Private ruling: New residential premises and changes in the extent of creditable purpose
Published: March 2012

Ruling: Q2: How is GST calculated on the sale of the property? Decision GST is 1/11 th of the amount the consideration received for the supply of the new residential premises exceeds the consideration paid for the land.


Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 Division 11 | Division 129 | Subsection 129-10(2) | Subsection 129-20(1) | Subsection 129-20(3) | Section 129-25 | Section 129-40 | Section 129-70 | Section 129-75 | Subsection 75-10(2)

Reasons for decision: Detailed Reasoning - Issue 1: Division 11 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides for an entity's entitlement input tax credits where they make a creditable acquisition. The tests focus on an entity's planned or intended use of the acquisition. Your planned use of the relevant acquisition was to make a taxable supply of new residential premises. In accordance with this planned use, you claimed input tax credits on the acquisitions associated with the construction of the premises. The extent to which an acquisition is applied for a creditable purpose (actual use) may be different to the intended use. In such cases, an adjustment for this change in extent of creditable purpose may arise. Division 129 of the GST Act contains provisions regarding adjustments where the creditable purpose of an acquisition has changed. Under Division 129 of the GST Act, each individual acquisition must be considered with reference to the amount of the acquisition and the date each acquisition was made. As explained in paragraph 14 of Goods and Services Tax Ruling GSTR 2009/4 Goods and services tax: new residential premises and adjustments for changes in extent of creditable purpose (GSTR 2009/4), Division 129 of the GST Act (section 129-20) provides for adjustments in relation to things in tax periods that are adjustment periods, with the number of periods being determined by the GST-exclusive value of the acquisition, as per the following table: GST-exclusive value of the acquisition Adjustment periods $5,000 or less Two $5,001 to $499,999 Five $500,000 or more Ten Subsection 129-10(2) of the GST Act provides that you will not have an adjustment under Division 129 unless the GST-exclusive value of the acquisition in question is more than $1,000. Subsection 129-20(1) defines an adjustment period to be a tax period applying to you that starts at least 12 months after the end of the tax period to which the acquisition or importation is attributable, and ends on 30 June in any year. Section 129-40 of the GST Act contains the methodology for determining whether you have an adjustment under Division 129. To work out if an adjustment arises for an acquisition or importation, you compare the 'actual application of the thing' with the 'intended or former application of the thing'. The 'actual application of the thing' is the extent to which you applied the acquisition for a creditable purpose, during the period: · starting at the time you acquired it; and · ending at the end of the relevant adjustment period. · The 'intended or former application of a thing' is either: · the planned application for a creditable purpose as at the time you acquired or imported the thing (i.e., the intended use); or · if there has been a previous adjustment under Division 129 for the thing - the actual application of the thing in respect of the previous adjustment period (i.e., the former use). You will have an increasing adjustment where the 'actual application of the thing' is less than the 'intended or former application of a thing'. Conversely, you will have an increasing adjustment where the 'actual application of the thing' is greater than the 'intended or former application of a thing'. GSTR 2009/4 provides guidance in regard to your specific situation and in particular the actual application of a thing. That is, the dual application of the new residential premises. | Detailed Reasoning - Interim adjustments: You advised that the property was never held for both sale and rent at the same time. As such, the premises are considered to have been held for dual consecutive purposes. Example 12 at paragraphs 98 through 102 explain that a time based apportionment method is appropriate to use in these situations for periods prior to the sale of the premises. | Detailed Reasoning - Final adjustment: Section 129-25 provides for the effect on adjustment periods of things being disposed of. The effect of section 129-25 for each of your acquisitions is that, provided the number of adjustment periods has not already expired, your last adjustment period will be the next quarterly tax period after settlement that ends on 30 June. In determining your actual application of the premises in the last adjustment period, it is appropriate to calculate your extent of entitlement to an input tax credit using the output based indirect method. The formula for the output based indirect method is contained in paragraph 83 of GSTR 2009/4 as: Consideration for the taxable supply of the premises Consideration for the taxable supply of the premises plus consideration for the input taxed supplies of residential premises by way of lease | Detailed Reasoning - Issue 2: Under subsection 75-10(2) of the GST Act, the margin for the supply is the amount by which the consideration for the supply (new residential premises) exceeds the consideration for the acquisition of the real property (in this case the vacant land). The consideration for the acquisition of the real property is the original purchase price after taking into account settlement adjustments. The consideration for the acquisition does not include costs that you incurred that were associated with your purchase of the real property, such as legal expenses and stamp duty. It also does not include costs incurred in developing the real property, prior to or after its acquisition. You advised that the consideration received for the supply of the new residential premises was a specified amount and the cost of the vacant land was also provided. The GST payable on the supply of the premises under the margin scheme will be 1/11 th of the margin. The GST payable will be attributed to the quarterly tax period in which settlement occurred. Goods and Services Tax Ruling GSTR 2006/8: Goods and services tax: the margin scheme for supplies of real property acquired on or after 1 July 2000 contains further guidance in regard to this issue.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet. | How are adjustments calculated when there is a change in the extent to which an acquisition is applied for a creditable purpose? | Please see explanation in 'Reasons for decision'. | Relevant facts: You are registered for GST | You account for GST on a cash basis and report quarterly | You purchased a block of land from a GST registered property developer who applied the margin scheme to the sale | You provided details of the cost of the land | You constructed a residential house on the land | The property development was carried on in the course of an enterprise that you carry on | You provided approximate development costs | It was your intention to sell the property on completion of construction | When construction was completed you accepted an offer (contract was subject to sale) however the contract condition was not met and the sale did not proceed | You then attempted to sell the property for approximately six months | You subsequently rented the property and a tenant moved in residing in the premises for approximately three years | When the tenant vacated the premises, the property was listed with an agent for the purpose of sale. However, advertising of the property was delayed while minor repairs were effected. | You sold the property for a specified amount | The sale contract contained a clause stating that the parties agree the margin scheme would apply to the sale | Whilst the property was always for sale (had an offer been presented) the property was never held for both sale and rent at the same time | You have made some adjustments to the GST claimed on acquisitions during construction in your June BAS for the past three years (in accordance with a schedule provided by your accountant) | Assumptions: Acquisitions relating to the construction do not relate to business finance.