Stage 2 of the Property Development Cycle: Development
The development phase of a property project often involves significant costs, including land acquisition, construction, and professional services. Understanding GST rules during this stage is crucial to optimising cash flow and maintaining compliance.
Entitlement to Input Tax Credits
A developer may claim GST input tax credits for certain acquisitions if they meet specific criteria. The entitlement typically depends on the intended use of the property during and after development.
Common Costs Incurred by Developers
- Land Acquisition Costs: Purchase of vacant land or developed property for subdivision or redevelopment
- Construction Costs: Building materials, contractor services, and labour
- Other Costs: Council fees, permits, legal expenses, and consultant services
To claim GST credits, these costs must be incurred in the course of a GST-registered enterprise and relate to making taxable or GST-free supplies rather than input-taxed supplies.
Denial of Input Tax Credits
Input tax credits may be denied if the developer uses the property for making input-taxed supplies, such as:
- Residential Leasing: Long-term leases of residential properties are input-taxed.
- Retirement Villages: Depending on specific circumstances, some retirement village supplies may be input-taxed.
Since input-taxed supplies do not attract GST, developers cannot claim back the GST paid on related acquisitions or expenses.
Example:
A developer constructs residential apartments intended solely for leasing. As leasing is input-taxed, they cannot claim GST credits on the construction and development costs.
Input Tax Credit Entitlement
Developers can claim GST input tax credits when the property is used for:
- Residential Build-to-Sell: New residential premises sold as taxable supplies
- Commercial Residential Premises: Hotels, motels, and similar developments
- Commercial Sales or Leases: Office spaces, warehouses, or retail developments
- GST-Free Supplies: Sales of going concerns that qualify for GST-free treatment
Example:
A developer constructs a new apartment complex for sale to individual buyers. Since these are taxable supplies, the developer can claim GST credits on related development costs.
Practical Considerations
- Change of Purpose: If the intended use of a development changes during the project (e.g., from build-to-sell to build-to-lease), GST credits may be impacted. Developers must carefully manage and document these changes.
- Mixed Supplies: Projects involving both taxable and input-taxed uses (e.g., a mixed-use commercial and residential development) require accurate allocation and apportionment of GST credits.
- Timely Registration: Ensuring GST registration at the commencement of development helps streamline the claim process for eligible credits.
Conclusion
Maximising GST input tax credits during the development phase can significantly enhance project viability. Understanding the implications of property use and seeking professional advice is essential to ensure compliance and financial efficiency.
