What happens with GST if you change the use of your development?

What happens if you are a GST-registered property developer who builds apartments exclusively for sale, and later decides to rent them?

The typical situation is that you would start out by correctly claiming input tax credits on all acquisitions relating to the development, including architect’s fees, legal fees and construction charges. However, when sales are slow or financial pressures arise, you then rent the apartments for income while still trying to actively sell them.

This is a change of use from a fully creditable purpose to a partly creditable application and will lead to a requirement to repay some of the GST credits claimed on the inputs into the development. The adjustment will be an increasing adjustment, meaning you will pay back the GST credits you previously claimed.

Contrary to popular belief, the increasing adjustment need not be made in the next activity statement due after an apartment is first leased. Nor is the GST repaid in a lump sum. The adjustment is made progressively at the end of an adjustment period.

An adjustment period for an acquisition is a tax period that starts at least twelve months after the end of the tax period during which you started renting out the properties, and ends on 30 June in any year. In other words, you have some time to repay the GST or indeed sell the apartments.

For example, if you report on a monthly basis, rental income earned in April 2013 would not have its first adjustment period until 30 June 2014. If you report quarterly and receive rental income in April 2013, the first adjustment period for the acquisition would be June 2015. The reason for this is that the quarterly reporter’s tax period ends on 30 June 2013 and the adjustment period must end on a 30 June that is at least twelve months after 30 June 2013. It can be seen, that 30 June 2014 does not fit this description as it falls within 12 months, not after 12 months.

The key point here is that you may sometimes be faced with the possibility of not being able to do what you originally set out to, such as, sell the apartment you just built. Not all is lost, as you will likely be able to rent until you find the right buyer/s.

What is important, is to understand how the GST is treated when there is a change to your circumstances.

If you need some clarification on this GST issue or any other, please do not hesitate to get in touch.

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Tony Dimitriadis
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