Topics on CGT and GST for property buyers (25)

In a significant update with implications for the real estate and property development industry, the Australian Taxation Office (ATO) has released a Decision Impact Statement (DIS) in response to the recent Administrative Appeals Tribunal (AAT) decision in the case of Domestic Property Developments Pty Ltd a/t for Dals Property Trust v FC of T 2022 ATC ¶10-661; [2022] AATA 4436. This decision has far-reaching consequences, particularly for property developers involved in the sale of residential units.

The Background

The case centered on a property developer who had completed a development comprising seven residential home units. Of these, two units (Units 1 and 3) were rented to tenants for approximately five years before being sold. Initially, the developer paid Goods and Services Tax (GST) calculated under the margin scheme for these sales. However, upon reconsideration, the developer lodged an objection against the assessments, arguing that the sales of Units 1 and 3 should be treated as input taxed supplies, and requested a refund of the GST paid. When the Commissioner denied the objection, the matter was escalated to the AAT.

The pivotal issue revolved around whether these unit sales could be classified as input taxed supplies. According to section 40-75(2)(a) of the GST Act, a sale would fall into this category if the units were exclusively used for making input taxed rental supplies for at least five years. It was undisputed that the sale of Unit 3 met this criterion.

The AAT upheld the Commissioner's objection decision. It ruled that actively marketing the premises for sale within the scope of a developer's enterprise constituted "use" for the purposes of section 40-75(2)(a). Additionally, the AAT found that GST had been incorporated into the sale prices of the units. The developer had sold the units at prices that ensured they exceeded their costs, including substantial amounts erroneously considered as GST.

The ATO's Perspective on the Decision

The ATO has welcomed the AAT's decision, as it aligns with their interpretation that marketing a property for sale indeed constitutes "use" of the property within the context of section 40-75(2)(a). This interpretation aligns with the stance taken in GST Ruling GSTR 2009/4, which outlines adjustments for changes in the extent of creditable purpose related to acquisitions made during the construction of new residential premises.

Furthermore, the ATO maintains that the term "used" should be interpreted in its ordinary sense in the context of the GST Act. While there is some overlap between the ordinary meaning of "used" and the defined term "apply," the ATO is committed to providing further clarity on this matter in GSTR 2009/4.

Regarding the requirement of a continuous five-year period as per section 40-75(2)(a), the ATO concurs with the AAT's position. However, since the AAT did not elaborate on the commencement date for this five-year period, the ATO plans to maintain its position, as outlined in GSTR 2003/3 and GSTR 2009/4, and aims to address this issue promptly before the AAT or Federal Court.

Lastly, the AAT's findings lend support to the ATO's view on the meaning of "passed on" and "reimburse" as defined in GSTR Ruling GSTR 2015/1 for the purposes of Division 142 of the GST Act.

Impact on Guidance

In response to this decision, the ATO will review and update GSTR 2003/3 and GSTR 2009/4 to provide greater clarity on the issues discussed in the case.

Seeking Input

The ATO is inviting comments on this Decision Impact Statement until October 27, 2023. This provides an opportunity for stakeholders to provide input and contribute to the ongoing development of tax guidance and policy.

This decision and its associated impact statement underscore the importance of staying informed about changes in tax law and regulations, particularly in the dynamic real estate and property development field. Tax professionals, property developers, and investors should monitor developments closely and seek expert advice to ensure compliance and optimize their financial strategies.

Source: Decision Impact Statement 2021/3014, ATO website, September 27, 2023, accessed on September 27, 2023.

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