GST opportunities where adjacent properties are acquired to develop into a single lot

Developers can benefit under the GST margin scheme where adjacent properties are acquired and consolidated into a single development lot. This is often the case where the developed lots are sold under a community titles scheme.

There is a common misconception that, if a developer acquires part of a property as a taxable supply, it will affect its ability to use the GST margin scheme when the developer sells the developed stock.

Issues to consider

Where multiple properties are acquired, the GST treatment of the acquisitions may be different.

If the properties are consolidated, then the developer will need to determine:

• whether the margin scheme can be applied to sales to end purchasers;
• its acquisition cost; and
• any increasing adjustment.

A common misconception

Where a consolidated property comes from eligible acquisitions and ineligible acquisitions, we often see developers attempt an apportionment based on margin scheme eligibility when calculating the GST on the sold lots. This is not correct.

This is because the margin scheme is only unavailable if the developer:

‘acquired the entire freehold interest, strata unit or long term lease through a supply that was ineligible for the margin scheme.’

The word ‘entire’ means that where at least part of the property was acquired as a supply that was eligible for the margin scheme, and that property is consolidated with other acquisitions that were ineligible for the margin scheme, all of the subdivided lots may be sold under the margin scheme.

If this happens, there is an increasing adjustment that effectively reverses out the input tax credit that was previously available. However, this increasing adjustment is almost concessional, as it is triggered at the time of the sales of the developed lots, rather than the time of acquisition. The developer has the benefit of the input tax credit throughout the development phrase, and only has to reverse it out at a time that it receives sales proceeds.

How does it work in practice?

Whether this analysis will apply depends on how the property development is structured. If multiple acquisitions are then consolidated into one lot, then the sale of new residential premises, for example, from that one lot will all be eligible for the margin scheme if at least one of the acquisitions was made as an eligible acquisition.

However, if lots are sold from a title that was acquired entirely as an ineligible supply, even if part of a broader development, the margin scheme will be unavailable.

The consolidated title analysis most often applies for community title developments. For example, consider where adjacent properties were acquired as follows:

Properties acquired

The developer then intends to consolidate the titles into a single community title scheme and construct townhouses on that community title lot. The development looks as follows:

Properties developed

The effect of the above analysis is that:

• each of lots 1 to 13 may be sold under the margin scheme – assuming the other requirements are satisfied; and
• there will be an increasing adjustment equal to the input tax credits that were claimed for the property that was acquired as taxable without applying the margin scheme.

The developer would need to consider:

• an increasing adjustment for shop 2,
• the GST treatment of the acquisitions of the carpark, the two houses and the old apartments,
• if the acquisition of the warehouse and/ or shop 1 is a GST-free supply of a going concern, the potential increasing adjustment (which would trace back to whether the previous vendor claimed input tax credits on its acquisition).

How does the increasing adjustment work?

Section 75 22 sets out how to calculate the increasing adjustment. That section states:

Increasing adjustment relating to input tax credit entitlement

1. You have an increasing adjustment if:

(a) you make a * taxable supply of * real property under the * margin scheme; and

(b) an acquisition that you made of part of the interest, unit or lease in question was made through a supply that was * ineligible for the margin scheme; and

(c) you were, or are, entitled to an input tax credit for the acquisition.

The amount of the increasing adjustment is an amount equal to the * previously attributed input tax credit amount for the acquisition.

The effect of the provision is to back out any input tax credit that was previously claimed.

As noted above, while this is an increasing adjustment, there is a timing benefit in claiming the input tax credit at the time of acquisition and then reversing out that input tax credit at the time of the increasing adjustment – which is at the time that the developed lots are sold under the margin scheme.

Please contact a member of our team if you would like to discuss.