GST is not always a straightforward tax. And when it concerns GST on property, there can be several shades of grey involved. Any SME considering developing property might like to consider what follows.
Whether a property is “residential premises used predominantly for residential accommodation” is a key factor in determining if GST is applicable and therefore, if a purchaser of such property who is registered for GST can claim input tax credits. There is some uncertainty about this issue as, among other things, it involves a consideration of the intention of a purchaser at the time of purchase.
In a recent decision, the Federal Court affirmed that a company (Sunchen Pty Ltd) was not entitled to claim an input tax credit (ITC) for the acquisition of a property. The case highlights some of the uncertainty surrounding this tax issue.
The company purchased the property in question in August 2006. The contract for sale included just over $47,000 in GST.
At the time of the purchase, the property was leased to a tenant whose right of occupation had approximately four months to run. In addition, the property was purchased with a development application that related to the construction of 10 units. In its Business Activity Statement (BAS) for the quarter ended September 30, 2006, the company claimed the ITC in respect of the property, which the Tax Commissioner disallowed.
In essence, if the house could be said to be “residential premises to be used predominantly for residential accommodation”, then the supply would be input taxed, so there will neither be a “taxable supply” nor a “creditable acquisition” under GST law.
Without a creditable acquisition, there could be no entitlement to an input tax credit. Conversely, if it is concluded that the premises are not residential premises to be used “predominantly for residential accommodation”, then the company would be entitled to claim an input tax credit.
The company contended that the words “residential premises to be used predominantly for residential accommodation” required an assessment of the likely future use to which the premises might be put and that assessment might be helped by considering the company’s intentions for the property. The Tax Commissioner, on the other hand, submitted that the expression was concerned only with an assessment of the physical characteristics of the premises without regard to any particular person’s intentions.
At first instance, the Administrative Appeals Tribunal (AAT) agreed with the Commissioner that the property was an input taxed supply because it was “residential premises to be used predominately for residential accommodation”. Subsequently, the taxpayer appealed to the Federal Court which concluded that no input tax credit could be claimed by the company.
The shades of grey
In reaching its decision, the Court considered that the meaning of the expression “premises to be used predominately for residential accommodation” required an objective view of the circumstances of the premises and their use. The Court said this interpretation was preferable to the decision of the NSW Supreme Court in Toyama Pty Ltd v Landmark Building and Developments Pty Ltd (2006) 62 ATR 73.
In that case, the Supreme Court said it was necessary to look at the predicted future use of the premises in question. However, the Federal Court said it was not persuaded to depart from the Toyama decision. Therefore, it said the expression requires “a prediction as to future use and that intention is a significant element in that enterprise”.
The Federal Court also considered the decision of the Full Federal Court in its 2004 decision in Marana Holdings Pty Ltd & Ors v FCT (2004) 57 ATR 521. It noted that decision did not require or permit an inquiry into the intentions of the taxpayers.
However, the Court took the view that “the thrust of Marana [was] that one should not search for the motives of any particular person in considering the questions raised by the definition of ‘residential premises’”.
The AAT had concluded that the company did not intend to develop the property as it had argued. It found that:
In determining the company’s intention, the Federal Court agreed with the AAT that it was legitimate to look at what the company did after acquiring the property to test whether the asserted intention existed. After considering the events that occurred after the acquisition, the Court concluded the intention of the taxpayer was not to develop the property. It therefore held that no ITC was available to the company.
This case illustrates some uncertainty surrounding this area of GST law. SMEs considering involvement in residential property should carefully consider this and seek good professional advice. Not being able to claim an input tax credit can certainly be a significant financial burden.
Terry Hayes is the senior tax writer at Thomson Reuters, a leading Australian provider of tax, accounting and legal information solutions.
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