GST on a Mixed-Supply Property Development and Going Concern
Harbourline Developments Pty Ltd is GST-registered and builds a mixed-use tower. Level 1 comprises 12 residential apartments sold off the plan for $9.6m. Level 2 is a retail arcade leased to tenants for $4.2m (plus GST). Harbourline also sells its wholly-owned subsidiary, which operates a managed shopping centre, as a going concern for $15m. The contract for the going concern states 'GST inclusive' and does not mention going concern. Harbourline has claimed $2.1m of input tax credits on construction, of which $600,000 relates to the residential apartments. The ATO audits and argues the going concern supply is taxable and that the residential input tax credits are overstated because the apartments are input-taxed.
1. Analyse the GST treatment of the residential apartments, the retail arcade and the going concern sale.
Read the worked answer
Residential apartments. A supply of residential premises by way of sale is input-taxed (s 40-65 GST Act) unless it is new residential premises. Off-the-plan apartments in a new tower are new residential premises, so the sale is taxable and GST applies at 10% on the margin or full value depending on the margin scheme election. If no margin scheme is used, GST is 1/11 of $9.6m = $872,727. If the margin scheme is used, GST is 1/11 of the margin over the original acquisition cost.
Retail arcade. Commercial premises leased are taxable supplies; GST of 1/11 of $4.2m = $381,818 is charged and remitted, with input tax credits available on related costs.
Going concern. A supply of a going concern is GST-free under s 38-325 only if: the supplier and recipient agree in writing that it is a going concern; the recipient is registered; and the enterprise is carried on until settlement. Here the contract says 'GST inclusive' and is silent on going concern - the written agreement requirement is not satisfied, so the supply is taxable. GST of 1/11 of $15m = $1,363,636 is payable unless the contract is amended before settlement. Harbourline should execute a deed of amendment expressly stating the supply is a going concern, with the recipient's ABN and GST registration confirmed.
2. Assess the $600,000 input tax credit claim on the residential apartments and advise on remediation.
Read the worked answer
The error. Input tax credits are not available for acquisitions relating to input-taxed supplies (s 11-15). If the apartments are new residential premises, the sales are taxable, so credits on construction are available - but only to the extent of creditable purpose. The $600,000 attributed to the apartments is creditable if the apartments are sold as taxable new residential premises. The ATO's argument that they are input-taxed fails on the new residential premises analysis.
However, if any apartments are retained and rented, that portion is input-taxed and the credits must be apportioned. Harbourline should review the floor plan: if, say, 2 of 12 apartments are held for rent, 1/6 of the $600,000 ($100,000) is not creditable and must be reversed.
Remediation. If credits were overstated, Harbourline should make a voluntary disclosure. A disclosure before audit notification reduces the shortfall penalty to 20% (or nil for a genuine mistake with reasonable care), and the general interest charge applies from the due date. If the ATO has already notified the audit, the base penalty is 75% for intentional disregard or 50% for recklessness. Harbourline should also consider the margin scheme election to reduce GST on the apartments, provided the supplier acquired the land before 1 July 2000 or the margin scheme is otherwise available.