In my small town (Canberra) we love property development which we can sell to well paid public servants. But there is something strange about Canberra (more than one thing but stay on point Ken). We don’t own our land, we lease it off the government for 99 year.
And after the Gloxinia case (Commissioner of Taxation v Gloxinia Investments (Trustee)  FCAFC 46) developers thought they were on a GST winner.
These developers often do their developments on land they have acquired under a long-term Crown lease that is automatically renewable, with the Commonwealth holding the reversion. They are set up like this:
- A developer enters into a contract for sale with a government agency to acquire a Crown lease over land in the ACT for a monetary purchase price.
- On completion of the contract (that is, once the developer has paid the full monetary purchase price to the government agency), a government agency is required to grant the Crown lease to the developer.
- The contract is contingent upon the developer entering into a project delivery agreement (PDA) with a government agency prior to or at the same time of entering into the contract.
- The Crown lease and the PDA provide that the developer must complete building works within a specified time period, for example, within 48 months from the date of the commencement of the Crown lease.
When the developers sell the land, they generally use the margin scheme, being the difference of what they bought the land for, against what they paid for it. But what is the “purchase price”? Everyone agrees it includes the case the developer pays for the lease of the land. But what about the costs of the developer building the houses, roads, drains… on the land?
People have argued that, under a contract that requires them to build all these (the PDA), it is consideration for the purchase of the land. And that makes the margin very small. The example in the draft Determination released recently (GSTD 2019/D1) has the developer buying the land for $5 million, doing $100 million of work on the land and let say selling it for $150 million. This would mean the margin is not $145 million (with about $14 million of GST payable), but rather is $50 million (with about $5 million of GST payable) – with the developer paying $9 million less in GST.
I know you are screaming that for the margin scheme to apply, they can’t claim input tax credits on the purchase price of the land. So if they spent $100 million on the building, they will have to give back all the GST. You are 100% right except, unfortunately for the Commissioner, the developer claimed all the GST on the development and now 4 years have past so they can’t amended their BAS to give it all back.
Effectively, we claim all the GST incurred on doing the development and they when we sell the property we don’t have to add GST when selling most of the development.
BUT IT DOES NOT WORK – In Draft Goods and Services Tax Determination GSTD 2019/D1 Goods and services tax: development works in the Australian Capital Territory the Commissioner states…
5. However, the building works and the associated site works a developer completes under a building arrangement are not consideration for the supply of the Crown lease by the government agency under section 9-5. While the developer is required to complete these works within a certain time period after acquiring the Crown lease, this stipulated timeframe does not make these works non-monetary consideration for the supply of the Crown lease.
What does this mean for my client who has treated the development costs as consideration for the supply of the Crown lease?
When the final Determination is issued, it is proposed to apply both before and after its date of issue. However, the Determination will not apply to taxpayers to the extent that it conflicts with the terms of settlement of a dispute agreed to before the date of issue of the Determination.
If you a private ruling or a settled dispute, you don’t have to do anything. If not, the margin you used is wrong and you should amend (if it is within the four year amendment period).
But most importantly, can we stop saying “Gloxinia” randomly at people we see walking down the street that we think might be property developers?