This is the 200th blog that I have published since I started in June 2012. And as I missed celebrating the 100th blog, I am doubling my celebrations. This is a good excuse, because recently we successfully defended before the Federal Administrative Court (A-5099/2055 dated 20 January 2016) our client’s standpoint that demolition costs entitle to input tax deduction.

Specifically the issue was whether the input tax deduction is permissible on demolition costs, if the property was used for taxable purposes (option leased) and the owner later realises on part of the plot a residential building. The Federal Tax Administration (FTA) wanted to rely on the future use and to refuse the input tax deduction (see also the blog dated 20 April 2015). We took the view that the demolition of the building ended the former taxable use and the input tax deduction therefore must be permissible. The Court in effect agreed with us and allowed the input tax deduction. However it argued that between the demolition of the factory and the buildings being constructed there is only a loose connection. The supplies and services drawn for the demolition of the factory were from a VAT aspect not in temporal or factual (or spatial) proximity to the new buildings and therefore the input tax deduction is given in full.

The ruling does not yet have legal effect: hopefully the Federal Court will confirm our viewpoint and establish even more explicitly that reliance can be placed on the previous use. The arguments of the Federal Administrative Court could have the result that in the case of a sale the FTA’s former practice will be turned on its head. Previously the input tax deduction was allowed on demolition costs for the seller of the undeveloped property, if the demolished property had been used for taxable purposes. If now reliance is to be placed on the connection between demolition and new construction, this could have the result that the input tax deduction will be refused to the seller, if the purchaser starts the residential construction immediately after demolition and the sale.