In a recent case, a purchaser had purchased real property that contained a tenant but the purchase price had included GST. The purchaser sought an input tax credit for the GST component of the purchase price on the basis that that it intended to develop the site rather than use it for residential purposes.
The Federal Court therefore had to interpret the meaning of section 40-65(1) of the GST Act which provides:
“A sale of real property is input taxed but only to the extent that the property is residential premises to be used predominantly for residential accommodation (regardless of the term of occupation).”
The judge referred to an earlier decision of a single judge of the NSW Supreme Court (Toyama Pty Limited v Landmark Building and Developments Pty Ltd  NSWSC 83) which had held that the provision calls for a prediction as to future use and that intention is a significant element in that enterprise. The judge in that case held that in the case of a sale, the likely future use of the property will probably depend on the purchaser’s intentions, to be assessed having regard to objective circumstances such as the physical condition of the premises, the zoning or any restrictive covenants rather than the physical construction of the premises, and what that construction connotes about the intention with which the premises were designed, built or modified.
The Commissioner argued that unless this decision was clearly wrong it ought to be followed. Although the judge disagreed with this interpretation of the section he was not persuaded that the earlier decision was clearly wrong and therefore followed that decision.
The judge was referred to a Full Bench decision of the Federal Court (Marana Holdings Pty Ltd v Commissioner of Taxation (2004) 141 FCR 299) in relation to the meaning of “intended” in the definition of “new residential premises” in the GST Act. The Commissioner argued this decision meant that the above decision in Toyama was wrong. This was despite that fact that in the earlier decision, the judge had made reference to that case and held that decision was not relevant to the present section because the Court was considering other provisions of the GST Act.
The judge in this case also held that this Full Bench decision was not relevant to the interpretation of section 40-65(1) and in particular because the sections being considered by the Full Court used the word “intended” whereas the present section did not.
The issue therefore was what was the intention of the taxpayer at the time of the supply. In determining this intention it was legitimate to look at what the taxpayer did after completion to test whether the asserted intention existed at the time of the supply. Therefore there was nothing wrong in considering the fact that the taxpayer continued to allow the premises to be let for residential purposes after completion. that it was likely it would continue to lease the premises for the foreseeable future and that there had been no attempt to sell units off the plan of the alleged proposed development. The taxpayer had not met the onus of proof that its intention was to develop the property. Therefore the decision of the tribunal that the taxpayer did not have the intention at the time of the supply to develop the property but merely to let it for residential purposes and make a profit on re-sale was upheld.
The moral of this case is that if a taxpayer wishes to establish that it has purchased a property with the intention of development then it must have ensure that it not only has the requisite subjective intention but what the taxpayer does after completion is consistent objectively with that subjective intention.