If you have claimed input tax credits on construction costs and then rented out residential apartments your GST affairs are on the Tax Commissioner’s target list, particularly where the property has now been sold.

For many property developers tough economic times have meant that apartments built for sale have been held onto and rented, waiting for some glimpses of blue sky.

From a GST perspective, the basics are pretty simple – if you build a residential apartment and rent it out you can’t claim input tax credits on the costs of construction. If you build and sell a residential apartment you can claim input tax credits, and you also will have to pay GST on the sale.

Where you develop an apartment intending to sell it and then decide to rent it the GST treatment is a whole lot more complicated.

The Tax Commissioner issued a 184 paragraph GST ruling in 2009 setting out his view of how GST works in these circumstances. Basically he says that you need to look at intention – if you intend to make a taxable supply (like the sale of new residential apartments) then you can claim full input tax credits. If that intention changes to residential renting (which is an input taxed supply) the law requires you to make an adjustment to the amount of input tax credits (on construction costs, for example) that you previously claimed.

On the face of it, if you can’t show that you ever had a sale intention, or the ATO thinks that any expected sale was so far in the future that you were just running a rental enterprise, you would generally have to pay back all the input tax credits originally claimed.

The rules about how much you may be required to pay back to the Tax Commissioner are different if you change your intended use of a residential apartment (from sale to rental), and different again if you had two intentions at the same time (sale and rental) after you correctly claimed input tax credits on construction costs.

The challenge for developers will be to work through very very complicated tax rules to identify if they have to pay back any input tax credits, and also to prove to the Tax Commissioner (or a court) which rules in fact apply.

As with most tax complications evidence will be critical. Telling the ATO that you had an intention to sell while you were renting when you told the bank that you planned to rent for 10 years may not get you where you want to be.

It is always wise to understand the detailed consequences of a particular tax position before you spend all your energy pursuing it. For example, if you rent a residential apartment for more than 5 years the sale may not attract GST, provided the sole intention during the required period was rental and there is no evidence of a concurrent intention to sell during that time. Proving a “sole intention” may be very hard to do unless evidence has been kept along the way. Keep in mind that if you did form the sole intention to rent you may have triggered an obligation to pay back input tax credits claimed on the construction costs in any case.

To make life even more difficult, the actual adjustment steps that need to be worked through can be hugely complex, and the Tax Commissioner has been successful in court when he has disputed the calculations developers have used to work out how much input tax credits they needed to pay back.

That doesn’t mean that the Tax Commissioner is always right, however it is important to be aware of these GST traps before you get caught in the glare of the ATO audit spotlight.

As a first step, you should look at the input tax credits that were claimed during the construction phase of residential apartment developments. This is the starting figure that the Tax Office will be looking at. Depending on how big this number is, and the prospect that the Commissioner may want to charge penalties and interest, you can then make a decision about how important it is for you to drill down into the detail before the Tax Office knocks on the door.