Matthew Cridland
The ATO has issued a taxpayer alert on GST and certain land deals involving government agencies known as “development lease arrangements”.
The concern is that some projects, government agencies and developers may be inconsistently applying GST, resulting in a big GST benefit, and that this will have a material impact on GST revenue for state governments.
Developers are being able to inflate their cost bases, reducing the GST payable on the sales of new residential premises (GST is payable on the first sale of a new apartment).
Where possible, developers reduce this liability under what is called a ‘margin scheme’ which allows a developer to deduct the consideration paid to acquire the underlying land of a development from the final sale price of the development.
GST is then calculated on the margin and not the full sale price.
To illustrate a typical arrangement, assume a developer purchased land for $22 million under the margin scheme. No GST credit is available for this purchase, so the net cost is $22 million.
The developer spends $88 million to construct new units.
The total sales price for all units is $300 million. The margin scheme allows the developer to deduct the $22 million paid for the land, so there is a margin of $278 million.
GST is paid on this margin, not $300 million.
In this situation there will be a GST saving of $2 million, being 1/11th of the land price.
In this example the GST rules do not permit the developer to deduct its development costs of $88 million when applying the margin scheme.
However, development lease arrangements with government agencies work differently, and here is where certain developers could be applying the rules inconsistently.
They involve a developer building commercial or residential premises on government land for the purposes of lease or sale on completion.
The developer gives free development services to the government in exchange for the government transferring ownership of the completed premises.
The true upside for the developer is that, unlike in the first example, it can deduct the $88 million for development costs when applying the margin scheme to its own end sales because the development services were a non-monetary consideration.
If the residential project above was undertaken on land owned by a government, the developer would pay that government $22 million upfront for transfer of the completed premises at the end of the project.
But no GST credit is available and net cost of the payment is $22 million.
The developer spends a net $80 million developing new units and because the government agency owns the land, the developer can say those $80 million in costs have been incurred to provide a development service to the government.
The developer is then liable for GST on those services and invoices $8 million to the government.
The government then pays that $8 million to the developer and then fully recovers that amount as a GST credit.
The government should also be liable for GST of $8 million as the free development work is additional non-monetary consideration for the transferred units.
The problem for the developer is that it cannot claim any credit if it pays the $8 million to the government agency.
To avoid this cost, some developers may argue statutory time limits apply and the government agency is no longer liable for GST if more than four years have passed following the initial $22 million payment.
The four-year time limits may not apply if there has been fraud or evasion.
The ATO states in the taxpayer alert that it may apply those exceptions if time limits have been exploited to create a mismatch.
The alert advises taxpayers who may have entered mismatched development lease arrangements to contact the ATO, warning they may face increased ATO scrutiny or penalties. Promoter penalties may also apply to advisers.
Developers that have been introduced to such arrangements by an adviser should consider obtaining independent advice, particularly if the adviser shared in any potential GST benefit through a contingency fee.
The adviser may have a conflict of interest.
Matthew Cridland is a partner at law firm K&L Gates
