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Self Managed Super Fund (SMSF) Article
GST, Self Managed Super Funds and Residential Property Development
By Tony Negline.
This article may be out of date.
1st January 1970
The GST and super funds aren't easy bedfellows.
One reason for the complexity is that superannuation is deemed by the GST laws to be a financial service which is generally input taxed. That is, GST will apply to many of the goods and services super funds purchase (these are the inputs) in order to provide services to their members but GST is not charged on those member services.
Super funds often have to deal with a particularly nasty beast called a Reduced Input Taxed Credit.
Only "enterprises" can be registered for GST purposes and a super fund is specifically deemed by the GST laws to be carrying on an enterprise.
However most small super funds do not have to register for GST because the value of their GST taxable supplies is less than the GST Turnover Threshold (since July 2007 this has been $75,000 per annum).
A super fund which doesn't have turnover exceeding $75,000 may elect to register for GST. They will do this because they want to claim their input taxed credits. Those super funds that do register for GST need to realise that the additional work required to administer their GST obligations is often not worthwhile from a cost/benefit perspective.
In some cases a super fund trustee will have to register their fund for GST because it provides GST-taxable goods or services which have a commercial value more than $75,000.
Most small super funds that have to register for GST do so because the fund owns commercial property and GST applies to all non-residential properties.
An increasing number of Self Managed Super Funds are showing an interest in building and developing residential property. In this article we'll look at how the GST applies to residential property development transactions only and we'll do this by looking at several different examples. We'll not be looking at transactions involving existing residential properties.
In our first example lets assume that a super fund's trustees leases out a property as soon as its been built. Leasing residential property is input taxed which means that the GST on all building costs cannot be claimed even if registered for GST.
Secondly lets assume that a super fund sells the land and buildings as soon as possible after completion. If the super fund is registered for GST then GST input tax credits on some or all of the development costs can be claimed. This rule could also be applied to relevant repair or improvement costs that were initially made in order to get a property ready for sale.
It will be possible to claim GST input taxed credits even if the super fund is registered for GST but is not deemed to be running a property development business.
Thirdly lets take the second case but assume that the property cannot be sold so the super fund trustee decides to rent it out until market conditions improve. In this case the purpose of the transactions have obviously changed and this will have GST implications.
The Tax Office has issued GST Ruling 2009/4 when the purpose of residential property development changes. This ruling supersedes other ATO information released on this subject and taxpayers who relied on that old information before 4 February 2009 can continue to use it for transactions that occurred before that date.
The size of any GST adjustments will depend on how the construction costs have been paid which are called acquisitions under the GST laws.
Has the property been developed by the super fund itself and therefore the fund has paid for each and every item or were all development costs (including all plant and equipment) paid to a builder or developer in one lump sum or were larger payments made on a regular basis?
GST adjustments will only arise for GST-exclusive costs greater than $1,000 and provide "an enduring benefit in the form of the completed premises". This threshold has applied since July 1999 and has never been indexed.
In this third example the property is now being leased which means the super fund must adjust any GST input taxed credits it has claimed on the property it intended to immediately sell. These adjustments are called "increasing adjustments" because they increase the amount of GST payable to the ATO.
The adjustments for each acquisition made to build the property are reassessed over a number of "adjustment periods". The value of an acquisition at the time they are acquired determines the number of adjustment periods.
For example items which cost more than $500,000 have 10 adjustment periods. For most people an adjustment period will run for 12 months. At the end of each adjustment period a super fund needs to work out what increasing or decreasing adjustments should apply for that period.
Effectively this means that a super fund which paid more than $500,000 for any single item will need to track what purpose that item had over the lesser of the period of time it is owned by the fund or the 10 year period and adjust the amount of GST payable accordingly each adjustment period.
How will a super fund demonstrate what purpose it is holding an asset? "An objective assessment of the facts and circumstances will demonstrate whether or not new residential premises are being held for the purpose of the sale as part of an entities enterprise," say the ATO in the GST ruling.
If a super fund develops a residential property for sale it might lease it out before it's ultimately sold. This may raise the issue of dual purpose under GST laws and the necessity to apportion expenses between GST taxable and input taxed supplies. The tax office demands that an appropriate methodology be used and its GST Ruling details a calculation it calls the "output based indirect method" as an acceptable one because it is fair and reasonable.
Super fund trustees should take care with the construction of residential unit complexes that comprise multiple stratum units especially if some units will be sold and others will have a dual purpose of sale and lease.
These adjustment and apportionment rules need to be carefully applied against another GST rule which says that residential property cannot be new if it's been owned for more than 5 years unless a property remains for sale.
Fourthly lets assume that the super fund intended to lease out the property but some time after completion decides to sell it.
In this case the reverse of all the rules used in example 3 will apply.
In a future article we will look at GST and super funds in greater detail especially the thorny issue of Reduced Input Taxed Credits.
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