In late 2018, the ATO released Taxpayer Alert TA 2018/3 GST implications of certain development lease arrangements.
The ATO says it is reviewing arrangements involving property developers acquiring land from government entities, specifically where the developer provides development works to the government entity as payment for the land.
The ATO is concerned that some developers and government entities are not reporting the value of their supplies under these arrangements in a consistent manner, resulting in GST being underpaid.
One of the scenarios under review has the following features:
- A government entity agrees to supply land to a property developer. The agreement requires the developer to pay an amount of money, and also to do certain development works, as payment for the supply of land.
- The developer pays the amount of money to the government entity.
- The government entity may grant the developer a short-term lease, or licence, to allow the developer to complete the development works on the land.
- Upon completing the development works, the developer invoices the government entity for the value (including GST) of the development works.
- The government entity then supplies the land to the developer by granting the developer a long-term lease, or transferring title, over the land.
Following from this, when reporting their GST obligations in their activity statements:
- The government entity claims an input tax credit for the amount of GST included on the developer's invoice for the supply of development works. However, the government entity only reports the monetary payment received for the land, not including the value of the development works the developer provided as payment for the land.
- The developer does not report the supply of the development works it invoiced to the government entity. This results in the developer not paying GST on the development works provided to the government entity, despite having claimed input tax credits on all the acquisitions it used in completing those development works.
- The developer may include the value of all the development works completed on the land (including those it invoiced to the government entity) in the cost of the development when applying the margin scheme. This significantly reduces the amount of GST the developer pays on its supply of the property (as vacant land or a residential unit) to a customer.
The ATO is engaging with taxpayers and government entities to examine the issues of concern and ensure that all parties correctly account for their GST and income tax obligations in such situations. Fraud or evasion provisions "may be considered" where there is a change in how the arrangement is accounted for after the fact, so as to gain an advantage due to the lapse of the statutory periods for amending activity statements.