TA 2018/3 – Tax Alert relating to GST underreported by developers on development works on land from Government Entities – including by mis-applying the ‘margin scheme’

On Mon 26.11.2018, the ATO released Taxpayer Alert TA 2018/3 – GST implications of certain development lease arrangements. It relates to GST which the ATO says has been under reported by developers, on development works undertaken on land acquired from Government Entities.

The ATO gives 2 examples:

1. The first is where a Government Entity supplies land, by way of lease, to a developer, in return for money and development works (which will revert to the Government Department, when the lease expires). The developer invoices the Government Entity for the development work, which claims input tax for the GST on the invoice, whilst the developer does not return the GST on the development. Also, the developer does the work under a short term lease, and then receives a long term lease, claiming that it’s own development is part of the cost of the supply, for ‘margin scheme’ purposes, when it on-supplies, say, new residential premises. The real problem here, appears to be the developer not returning any GST on the development. It’s really a barter transaction, in part (long term lease for, in part, development activities) and both parties ought have GST to pay and input tax credits to claim on the market value of the non-cash consideration.
2. The second is where the Government Entity supplies land to a developer, for money (without any obligation to develop the land). The developer develops the land (no doubt claiming input tax credits on the development) and without knowledge of the Government Entity, claims that the development works as part of the cost of it’s acquisition of the land, for margin scheme purposes. This is just wrong, under the margin scheme provisions (s75-10 of the GST Act) and results in the input tax credits allowed for the development never being recouped by a proper application of the margin scheme.

The ATO said it is engaging with taxpayers and government entities to examine the issues of concern and ensure that all parties have correctly accounted for their GST and income tax obligations. In situations 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, the fraud or evasion provisions may be considered, the ATO warned.

FJM 6.12.18

[LTN 228, 26/11/18; Tax Month – November 2018]

CPD questions (answers available)

1. Has the ATO alerted Government Entities and Developers to correctly report GST on development work, done on land, acquired from the Government Entity and on applying the ‘margin scheme’ in any on-supply of the developed property?
2. Do some of the schemes appear to rely on deliberately not reporting Development supplies, to the Government Entity?
3. Do some of the schemes involve claiming that development work, is included in the cost of acquiring the land, from the Government Entity, for the purposes of applying the margin scheme, for on-supply of the developed property (leaving at least some of the value of the development work outside the GST net)?
4. Does the arrangement above (Example 2) sound honest?