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GST – Taxpayer alert: Why is the ATO so concerned about GST compliance in connection with development leases?

We have previously discussed issues surrounding the GST treatment of development leases. More recently, the ATO’s concerns with GST compliance involving development leases has led to the issue of a taxpayer alert. In this article, we take a look at the issues under consideration in TA 2018/3.

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We have explored the GST treatment of development leases in previous TaxEd newsletters. To refresh your memory, take a look at our article ‘Development lease arrangements with government agencies – GSTR 2015/2’.

On 26 November 2018, the ATO took the very serious step of issuing a taxpayer alert, TA 2018/3 ‘GST implications of certain development lease arrangements’, flagging concerns with GST compliance in this area. By way of background, the ATO only issues a taxpayer alert when it is concerned with an emerging practice that highlights a significant tax risk. Therefore, it is very important to be aware of the issue. For more information regarding the role and use of taxpayer alerts we suggest you review information located on the ATO website (QC 40441 – Taxpayer alerts).

The ATO’s concerns can be summarised as:

  • the failure by government agencies and developers to achieve GST compliance where ‘services’ are provided by developers as consideration for a land supply under the development agreement; and
  • developers incorrectly including the value of services as ‘consideration’ for the land supply where the development agreement does not support that view.

Regarding the first issue, GST compliance requires that the development services be treated as consideration for the supply of land by the government agency, and separately as a supply by the developer in return for which the land supply is consideration. The ATO is concerned that one or both of these transactions are being ignored when calculating the GST liability (and GST credit) for the supply of the land, particularly where there is a mismatch between the treatment by the government agency and the developer.

Regarding the second issue, the ATO is concerned that developers adopting this practice are incorrectly including the value of services undertaken by the developer (but not services provided as consideration for the land supply) as ‘consideration’ when determining the margin and resulting GST payable under the margin scheme when the land is later sold. By including the value of services as consideration, the margin is reduced and the GST payable is accordingly reduced.

As development leases often involve significant values, the amount of GST will also be significant—this would be one reason why the ATO has taken the action to issue a taxpayer alert. It appears that the ATO plans to actively review arrangements in this area, so it would be prudent for TaxEd members that engage in development leases to consider reviewing transactions they’ve entered into. It would also be worthwhile reviewing the procedures adopted in relation to entering into development leases, as well as the approach taken to GST compliance generally.

The recommendations encouraged by the ATO in TA 2018/3 are to contact the ATO, seek a private ruling from the ATO or seek independent advice. TaxEd is a registered tax agent and we are available to assist with any of these courses of actions.

Disclaimer: This article is based upon information available as at the time of publishing and may be subject to change.