A developer who has acquired a property for the principal purpose of making taxable supplies (and has received a full input tax deduction), may then rent out the property for residential purposes. This may occur if the developer is unable to sell the property. Such a supply is an exempt supply.

As a developer or dealer, you may decide the time is not right to sell a property, so rent it out. If you decide to hold and rent out a property rather than selling it at a loss during times of declining property prices or slow sales, there are implications for income tax, and GST, if you are registered.

 

Income tax

Your rental income will have to be included in your income tax return and any costs associated with the rental may be claimed.

You may be able to recover some or all of the unclaimed input tax if you later dispose the houses in the course of taxable activity.

You will not be able to claim any depreciation on the property as the property is treated as trading stock.

 

GST

If the asset is acquired for the principal purpose of making taxable supplies, the person can claim a full input tax deduction. The person can’t claim an input tax deduction if the asset is not acquired for the principal purpose of making taxable supplies.

Developers may be registered for GST and so are likely to have claimed a GST refund when they purchased of the property.

When a property is acquired for the principal purpose of making taxable supplies (in this case property dealing or speculation), but is then applied for a purpose other than making taxable supplies (in this case residential rental), you must make an adjustment to reflect that non-taxable purpose.

The developer may be able to recover some or all of the unclaimed input tax if she later disposes of the houses in the course of her taxable activity.

 

Rent received & GST

Where the goods acquired for the principal purpose of making taxable supplies are subsequently applied for a purpose other than making taxable supplies, the GST ACT deems a supply of those goods to occur to the extent of the subsequent application.

In other words, the Act deems the supply of rental accommodation (ordinarily an exempt supply) to be a taxable supply. The developer must account for output tax on the rent received.