What’s in store for the massive property development and construction services sectors?
by Nithea Nadarajah
A modified form of SST (Sales and Services Tax) will take effect from 1 September 2018 onwards, replacing the previous GST regime.
Property development and construction services are two massive sectors that were previously exempted from the SST purview. Once again, both developers and construction companies are not included in the modified SST, with the exception of some construction materials that are subject to Sales Tax.
However, under the previous GST regime, these two sectors comprised a third of all businesses registered for GST. As the GST Act 2014 is yet to be repealed, and in the absence of any transitional provisions, businesses will be required to fall back on the law and its governing principles set out under Sections 66 and 67 of the GST Act 2014, said Thenesh Kannaa, Partner of TraTax, at a recent MIA programme on the impact of zero rating GST changes to these sectors.
Unlike most businesses, the nature of construction and property development projects is such that they take years (and some even decades) to complete. Moreover, contract payments are made progressively throughout the construction process according to project milestones or specified dates. Determining GST impacts will definitely be challenging.
Compliance Under Section 66 of the GST Act 2014
Section 66(2) of the GST Act 2014 stipulates that,
(2) Where there is a change in the rate of tax, the rate at which the tax is chargeable on any supply spanning the change in the rate of tax* shall be as follows:
(a) tax shall be charged at the old tax rate on the higher of the following amounts:
(i) full payment or part payment received before the date of change in the rate of tax; or
(ii) value of the supply of goods where the goods are wholly or partly removed or made available or the services are wholly or partly performed before the date of change in the rate of tax; and
(b) tax shall be charged at the new tax rate on the difference, if any, between the amount of the whole supply and the amount referred to in paragraph (a).
*Note: Supply spanning the change in the rate of tax is further defined in greater detail under Section 66(5) of the GST Act 2014.
In a nutshell, if a business were to receive monies under subsection 2(a)(i) above or supply goods or render services under 2(a)(ii) prior to 1 June 2018, the previous GST rate of 6% will be charged on the higher of either 2(a)(i) or 2(a)(ii); and the new GST rate of 0% will be applicable on the difference (if any) between the whole taxable supply and the amount referred to in subsection 2(a).
A pertinent point to note here is that Section 66(2) discussed above does not make any reference to invoices raised by businesses; it merely refers to monies paid, goods supplied and work-performed. For example, if a company raises its invoice prior to 1 June 2018 (with a 6% GST) but made payments or supplied goods or rendered services only after 1 June 2018, the company cannot expect its customer to absorb the 6% GST. The company would therefore be required to raise a credit note to reverse the 6% GST portion from the said invoice. Although, raising credit notes appear simple enough but its practical difficulty is evident in businesses where invoices are generated on a monthly basis e.g. monthly premiums charged by insurance companies or even monthly building maintenance charges. “The proposition for raising credit notes is legally correct but practically burdensome,” asserted Thenesh.
In terms of building contract payments payable by property developers (progressively according to project milestones) to the building contractors, an architect’s certificate is not mandatory to provide sufficient proof of work performed. However, in the absence of an architect’s certificate, the validity of the progress claim may be questioned by the Customs Department and proper justification would need to be provided by property developers to substantiate any claims made.
Thenesh advised contractors to adhere to Section 66(2) when calculating the appropriate GST rate applicable for retention sums. Retention sums are normally retained by property developers throughout the contract period and usually beyond the construction period, up to the expiry of the defects liability period. Hence, when the retention sum is invoiced by the contractor after 1 June 2018 in relation to work done prior to 1 June 2018, the 6% GST will apply on the retention sum and is payable to the contractor.
For commercial property development projects (residential development projects are exempt) involving a joint venture (JV) arrangement between two or more parties, the GST rate change and the application of Section 66(2) to calculate the GST rate may create some issues for the relevant parties concerned. For example, in 2016 a company that owns a parcel of land enters into a JV agreement (with a property development company) to supply the right to develop the said land (taxable service) for a non-monetary consideration comprising 30% of the completed units (taxable goods) which will only be completed in the year 2020. The question here is, when is the time of supply that would be used to determine the applicable GST rate? Is it the point of supply of the rights to develop the land (which is prior to 1 June 2018) or the point of supply of the 30% completed units to the land owner (which is after 1 June 2018)? Currently, there is no clear solution to address this issue which in the future may pose a huge problem for JV companies, he said. Hence, Thenesh reiterated the importance of the government issuing clear transitional rules and guides to address situations like the above accordingly.
Review of Agreements Under Section 67 of the GST Act 2014
Section 67 of the GST Act 2014 requires that contract values of any business agreements be automatically varied to take into account any changes in the GST rate, unless of course there is an express provision for the exclusion of any such change in the rate of tax charged, or where the change in the rate of tax has already been taken into account. All businesses (especially property developers), should review the provisions and clauses in their trade contracts and/or agreements to accommodate the variances in the GST rate.
Residential property developers (exempted under GST) would generally have potential cost savings (although these are not eligible for input tax credits) as development costs in relation to ongoing projects will be reduced in line with the new GST rate of 0%. Therefore, it is apparent that property developers will benefit from potential cost savings relating to ongoing projects [where the Sales and Purchases Agreements (SPAs) were entered into prior to 1 June 2018] and it would be necessary for them to not only review and revise the tax-related provisions in SPA but to relook at the selling prices in the SPA as well.
New property development projects with SPAs signed after 1 June 2018 should already include the necessary clauses. It is also advisable to account for any potential issues or variances that may arise upon the reintroduction of SST on 1 September 2018.