Don't forget your GST obligations when arranging your project finance

Your GST obligations are not a project cost as they are ‘self-liquidating’ however, they are a cost that you need to account for from a cash flow perspective.
Financiers have a number of ways of dealing with GST on both the initial site acquisition and then the GST portion of the subsequent development costs.

GST ON INITIAL LAND ACQUISITION – When considering the funding of the initial site acquisition, you need to be clear with the potential financier on how GST payable on the acquisition is to be dealt with. Some funders will require that you cover the GST from your own cash flow or capital resources while others will allow a temporary gearing excess to fund the GST on the undertaking that you claim the refund and the payment is directed to reduction of the debt.

GST ON DEVELOPMENT COSTS – DEVELOPER FUNDED – Some financiers require the developer to finance the GST payable on the development costs from their own resources. Progress claims are funded from the loan facility on a “net of GST” basis and the developer is required to ‘top up’ the payments to the builder/creditors for the GST portion and then claim the GST refund back to their own account. In these cases the developer will need to allow a cash reserve from their capital contribution sufficient to fund 10% of the first two months estimated project costs. The GST refund claims then reimburse the cash reserve to provide for future GST outlays.

GST FUNDED BY A SEPARATE OVERDRAFT FACILITY – Some financiers will provide an overdraft facility specifically for the purposes of covering the GST commitment, which is separate from the construction facility. They will require an undertaking that the developer will claim the GST back on a monthly cycle and have the GST refund electronically credited to the nominated account. The overdraft is secured by the project security but financiers differ in the LVR and LCR calculation – some require it to be covered within their maximum tolerances where others will allow it ‘outside’ of their calculations of the key ratios, acknowledging the ‘self-liquidating’ nature of the facility.

GST FUNDED WITHIN THE PROJECT FINANCE FACILITY – Some financiers allow a ‘self-liquidating’ cost line within the project funding categories to cover GST – this is basically a cash flow utilisation of the project financing facility limit. The financier will allow the first two months claims to be GST inclusive but from month 3 onwards the progress claim allowable will be adjusted for the GST refund that should have been received by the developer from the claim two months previously. The developer still needs to manage their cash flow to account for the ‘ins and outs’ over a 3-month cycle.
The optimum outcome from a developer’s perspective is to be provided with a GST overdraft facility that is excluded from the financiers calculations of its key ratios but it is important to understand your financiers preference up front when finalising your funding.