Decision impact statement
Commissioner of Taxation v Gloxinia Investments Ltd atf Gloxinia Unit Trust
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 FCAFC 46
2010 ATC 20-182
75 ATR 806
Venue: Federal Court of Australia
Venue Reference No: S 154 of 2010
Judge Name: Dowsett, Kenny & Middleton JJ
Judgment date: 24 May 2010
Appeals on foot: No
Commissioner's application for special leave to appeal to the High Court refused on 1 October 2010
Impacted AdviceRelevant Rulings/Determinations:
input taxed supply
long term lease
new residential premises
strata lot lease
Outlines the Tax Office view in relation to this decision, which is about the GST treatment of the sale of strata-titled home units:
- constructed by a developer on its own account;
- on lands already held by the developer by virtue of an existing long-term lease granted to the developer by a local Council; and
- whereby the developer's existing long-term leasehold interest in the land, upon completion of construction of the home units, will be converted into individual 99 year strata lot leases.
Brief summary of facts
The taxpayer, Gloxinia, is the trustee of the Gloxinia Unit Trust. Gloxinia entered into an agreement with Woollahra Municipal Council with respect to the redevelopment of a site in Double Bay. At the time of entering into the agreement with the Council, Gloxinia already occupied the site under an existing long term lease that was transferred to Gloxinia in 1994, with the term of this existing lease expiring on 4 May 2063.
The principal legal agreement that governs the terms of the redevelopment project is the Agreement for Lease ("AFL"). Gloxinia executed its counterpart of the AFL on 19 October 2007 and the Council executed its counterpart on 22 October 2007.
In accordance with the terms of the AFL, Gloxinia is required to undertake the development in a staged manner, although Gloxinia can undertake the works contemporaneously. The Works consist of the Retail Works, the Car Park Works and the Residential Works.
As the various stages of the project are completed, it is agreed that Gloxinia will surrender its existing lease and then take back 99 year leases from the Council.
Following completion of the Residential Works, and upon registration of a strata leasehold plan, the Council will grant leases to Gloxinia over each of the 28 individual strata lots in that strata leasehold plan. The owners' corporation will be granted a lease of the common property in that strata leasehold plan.
Gloxinia intends that, after completion of the Residential Works and grant of the Strata Lot Leases by the Council, it will sell to third party purchasers each of the residential premises that is the subject of a lot in the strata leasehold plan.
Issues decided by the court
The issue in dispute in this matter was whether the home units will have previously been the subject of a long term lease and no longer be new residential premises pursuant to s 40-75(1)(a) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), when Gloxinia sells them to third parties by assigning the individual strata lot leases.
The majority of the Full Federal Court (Kenny and Middleton J) held that when the strata lot leases are granted to Gloxinia, there is a grant or assignment of real property, which effects a supply, pursuant to s 9-10 of the GST Act, by way of a long-term lease of each of the home units that is the subject of a lot in the Strata Leasehold Plan.
Having found that the grant of the strata lot leases involves the making of a supply of each of the home units to Gloxinia, the majority held that the home units, when sold by Gloxinia, will have previously been the subject of a long term lease and will no longer be new residential premises pursuant to s 40-75(1)(a) of the GST Act.
The Court concluded that, pursuant to s 40-65 of the GST Act, the sale of the home units by Gloxinia to third parties would be input taxed supplies of residential premises.
Tax Office view of Decision
Subsection 40-75(1)(a) of the GST Act provides that residential premises are new residential premises if they have not previously been sold as residential premises and have not previously been the subject of a long term lease.
The Commissioner considers the effect of the decision in this case, under the current law, to be as follows:
Development lease arrangements
- A developer supplies development services to the land owner when they undertake development works pursuant to the terms of a development lease arrangement. Subject to the application of Division 82, the supply of those development services will be a taxable supply, and the land owner will make a corresponding creditable acquisition.
- Upon transfer or grant of the freehold or leasehold title to the land comprising the completed works to the developer, the land owner makes a taxable supply to the developer. The consideration received from the developer will include the development works undertaken by the developer (except any works to which Division 82 applies).
- To the extent that the land comprises residential premises, the developer does not make a creditable acquisition in acquiring the land from the land owner. This is because the acquisition relates to the developer's subsequent sales of the premises to home buyers and investors and, in accordance with the decision, those subsequent sales are input taxed supplies of residential premises.
Sale of newly constructed residential stratum unit
- The grant by a government agency, to a developer, of a long-term lease with respect to a newly constructed residential unit that is an individual lot in a strata leasehold plan will give effect to a supply of that residential unit to the developer. A subsequent sale of the residential unit, by way of assignment of the long-term leasehold interest, will be an input taxed supply of residential premises. In accordance with the decision, at the time of the subsequent sale, the residential unit will not be new residential premises because it will have previously been the subject of a long term lease.
- Similarly, the transfer for consideration under a development lease arrangement, by a government agency, to a developer, of a community or strata title with respect to a newly constructed residential unit that is an individual lot in a strata plan is a sale of that residential unit to the developer. A subsequent sale of the residential unit will be an input taxed supply of residential premises. At the time of the subsequent sale, the residential unit will not be new residential premises because it will have previously been the subject of a long term lease.
However, it is noted that the Assistant Treasurer issued a press release "Clarifying GST Rules Around Residential Property" on 27 January 2011 announcing that the Government will move to amend the GST Act in the light of this decision to ensure that the Act achieves the intended policy outcomes for the GST treatment of residential premises.
The press release indicates that the amendments, when enacted, will have some retrospective application. The press release also indicates that the amendments will contain a transitional provision to ensure that taxpayers who have entered into arrangements on a basis consistent with the Court's findings, prior to the date of the press release, are not disadvantaged.
On the basis that it is intended that the proposed amendments will have some retrospective effect, the link above sets out the Tax Office's approach to amendments that are proposed to operate retrospectively.
Refunds of GST
The decision means that, under the current law, an overpayment may have occurred in instances where taxpayers have applied the ATO view in GSTR 2008/2, or otherwise treated relevant sales of residential premises as being taxable.
Pending any amendments becoming law, the ATO will process any claims for refunds, arising from the decision, in accordance with its usual processes.
Any entitlement to a refund will also be subject to relevant provisions of the Taxation Administration Act 1953 ('TAA'). In particular, the ATO considers that s 105-65 of Schedule 1 to that Act will apply in those circumstances.
Pursuant to s 105-65, the ATO is not required to refund an amount paid with respect to relevant sales of residential premises where the conditions for the operation of s 105-65 are satisfied, namely:
- the ATO is not satisfied that a corresponding amount has been reimbursed to the recipient of the supply; or
- the recipient of the supply is registered or required to be registered for GST purposes.
However, s 105-65 provides the Commissioner with the discretion to pay a refund in appropriate circumstances, even though the conditions for the operation of s 105-65 are satisfied. Paragraphs 128 to 132 of MT 2010/1 set out the guiding principles that the Commissioner will have regard to when considering whether it would be appropriate to exercise his discretion in a particular case.
Any refund claims received in this period will be considered on their merits having regard to the above conditions for the operation of s 105-65. If taxpayers consider that, in their particular circumstances, refunds should be paid, even though the conditions for the operation of s 105-65 apply, the ATO should be provided with full details of the basis of the overpayment and the reasons why a refund should be paid.
Any entitlement to a refund may also be affected by section 105-55 of Schedule 1 to the TAA, which provides for a four year time limit for entitlements to refunds, other payments or credits in relation to GST.
Implications on current Public Rulings & Determinations
GSTR 2008/2 will be withdrawn. The Court's decision means that the ATO view outlined in GSTR 2008/2 with respect to development lease arrangements with government agencies is incorrect under the current law.
GSTR 2003/3 will also be reviewed to ensure consistency with the Court's decision.
Implications on Law Administration Practice Statements
A New Tax System (Goods and Services Tax) Act 1999
A New Tax System (Indirect Tax and Consequential Amendments) Act 1999 (Cth)
Strata Schemes Leasehold Development Act 1986 (NSW)
Tax Laws Amendment (2006 Measures No. 3) Act 2006 (Cth)
Abbey National Building Society v Cann
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Allders International Pty Ltd v Commissioner of State Revenue (Vic)
(1996) 186 CLR 630
96 ATC 5135
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Australian Guarantee Corporation (NZ) Ltd v Nicholson
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Brady King Pty Ltd v Federal Commissioner of Taxation
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2008 ATC 20-034
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CIC Insurance Ltd v Bankstown Football Club Ltd
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Commissioner of Taxation v Reliance Carpet Co Pty Ltd
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2008 ATC 20-028
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Gloxinia Investments Limited v Commissioner of Taxation
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Hadlee v Commissioner of Inland Revenue
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Saga Holidays Ltd v Commissioner of Taxation
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Sogelease Australia Ltd v Boston Australia Ltd
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Sterling Guardian Pty Ltd v Commissioner of Taxation
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Westley Nominees Pty Ltd v Coles Supermarkets Australia Pty Ltd
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Clarifying GST Rules around Residential Property - 27 January 2011 (Media Release No. 20)
The ATO's approach to dealing with retrospective law changes
The term 'development lease arrangement' is a reference to an arrangement whereby a developer becomes entitled to the supply of a freehold or long term leasehold interest in land upon satisfactory completion of a development on that land.
Division 82 only applies where the works are undertaken in return for the supply by an Australian government agency of right to develop land, and where they satisfy the other requirements stipulated in subsections 82-5(1) and 82-10(1). Division 82 does not apply if the supply of the works is a condition of the sale or long-term lease of the land to the developer, rather than a condition of obtaining a right to develop the land.