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Ruling

Subject: GST and sale of property

Question 1

Are your supplies of residential premises correctly classified as input taxed supplies?

Answer

Yes

Facts

You are registered for GST.

You conduct an enterprise of housing construction.

You entered a contract to acquire leasehold land.

The contract for sale provides that the seller agrees to grant or procure the grant of, and the buyer agrees to accept the lease for the price subject to the terms of the contract.

You entered a lease with a land owner in respect of the leasehold land. Under the lease and development agreements, you agreed to undertake the design construction and completion of certain works at your own cost.

You paid consideration in excess of $X (GST exclusive) and also incurred preliminary development costs,

After the completion of the works, subsequent leases were granted to you. The lease term is for a period in excess of 50 years.

You commenced or will shortly commence settling on contracts for sale of the subsequent leases to purchasers. Upon settlement of the contracts for sale, the subsequent leases were assigned from you to the purchasers.

During the preliminary phase of the residential development you acted in accordance with the prevailing ATO view at the time as outlined in Goods and Services Tax Ruling GSTR 2008/2 - development lease arrangements with government agencies (now withdrawn) and Goods and Services Tax Ruling Goods and Services Tax Ruling GSTR 2003/3 - when is a sale of real property a sale of new residential premises? Accordingly, during the preliminary phase of the development (prior to entering the Development Deed), you claimed all input tax credits due to the acquisitions being viewed as creditable acquisitions at the time.

You advised that in the event that the supplies are correctly classified as input taxed supplies, you will amend your business activity statements lodged for the relevant tax periods to treat the acquisitions as not being creditable acquisitions.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 section 9-5

A New Tax System (Goods and Services Tax) Act 1999 section 195-1

A New Tax System (Goods and Services Tax) Act 1999 subsection 40-70(1)

A New Tax System (Goods and Services Tax) Act 1999 subsection 40-70(2)

A New Tax System (Goods and Services Tax) Act 1999 subsection40-75(1)

A New Tax System (Goods and Services Tax) Act 1999 subsection 40-75(2)

A New Tax System (Goods and Services Tax) Act 1999 subsection 40-75(2AA)

A New Tax System (Goods and Services Tax) Act 1999 subsection 40-75(2B)

Tax Laws Amendment (2011 Measures No. 9) Act 2012 item 12 of Schedule 4

Reasons for decision

Under subsection 40-70(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), a supply of residential premises by way of long term lease is input taxed. However subsection 40-70(2) provides that the supply is not input taxed to the extent that the residential premises are:

o commercial residential premises; or

o new residential premises other than those used for residential accommodation (regardless of the term of occupation) before 2 December 1998

Input taxed means that there is no GST payable on the supply and there is no entitlement to an input tax credit for anything that is acquired to make the supply.

The definition of residential premises in section 195-1 of the GST Act refers to land or a building that is occupied as a residence or for residential accommodation, or is intended to be, and is capable of being, occupied as a residence or for residential accommodation.

Subsection 40-75(1) of the GST Act provides that residential premises are new residential premises if they:

(b) have been created through substantial renovations of a building; or

(c) have been built, or contain a building that has been built, to replace demolished premises on the same land.

Based on the submitted information, the premises to be supplied by way of lease are residential premises and not commercial residential premises. In addition, the residential premises have not been used for residential accommodation before 199X because they were constructed after this date.

If any of the provisions in subsection 40-75 (1) of the GST Act apply, the supply will, (subject to subsection 40-75 (2) of the GST Act) be new residential premises and will therefore be a taxable supply under section 9-5 of the GST Act.

The question to be determined is whether the residential premises that are supplied to the purchasers have ever been the subject of a long-term lease.

The definition of long-term lease in section 195-1 of the GST Act refers to a supply by way of lease, hire or licence (including a renewal or extension of a lease, hire or licence) for at least 50 years if:

· at the time of the lease, hire or licence, or the renewal or extension of the lease, hire or licence, it was reasonable to expect that it would continue for at least 50 years, and

· unless the supplier is an Australian government agency - the terms of the lease, hire or licence, or the renewal or extension of the lease, hire or licence, as they apply to the recipient are substantially the same as those under which the supplier held the premises.

The subsequent lease you have entered into is for a term in excess of 50 years. The supply from the land owner to you is a supply by way of a long term lease. Therefore the subsequent supply of the lease from you to the purchasers is a supply which has previously been the subject of a long term lease. On this basis the supply of the residential premises is not a supply of new residential premises as defined in section 40-75 of the GST Act. Accordingly, the supply of the residential premises by way of long term lease is an input taxed supply.

The Federal Court decision Commissioner of Taxation v Gloxinia Investments (Trustee) [2010] FCAFC 46 (Gloxinia) handed down on 24 May 2010, held that a developer's sales of newly constructed residential premises, constructed under a particular arrangement with a land owner (sometimes referred to as a 'development lease' arrangement) are input taxed supplies of residential premises.

On the facts provided the arrangement between you and the land owner is similar to the development lease arrangement that was the subject of the Gloxinia decision. Therefore your subsequent supply of residential premises will be input taxed as they have previously been subject to a long term lease.

On 21 March 2012, Tax Laws Amendment (2011 Measures No.9) Bill 2012 ("the Bill") received Royal Assent. The Bill contains amendments to Division 40 of the GST Act that aim to overcome the issues identified in Gloxinia. In particular, a new section (section 40-75(2B)) has been inserted into the GST Act to disregard a 'wholesale supply' (such as the supply made by the lessor to you in granting the consequent leases) of residential premises as a supply for the purposes of section 40-75(1)(a).

Whilst the new section 40-75(2B) applies in relation to supplies of residential premises occurring on or after 27 January 2011, there is an exception whereby certain arrangements which were entered into before 27 January 2011 will not be subject to section 40-75(2B). The exception is contained at item 12 of Schedule 4 to Tax Laws Amendment (2011 Measures No. 9) Act 2012.

Where the wholesale supply of consequent leases occurs after 27 January 2011, in order to qualify for the exception the following conditions must be satisfied:

a) The premises from which the residential premises were created had earlier been supplied to the recipient of the wholesale supply or one or more of its associates; and

b) Immediately before 27 January 2011, the recipient of the wholesale supply or one of more of its associates were commercially committed to an arrangement; and

c) Under the arrangement, the wholesale supply was conditional on specified building or renovation work being undertaken by the recipient of the wholesale supply or by one or more of its associates; and

d) No GST return (as amended) given to the Commissioner reports a net amount for a tax period that includes amounts equivalent to the input tax credits that the recipient of the wholesale supply would have been entitled to if its acquisitions relating to the next sale or long term lease of the residential premises were creditable acquisitions.

Application of the exception to section 40-75(2B)

a) Earlier supply to you of the wholesale supply

The wholesale supply of consequent leases by the lessor to you has not yet occurred and therefore will occur after 27 January 2011.

The premises from which the residential premises will be created is currently supplied to you under the residential holding lease

b) Commercially committed

You were a party to an arrangement, where the arrangement is legally binding:

You have directly made (with associates) acquisitions, having a total GST exclusive value of at least $X, in relation to the arrangement:

c) Wholesale supply conditional on specified building or renovation work being undertaken by the recipient of the wholesale supply.

The 'specified building works' are required under the arrangement, with reference to various clauses.

d) GST return details

You advised that in the event that the supplies are correctly classified as input taxed supplies, you will amend your business activity statements lodged for the relevant tax periods to treat the acquisitions as not being creditable acquisitions.

Subject to you amending the GST returns relating to the preliminary costs, you will satisfy this requirement of the exception to section 40-75(2B) of the GST Act.

Under section 40-75(2AA), residential premises are not new if

a) they are created from residential premises that become the subject of a property subdivision plan; and

b) the residential premises referred to in paragraph (a) were not new residential premises immediately before they became the subject of that plan.

Therefore, as the premises which are the subject of the units title plan are not new residential premises, your registration of a units title plan does not result in those residential premises becoming new residential premises.

Therefore, your supplies of residential premises that occur subsequent to the registration of the units plan will retain their status as input taxed supplies of residential premises.

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