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Ruling

Subject: GST and supplies of residential premises under a development lease

Question 1

Are your supplies of the newly constructed residential premises under a development lease correctly classified as input taxed supplies?

Advice/Answers

Yes

Question 2

Where you are not entitled to input tax credits in relation to the input taxed supplies of the relevant residential premises, can an increasing adjustment under Division 129 of the GST Act be used to repay the over-claimed input tax credit?

Advice/Answers

No

Question 3

If the outcome of question 2 is that each BAS required amendment, the taxpayer that all general interest charge (GIC) that would otherwise accrue in relation to the input tax credits that have been previously claimed be either remitted in full or in the alternative, remitted to the base interest rate.

Advice/Answer

See Reason for decision

Relevant facts

· You are a building entity and are registered for goods and services (GST)

· Prior to 20XX you were granted a long-term lease over land situated in Australia.

· Subsequently to the grant of the leases you have undertaken a medium density multi staged residential development on the land.

· Lease of the land

The lease was granted prior to 20YY by a government agency on behalf of the Commonwealth. The land is to be used for the purposes which includes residential use.

· The Deed provides for commencement of works, completion of works and list of works.

· 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 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. All supplies of residential premises made prior to 27 January 2011 have been treated as input taxed supplies, being the sales of residential premises that are not new residential premises

You have undertaken an exercise of quantification of the over-claimed input tax credit. An increasing adjustment pursuant to Division 129 of the GST Act was made in one of your BASs to repay the over-claimed input tax credits.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Sections 9-5. 40-65, 40-75

Reasons for decision

Question 1

Summary

Yes, the supplies of newly constructed residential premises in the relevant development are input taxed in accordance with the decision in Commissioner of Taxation v Gloxinia Investments (Trustee) [2010] FCAFC 46 (the Gloxinia case) and the amended legislation.

Detailed reasoning

The GST treatment of a supply of residential premises is considered under sections 40-65 and 40-70 of the A New Tax System (Goods and Services Tax) Act (GST Act). Under those sections, the sale or long term lease of residential premises to be used predominantly for residential accommodation is input taxed to the extent that the premises are not commercial residential premises or new residential premises.

The supplies of residential premises in the development are not supplies of commercial residential premises.

The term 'new residential premises' is defined in subsection 40-75(1) of the GST Act. Of relevance to this case is paragraph 40-75(1)(a) which states:

40-75 Meaning of new residential premises  

When premises are new residential premises

(1) *Residential premises are new residential premises if they:

(2) (a) have not previously been sold as residential premises (other than *commercial residential premises) and have not previously been the subject of a *long-term lease; or

(b)  …; or

(c)  …

Paragraphs (b) and (c) have effect subject to paragraph (a).

*asterisk denotes a defined term in the GST Act

The relevant supply in this case is a supply of a new land and house package by way of assigning a long term lease made since 20XX. Whilst it is accepted that the supply is a supply of residential premises as defined in the GST Act, the issue is whether the supply is a supply of new residential premises that would not be treated as input taxed under sections 40-65 and 40-70 of the GST Act.

Under paragraph 40-70(1)(a) of the GST Act, we need to consider whether the underlying supply in question (the house and land package) has previously been subject to a long term lease.

Goods and Services Ruling GSTR 2008/2 (issued on 11 May 2008) provided the view of the Tax Office on the supply of newly constructed residential premises under a development lease.

Under this Ruling, it was considered that the government entity merely sells or leases land (not land and the attached development works) to the developer. Therefore, when the developer supplies the completed residential premises by way of sale or long-term lease, it is making supplies of new residential premises, as the premises 'have not previously been sold as residential premises and have not previously been the subject of a long-term lease'. It followed that the supply is a supply of new residential premises and paragraph 40-65(2)(b) of the GST Act applies to make the supply taxable.

However, following the decision in the Gloxinia case handed down by the Federal Court on 24 May 2010, the ATO issued a Decision Impact Statement (DIS) providing the amended view of the Tax Office in relation to this decision.

In the DIS the Commissioner considers, amongst other things, that:

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 acquisitions relate 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.

Following the Court decision in the Gloxinia case, the Tax Office confirmed that the correct decision was the input taxed treatment of the supplies, and GSTR 2008/2 was later withdrawn to reflect the Court decision.

Supplies made on or after 27 January 2011

On 21 March 2012, the Tax Law Amendment (2011 Measures No 9) Act 2011 (TLAA) received Royal Assent. Of relevance to this case are the new subsections 40-75(2B) and (2C) that apply to supply of residential premises on or after 27 January 2011 (subject to certain exceptions contained in items 12 and 13 of Schedule 4 to the TLAA).

Transitional provisions

However, some supplies of residential premises after 27 January 2011 will not be subject to the amendments if the conditions contained in items 12 and 13 of Schedule 4 to the TLAA are satisfied.

Item 12 excludes certain 'wholesale supplies' of residential premises made on or after 27 January 2011, from the application of the new law [ss 40-75(2B)] subject to certain conditions being satisfied in relation to the whole sale supply.

In your circumstances:

· The wholesale supply to you was made before 27 January 2011.

· You were commercially committed to an arrangement under which the wholesale supply was or is to be made, immediately before 27 January 2011

· The land from which the residential premises were created had earlier been supplied to you under the Holding Lease.

· You entered into an arrangement for the purposes specified under clause 2(f) of the Holding Lease. Under sub-item 12(3) of Schedule 4 to the TLAA the term 'commercially committed' in relation to an arrangement means 'to be a party to the arrangement where the arrangement is legally binding'. The Holding Lease and the Deed are legally binding arrangements that you have entered into before 27 January 2011.

· The arrangement under the Holding Lease specifies that the purpose of the lease is to enable use of the premises only for the purpose of subdivision and constructing the works and building in accordance with the requirements of the deed. We therefore consider that the wholesale supply is conditional on specified building works being undertaken by you as clauses of the Holding Lease, the Deed have specified the works required to be completed by you prior to the wholesale supply:

· Any acquisitions relating to a subsequent supply by way of long term lease of the residential premises by you have not been treated as being creditable acquisitions for which entitlements to an input tax credit arises. This condition is satisfied where a GST return has subsequently been amended so that they does not include any input tax credit (or any part) mentioned above.

· In the June 20YY BAS you have amended your relevant GST returns to reflect that the acquisitions are no longer creditable, and have repaid all of the input tax credits previously claimed.

Therefore the requirements of the exception in item 12 are met in your circumstances.

You have provided that:

· A number of newly constructed residential premises were supplied in or after January 2011.

· The residential premises have been constructed pursuant to a particular arrangement under an arrangement between you ( the Developer) ad the land owner (a Government Authority) whereby you became entitled to the long term lease hold title in the premises conditional on specified building work being undertaken by you.

· The supplies were made by way of long term leases. The terms of all Consequent Lease exceed 50 years. And were assigned on settlement of the sales contracts to the purchasers.

Your supplies of will not be subject to the new law if the condition under Item 12 of Schedule 4 to the TLAA are satisfied. That is, the whole sale supply will be excluded from the application of the new law and the supplies will be considered as have been previously subject to a long term lease. It then follows that paragraph 40-70(2)(b) applies and the supplies are input taxed supply of residential premises.

As all of the conditions in Item 12 of Schedule 4 to the TLAA are met, the wholesale supply is not disregard (that is the new section 40-75(2B) does not apply). Therefore, the supplies of residential premises by you in the development are considered input taxed supplies.

Question 2

Summary

As the relevant acquisitions were not creditable acquisitions under section 11-5 of the GST Act in increasing adjustment under Division 129 of the GST Act cannot be used to repaid the over-

The over-claimed ITCs must be repaid by revising the relevant original BASs.

Detailed reasoning

Pursuant to subsection 7-1(2) of the GST Act, entitlements to input tax credit arise on creditable acquisitions.

You have provided during the construction phase it followed the ATO's view in GSTR 2003/3 and GSTR 2008/2)) and treated the acquisitions as creditable and therefore claimed input tax credits on all relevant acquisitions.

Following the decision in the Gloxinia case, the correct treatment of the relevant supply is input taxed rather than taxable.

The acquisitions in question are not creditable acquisitions under Division 11 of the GST Act. X 2 is not entitled to input tax credits for things acquired to make input taxed supplies. As you have claimed input tax credits that it is not entitled to, it is required to repay the over-claimed credits to the Tax Office.

The question is how the return of the over-claimed input tax credit can be done under the GST Act.

Division 129

Section 129-1 of the GST Act, although not an operative provision, provides a short explanation of the Division. It provides that when the extent of creditable purpose is changed by a later event, adjustments may be made.

Goods and services tax ruling GSTR 2000/24 Division 129 - making adjustments for change in extent of creditable purpose explains the Tax Office's view on how to work out an adjustment for an acquisition or importation under Division 129 of the GST Act. In particular, the Ruling explains the circumstances when an adjustment will arise for an acquisition. Paragraph 12 of this ruling states that:

When an adjustment arises

12. You may have an adjustment for an acquisition or importation where there is a difference between the actual use and the planned use of the thing for a creditable purpose. An adjustment also arises where there is a difference between the actual use of the thing up to the end of one adjustment period, and the actual use of it up to the end of the previous adjustment period. These adjustments are made in a tax period called an adjustment period

Similarly, paragraph 13 of GSTR 2009/4: new residential premised and adjustments for changes in extent of creditable purpose states that:

An adjustment under Division 129 arises for an acquisition in an adjustment period where:

· There is a difference between the actual application and the planned (or intended) application of the thing for a creditable purpose, or

· There is a difference between the actual application of the thing up to the end of one adjustment period and the actual application of the thing up to the end of the previous adjustment period.

The amount of the input tax credit depends on the extent to which the acquisition or importation is for a creditable purpose. In order to claim the correct amount of input tax credits, an entity will need to determine the extent of creditable purpose for its acquisitions and importations on a reasonable basis that reflects its planned use of an acquisition (section 11-15) or importation (section 15-10) in its enterprise relative to the total use.

Divisions 11 and 15 provide that it is the planned extent of creditable purpose for that acquisition or importation which is relevant for claiming input tax credits.

Division 129 provides that after an acquisition or importation is made, the extent to which it is actually applied or used for a creditable purpose may be different from the planned use. This means that the original input tax credit claimed may have been too much or not enough. Adjustments for such changes in the extent of creditable purpose are subject to the provisions of Division 129 of the GST Act.

The word 'apply' is defined in section 129-55 to include:

a. supply of the thing; and

b. consume, dispose of or destroy the thing; and

c. allow another entity to consume, dispose of or destroy the thing

Both Divisions 11 and 129 operate in respect of a 'thing'. Division 11 determines what input tax credits an entity is entitled to when it acquires a thing. Division 129 determines whether the amount it originally claimed in respect of the acquisition of the thing needs to be altered due to a change in use.

It is considered that 'applied' in step 1 of the method statement in section 129-40 requires the thing to actually be applied to a particular purpose, That is, the actual application of the thing. It compares this with the intention when the entity acquired the thing, or its former application of the thing. The method statement focuses on what the entity has actually done with the thing rather than a continuation of its intention when the entity acquired it.

· What are the consequences of this meaning of 'apply'?

Where an entity acquires a thing for a particular creditable purpose, but uses the thing for a different purpose, the only use relevant for the purposes of the method statement in Division 129 is the actual use of the thing. If the actual use is not for a creditable purpose, applying the method statement will result in an increasing adjustment that will require all of the input tax credits to be repaid in the first adjustment period.

· When does Division 129 apply?

As noted above, Division 129 operates where there is a change in the extent of creditable purpose. Section 129-1, when read in conjunction with section 182-10, requires the extent of creditable purpose to be changed by later events before you need to apply Division 129.

Division 129 only applies where there is a later event that causes the actual use of a thing to be different from the intended or former use of it. The later event could be any application of the thing. In other words, there has to be some active application of the thing, for example, applying residential premises to renting.

For example, a builder who constructs residential premises, with the intention of renting them and then selling the premises as new residential premises, will have both creditable and non creditable purposes in respect of acquisitions made to construct the premises. The builder will therefore be entitled to a proportion of the relevant input tax credits under Division 11. If, however, the premises are not sold during the first adjustment period, the actual use of the property has only been for a non-creditable purpose and the builder will be required to apply Division 129.

In your circumstances:

· you acquired things to build residential premises. The intended application of the thing acquired was the supply of the thing by way of an assignment of a long term lease to the purchaser.

· The actual application of the thing is the same. The purpose of the acquisitions was to supply the thing by way of an assignment of a long term lease to the purchaser. That is, the use of the things acquired to build the residential premises did not change from sale to, for example, rent.

The correct GST status of the supply is always input taxed, taking into account the change in the view of the Tax Office and the exception in Item 12 of Schedule 4 to the TLAA (the amendment). Therefore, where you acquired things to make residential premises and supply them as input taxed supplies, you did not acquire things for a creditable purpose under paragraph 11-15(2)(a) of the GST Act. It follows that you did not make creditable acquisitions and therefore is not entitled to any input tax credit (at any time) from those acquisitions under Division 11 of the GST Act.

The change in the Tax Office's view and subsequent legislative change is not a later event that changes the application of the things.

In conclusion, under Division 11 of the GST Act, you are not entitled to any input tax credit in relation to acquisitions of things to make the input taxed supplies. Division 129 does not have any application to these acquisitions as explained above.

In order to repay the over-claimed input tax credit, you need to revise its relevant BASs to exclude the incorrectly claimed ITCs.

There are only two ways an entity may correct an error in a tax period other than the tax period of the original BASs:

· under the 'Correcting GST mistakes' rules.

· under Division 19 of the GST Act (adjustments).

Under the 'Correcting GST mistake' rules an entity can make a correction on a later BAS subject to the correction limits. For an entity whose turnover:

· less than $20m: the correction limit is less than $5,000

· $20m to less than $100m: the correction limit is less than $10,000

· $100m to less than $500m: the correction limit is less than $25,000

· $500m to less than $1b: the correction limit is less than $50,000.

As your correction amount is greater than the correction limit, X 2 cannot apply the 'Correction GST mistake' rule.

Under subsection 29-20(1) of the GST Act, an adjustment is attributable to the tax period in which the entity becomes aware of the adjustment. However, for this section to apply there must be an adjustment event pursuant to of section 19-10(1) of the GST Act.

An adjustment event is defined in subsection 19-10(1) to mean any event which has the effect of:

· cancelling a supply or acquisition, or

· changing the consideration for a supply or acquisition, or

· causing a supply or acquisition to become, or stop being, a taxable supply or creditable acquisition.

The circumstances that you over-claimed input tax credit do not fall into any of the requirements above.

Therefore, you cannot revise the error in any BAS other than the original BASs.

Question 3

Summary

As each business activity statement requires amendment, we have considered your request that all GIC charges in relation to the over-claimed input tax credits be remitted either in full or to the base interest rate.

Detailed reasoning

The following events lead to the input taxed treatment of the supplies in prior to 27 January 2011 (That is the supplies made in November and December 20XX):

· GSTR 2008/2 was issued on 7 May 2008. This supported the view that the relevant supply is taxable, and therefore you were entitled to input tax credits for things acquired to make the taxable supplies.

· On 24 May 2010 the Federal Court handed down the Gloxinia decision, which provided the alternative view (that the supply would be input taxed).

· On 1 October the High Court refused the Commissioner's application for special leave to appeal.

You have advised that:

· For acquisitions made prior to 27 January 2011, for which relevant input tax credits have been claimed, you undertook an exercise of quantification of the over-claimed input tax credits. A repayment amount was reported in June 20ZZ BAS as an increasing adjustment pursuant to Division 129 of the GST Act.

When the High Court refused the Commissioner's application for special leave to appeal the Federal Court decision it is appropriate that you reviewed its supplies and input tax credit in light of the Court decision.

You have determined that it was not entitled to the input tax credits it claimed earlier for acquisitions made to make the input taxed supplies.

In relation to the supply, you have decided correctly that the supplies should have been treated as input taxed.

Your penalty and GIC remission request is considered in light of section 358 of the TAA, Law Practice Statement PS LA 2008/3 and the ATO's approach to dealing with retrospective law changes.

In reaching a decision we have also considered the following:

· You were correct in anticipating the law changes by treating the supplies prior to 27 January 2011 as input taxed.

· The over-claiming of input tax credits was caused by the view under GSTR 2008/2. These views were later found to be incorrect and withdrawn.

· The amendments to repay the over-claimed input tax credits should have been made when the character of the supplies was determined. However, this did not occur until the lodgement of the later BAS (as you believed that Division 129 applied and therefore believed that the correct timing to repay the over-claimed input tax credit was the June 20ZZ).

In these circumstances it is appropriate for the Commissioner to exercise his discretion in relation to penalties and interest. X 2 has acted in good faith and applied an approach that is fair, reasonable and equitable in view of the circumstances surrounding the case.

Accordingly the ATO has adopted the following approach:

· no tax shortfall penalties will apply.

· any interest attributable to the shortfall will be remitted to nil up to the date of the decision to treat the supplies as input taxed (from when no entitlement to input tax credit existed), it is 1 November 20XX.

· GIC applies at the base rate as from the date above to the actual date the repayment of the over-claimed input tax credits was made.

We note that this base GIC rate reflects the Commissioner's lack of access to these funds, rather than any element of punishment.

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