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Ruling

Subject: GST and leasehold supply of strata titled residential

Question

Are your supplies by way of lease of strata titled residential premises, to third party purchasers, input taxed supplies of residential premises?

Answer

Yes

Relevant facts and circumstances

You are registered for GST.

You acquired a leasehold interest in land as a GST-free going concern. The property had existing tenants in commercial premises.

You submitted a Development Application (DA) to construct a mixed use development, which included:

· X times I bedroom apartments

· Y times 2 bedroom apartments

· Z times 3 bedroom apartments and

· Xm² retail area.

A Notice of Decision ("NOD") in relation to the DA advised that the proposal was approved, subject to conditions. One of the conditions was that the existing Crown Lease over the Land be surrendered and a new Crown Lease be granted.

The new Crown Lease contained an amended Purpose clause which allows residential use to a maximum of X dwellings. It provides that the lessee is to hold the lease for a term greater than 50 years.

At Clause X the lease provides:

(a) - Commencement of development:

That the lessee shall within twelve months (12) from the date of the commencement of the lease or within such further time as may be approved in writing by the Authority for that purpose commence to erect an approved development on the land in accordance with plans and specifications prepared by the lessee and previously submitted to and approved in writing by the Authority;

(b) - Completion of development

That the lessee shall within X months from the date of the commencement of the lease or within such further time as may be approved in writing by the Authority complete the erection of the said approved development on the land in accordance with the said plans and specifications and in accordance with every Statute Ordinance or Regulation applicable to such development

(c) sets out that the purpose is to use the land for one or more of the following uses:

i. non retail commercial use

ii. residential use;

iii. restaurant

iv. shop

You conducted development activities on the land from the time you acquired the property and claimed GST credits on the costs in accordance with the Public ruling, Goods and Services Tax Ruling GSTR 2008/2 - development lease arrangements with government agencies. You incurred costs in excess of $200,000 on these development activities. This Public ruling was withdrawn on 11 May 2011 following the Full Federal Court decision in Federal Commissioner of Taxation v Gloxinia Ltd (as Trustee for Gloxinia Unit Trust) [2010]

You entered into a Development Deed with a third party for them to construct the premises for you. The Development Deed provides that:

· Upon settlement of the units the Developer makes a supply of development services

· The Developer will charge a development fee calculated and charged on a unit by unit basis.

Upon completion of the development, an application will be made to register a 'units plan', (ie a strata plan). Upon registration of the unit plan, the provisions of the Crown lease (eg residential construction, start and completion dates, etc.) will be carried over in Form 4 of the units plan and the unit title leases will be granted to the taxpayer in respect of registered unit plans having an identical term to the earlier crown lease that exceeded 50 years.

Settlements have not yet commenced and accordingly, the builder has not yet started charging you any development fees. No further input tax credits have been claimed since entering into the Development Deed with the developer.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Section 40-35,

A New Tax System (Goods and Services Tax) Act 1999 Section 40-70,

A New Tax System (Goods and Services Tax) Act 1999 Section 40-75,

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

A New Tax System (Goods and Services Tax) Act 1999 Section 135.

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:

· commercial residential premises; or

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

Long-term leases are defined term in section 195-1 to mean:

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:

(a) 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

(b) 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 leases you will enter into with the residents after issue of the strata plan are expected to last more than 50 years. Upon registration of the unit plan, the provisions of the Crown lease (eg residential construction, start and completion dates, etc.) will be carried over in Form 4 of the units plan. Therefore we accept that the leases of your premises from you to third parties will meet the definition of a GST Long term lease, as they are expected to continue for at least 50 years and on terms that are substantially the same as the lease you hold from the Crown.

Based on the submitted information, the premises to be supplied by way of leases are residential premises and not commercial residential premises. In addition, the residential premises have not been used for residential accommodation before 2 December 1998 because they were constructed after this date.

Therefore we will consider whether they are considered to be 'new residential premises' as defined in subsection 40-75(1) of the GST Act.

Paragraph 40-75(1) provides that residential premises are new residential premises if they:

(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) 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.

The relevant supplies in this case are the surrender of the long term lease to the crown following completion of the construction, followed by the resupply by the crown to you of the premises under a strata plan which is expected to be made some time in the future. The question to be determined is whether the supply of the premises under a long term lease to the third parties will have previously been supplied under a long term lease and therefore are not new residential premises.

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, your arrangement is similar to the development lease arrangement that was the subject of the Gloxinia decision. Therefore your subsequent supply of residential premises would be input taxed as they have previously been subject to a long term lease.

However, 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 any 'wholesale supply' (such as the supply made by ACTPLA to you in granting the consequent strata leases) of residential premises as a supply for the purposes of section 40-75(1)(a). This has the effect of making the consequent supply of strata titled premises to the new owners' taxable supplies of new residential premises.

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 items 12 and 13 of Schedule 4 to Tax Laws Amendment (2011 Measures No. 9) Act 2012.

Item 12 is relevant to your situation. In order for 40-75(2B) of the GST Act not to apply to a supply where there was an earlier wholesale supply of the premises, the following relevant conditions from Item 12 must be satisfied:

Subitem 1 Time of wholesale supply

(a) wholesale supply happens on or after 27 January 2011.

Subitem 2 Details of arrangement / Wholesale supply

(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 or more of its associates were commercially committed to an arrangement;

Commercially committed is a defined term. To be commercially committed, in relation to an arrangement, means:

i. to be a party to the arrangement, where the arrangement is legally binding; or

ii. to be the preferred tenderer (however described) in the final step in a bidding or tendering process relating to the arrangement; or

iii. to have directly made (with associates) acquisitions, having a total GST exclusive value of at least $200,000, in relation to the arrangement; or

iv. to have directly incurred (with associates) internal direct costs, of at least $200,000, in relation to the arrangement.

(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.

In your case:

Subitem 1: Time of wholesale supply

The wholesale supply of the unit title leases to you and the subsequent supply to third parties will occur after 27 January 2011. Therefore, you meet this requirement.

Subitem 2: Details of arrangement of wholesale supply

(a) The premises from which the residential premises will be created are currently supplied to you.

(b) You were commercially committed to the arrangement in that:

a. You entered into a legally binding Crown lease agreement

b. You have has incurred direct costs in relation to acquisition of the Crown Lease, being consideration for the acquisition of the Land and

c. You also incurred additional direct costs in relation to the arrangement.

(c) Under the Crown lease arrangement you are required to undertake "an approved development on the land in accordance with plans and specifications prepared by the Lessee and previously submitted to and approved by the Authority."

a. The DA for the construction, a mixed use development was approved

b. The Crown Lease required that the development, as approved, commence within twelve months and be completed within a specified time

c. The wholesale supply of the unit title leases cannot occur without the completion of the development

d. Upon registration of the units plan, the authority will make the wholesale supply of unit title leases to you.

(d) You have advised that, in the event that the future supplies are correctly classified as input taxed supplies, you will review and amend any GST returns that have been lodged in relation to the development of the Land to ensure that all acquisitions are treated as not being creditable acquisitions.

Subject to you amending your GST returns as set out above, you will satisfy all the preceding conditions to the exception to section 40-75(2B) of the GST Act contained in Item 12 of the TLAA 2012 and therefore, the premises are not new residential premises. Any supplies of the premises by the taxpayer to third party residents will be input taxed supplies of residential premises.

Further issues for you to consider

As you acquired the property as a GST free going concern, Division 135 requires you to make an increasing adjustment to take into account the proportion of supplies that are neither taxable supplies nor GST-free supplies.

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