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Authorisation Number: 1012418886821

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Ruling

Subject: GST and the supply of residential premises

GST and supply of residential premises

Question

Will your supplies of residential premises in Australia, by way of assignment of a long term lease from you to third party purchasers be input taxed supplies?

Answer

Yes

Relevant facts and circumstances

The Land was offered for auction.

You were the successful bidder.

Consequently, you entered into a contract to acquire a Crown Lease over the Land from the relevant authority.

Completion of the contract was subject to the vendor completing certain 'works'.

The General Sales Information notes the following:

· 'Works' is defined

· The commencement date is defined.

· The date for completion is specified.

The Contract for Sale provides that:

· The premises may be used for residential purposes

· Residential use means a caretaker's residence, multi-unit housing, residential care accommodation, retirement complex, single dwelling housing and supportive housing;

· That the lessee shall within a specified time from the date of the commencement of the lease or within such further time as may be approved in writing by the relevant 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 relevant authority;

· That the lessee shall within a specified time 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 Statue Ordinance or Regulation to such development.

· That the lessee shall commence within a specified time months and complete within a specified time from the date of the commencement of the lease or within such further time as may be approved in writing by the relevant authority for that purpose, and prior to the commencement of any trading of business form the premises, the design and construction of....

· The Buyer will be required to pay a deposit at the auction and pay the balance of the purchase price on completion.

Settlement of the sale subsequently occurred on a specified date and the finalised 99 year Crown Lease was issued to you, commencing on the same day.

The Crown Lease contained particular clauses. These clauses were identical to those in the specimen Crown Lease.

You lodged Development Application 1 (DA 1) with the relevant Authority for construction of a residential development on the Land.

At a later date the relevant Authority issued a Notice of Decision ('NOD") in relation to DA 1. The NOD advised that relevant Authority had approved the proposal as lodged.

Later, Development Application 2 (DA 2) was lodged for subdivision of the Land and construction of a residential development on one of the proposed subdivided blocks.

Later, the relevant Authority advised that they had approved the proposal as lodged and provided copies of draft Crown Leases (for Blocks A, B and C) to replace the existing Crown Lease over the Land upon registration of the subdivision.

Later, pursuant to the subsequent DA 2 NOD, the Crown Lease over the Land was surrendered to the relevant Authority, and 3 new Crown lease were issued in its place over the subdivided land.

Each of the new Crown Leases contains particular clauses, similar to those contained in the specimen Crown Lease and the original Crown Lease issued over the land. Specified clauses required you to commence construction of the development by a specified date, with completion by specified date. Therefore, the obligations that were in place at the time of acquiring the original Crown Lease (ie. at auction) remain in place with the new Crown Leases.

As at the date of this ruling request, you have undertaken a residential development on Block B, being the development approved on DA 1. The strata title plan for that development was approved after 27 January 2011. Upon registration of this units plan the provisions of the crown lease (purpose, clause, term etc for Block B are carried over in the leases to the purchasers of each unit. The leases will expire on ddmmyyyy.

To date:

· you have undertaken a residential development on Block B,

· you have obtained approval for a residential development on Block A

· you are required to undertake a development on Block C. The new Crown Lease for Block C permits residential use, thereby allowing you to undertake a residential development on that block in the future, regardless of whether you undertake a residential development or not.

This ruling applies to all supplies of residential premises that will occur on the Land, regardless of whether those residential premises are constructed on Blocks A, B or C, of the Land.

Up to and including the date of this Private Ruling Request, you have acted in accordance with, the principles as established in Goods and Services Tax Ruling GSTR 2008/2 - development lease arrangements with government agencies (now withdrawn). Accordingly, you have claimed all input tax credits on acquisitions made in relation to the development.

Upon completion of the residential development on Block B an application was made to register a units plan (i.e. strata title plan), which was approved after 27 January 2011. Upon registration of the units plan, the provisions of the Crown Lease (purpose clause, term etc.) are carried over in the Units Plan. The unit title leases granted to you in respect of the registered units plan have a term of approximately xx years.

Upon completion of the residential development on Block A, you will make an application to register a units plan (i.e. strata title plan). Upon registration of the units plan, the provisions of the Crown Lease (purpose clause, term etc.) will be carried over in the Units Plan. The unit title leases granted to you in respect of the registered units plan are anticipated to have a term of approximately zz years.

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 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 subsection 40-75(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(2B)

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

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

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 information submitted, the premises developed on Block B, which are to be supplied by way of lease are residential premises and are 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. Similarly the premises proposed to be developed on Block A, will be residential premises constructed after 2 December 1998.

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.

You were granted a Crown Lease for the purpose of construction of a residential development on the Land, which initially included xx units. Subsequent to subdivision of the Land, approval has been granted for construction of further zz units.

Upon completion of the development on Block B, you made an application to register a units plan (i.e. strata title plan), which was approved on after 27 January 2011. Upon registration of the units plan, the provisions of the Crown Lease (purpose clause, term etc.) are carried over in the Units Plan. The unit title leases granted to you in respect of the registered units plan have a term of approximately xx years.

Upon completion of the residential development on Block A, you will make an application to register a units plan (i.e. strata title plan). Upon registration of the units plan, the provisions of the Crown Lease (purpose clause, term etc.) will be carried over in the Units Plan. The unit title leases granted to you in respect of the registered units plan are anticipated to have a term of zz years.

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 relevant Authority 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 a 'wholesale supply' (such as the supply made by ACTPLA to you in granting the consequent leases on block 10) 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)

The wholesale supply of the unit title leases for Block B to you occurred after 27 January 2011.

The wholesale supply of the unit title leases for Block A to you has not yet occurred,

The wholesale supply of the unit title leases for Block C (if any such supply is to happen) to you has not yet occurred,

Therefore, the wholesale supplies have occurred, or will occur, after 27 January 2011.

a) Earlier supply to you of the premises:

The premises from which the residential premises on Block B were created was previously supplied to you.

The premises from which the residential premises on Blocks A and C will be created was previously supplied to you.

b) Commercially committed to an arrangement

The arrangement in this matter is the development of Blocks A, B and C:

You were party to an arrangement, where the arrangement was legally binding.

You have incurred direct costs in relation to initial acquisition of the Crown Lease.

You have incurred additional direct costs, in excess of $200,000, in relation to the arrangement.

c) The wholesale supply was conditional on specified building or renovation work being undertaken by the recipient of the wholesale supply:

Under the arrangement, you are required to "erect an approved development on the land";

DA No 1 approved a residential development of xx units;

DA No 2 approved a development of zz units;

Under the arrangement, you are required to undertake specified works;

The wholesale supply of the unit title leases could not occur without the completion of the development;

Upon registration of the units plan, the relevant Authority made the wholesale supply of unit title leases for Block B to you;

Upon registration of the units plan, the relevant Authority will make the wholesale supply of unit title leases for Block A to you.

d) GST return details

You advised that in the event that the supplies are correctly classified as input taxed supplies, you will review and amend any prior 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 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.

Subject to you amending the GST returns relating to the preliminary costs, you have satisfied all the preceding conditions to the exception to section 40-75(2B) of the GST Act. Therefore, the premises are not new residential premises. Any supplies of the premises at Block A or B by you will be input taxed supplies of residential premises. Likewise, any supplies of the premises at Block C by you will be input taxed supplies of residential premises.

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