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Ruling
Subject: GST and supply of residential property by lease.
GST and supply of residential property by lease
Question 1
Are you entitled to input tax credits on your acquisition of land and costs incurred on the construction of the residential units in relation to the Project?
Answer
No
Relevant facts and circumstances
You purchased land for construction of residential units as part of the Project.
You will construct xx residential units on the land. You advised that the units meet the definition of residential premises as set out in section 195 of the GST Act.
You originally intended to sell some of the units direct to the public. The remaining units were to be leased to a specified Agency (the Agency).
Your intention now is to provide all units to the Agency.
Construction is due to commence in mmyyyy.
The target group is primarily people in need of crisis accommodation.
The Agency will use the premises to provide accommodation (sublease) and support services to members of this target group - not meant to align with ATO's definition of provision of crisis accommodation.
The land associated with the units for sale was supplied under the margin scheme - you did not claim input tax credits for this part of the land. The remaining land was supplied as a fully taxable supply - you claimed input tax credits on this part of the land.
Lease and property management agreement
You provided a sample lease and property management agreement between you and an Agency.
The recitals to the agreement state:
Recitals
(a) The Director and the Agency have agreed to work collaboratively to provide affordable, long term social housing that recognises the rights of Sub-Tenants, acknowledges the importance of security of tenure, is suitable and responsive to the needs of the Target Group and is integrated into the community.
(b) The Director is the registered proprietor of the Premises.
(c) The Agency is an organisation with expertise in the provision of social housing and property management services.
(d) The Director has agreed to grant a lease of the Premises to the Agency so that the Agency can sub-let the Premises for the purpose of providing affordable, flexible and long term housing, and on site support services, to particular sectors within the community in a manner which is generally consistent with the approach taken by the Director in providing public housing.
(e) The parties wish to record their agreement on the terms set out in this Agreement.
Agreement Schedule
Item A identifies the premises
Item B provides for the payment of a peppercorn rent ($X for the term of the agreement).
Item C states that the Permitted Use is for the provision of residential accommodation and related services to the Target Group in accordance with the Service Agreement
Lease clauses
The most relevant clauses are:
Clause D.1 provides:
"From the Commencement Date, the Director agrees to lease the Premises to the Agency and the Agency agrees to accept the Lease of the Premises for the Term on the terms and conditions set out in this Agreement."
Under clause E, the Agreement expires on the day which is Y years and Z day from the commencement date.
Clause F requires the Agency to pay rent to the Director and to pay the outgoings associated with the property.
Clause G sets out the terms for subletting of the premises, including maximum rental amounts.
Under Clause H, the Director is generally responsible for repairs and maintenance.
Relevant legislative provisions
A New Tax System (Goods and Services Tax) Act 1999 Division 11
A New Tax System (Goods and Services Tax) Act 1999 section 40-35
A New Tax System (Goods and Services Tax) Act 1999 section 195-1
Reasons for decision
Under Division 11 of the GST Act, you are entitled to the input tax credit for any creditable acquisition that you make. However, under section 11-15 of the GST Act, you are not entitled to the credits to the extent that the acquisition relates to making supplies that would be input taxed.
Your acquisition of the land and construction services relate to the provision of the residential units to the Agency.
Residential premises is defined as land or a building that:
· is occupied as a residence or for residential accommodation; or
· is intended to be occupied, and is capable of being occupied, as a residence or for residential accommodation;
(regardless of the term of the occupation or intended occupation) and including a floating home.
You advised that the residential units that you will construct and supply to the Agency will meet this definition of residential premises.
You contend that you are simply making the units available to the Agency, effectively for them to manage on your behalf. Therefore, you are not making an input taxed supply of residential premises.
However, the lease and property management agreement sets out the basis on which the premises will be supplied to the Agencies. Among other things, it details the premises to be supplied, the term of the lease and the rental to be paid ie it is a lease. Although the rental is only nominal, it is nonetheless consideration, thus making the agreement a valid lease.
Under section 40-35 of the GST Act, a supply of residential premises by way of lease is input taxed. Accordingly, your acquisitions of the land and constructions services will relate to this input taxed supply of residential premises. Therefore, they will not be creditable acquisitions and you will not be entitled to the input tax credits.
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