Edited version of your private ruling

Authorisation Number: 1012445174887

Ruling

Subject: GST and supply of residential premises

Question 1

Are your supplies of the newly constructed residential premises to purchasers by way of long term lease eligible to be treated as input taxed supplies?

Answer

Yes, once you have repaid the input tax credits already claimed

Question 2

If the outcome of question 2 is that each Business Activity statement (BAS) requires amendment, will the Commissioner remit, in part or in full, any penalties and /or general interest charges that would otherwise accrue in relation to the input tax credits that have been previously claimed?

Answer

Please refer to our reasons for decision.

Relevant facts and circumstances

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

· Prior to 27 January 2011 you were granted a long-term lease over land situated in Australia.

· Subsequent 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 2011 by a government agency on behalf of the Commonwealth. The land is to be used for purposes which includes residential use.

· Input tax credit claims during construction phase

During the construction phase you have treated the acquisitions as creditable in accordance with the view of the Tax Office at that time (GSTR 2003/3) and claimed all relevant input tax credits.

· Your unit plan is being registered. It is expected that the grant of the Units Plan will be made in the relevant year. You will subsequently commence settling on Contract of sales of individual certificate of titles to third party purchasers. Upon settlement of the sale contracts, the consequent leases will be assigned from you to the purchasers.

· Repayment of input tax credits

You have undertaken an exercise of quantification of the over-claimed input tax credit and will repay the claimed input tax credits.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999

Section 9-5

Sections 40-65

Section 40-75

Tax Laws Amendment (2011 Measures No 9) Act 2011.

Items 12 and 13 of Schedule 4

Taxation Administration Act

Section 358

Reasons for decision

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 relevant 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 relevant to the 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:

(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 newly constructed units have not been previously sold as residential premises. However, we need to consider whether the underlying supply in question has previously been subject to a long term lease.

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 Tax Laws Amendment (2011 Measures No 9) Act 2011 (TLAA)).

The purpose of subsection 40-75(2B) is to ensure that the intended GST treatment of residential premises is achieved. That is, that new residential premises constructed under development lease arrangement are treated as taxable supplies rather than input taxed where the premises are sold by developers to home buyers or investors.

This is the intended outcome even though there may have been an 'earlier wholesale supply' of the premises. Under subsection 40-75(2B) of the GST Act the earlier supply is disregarded for the purpose of determining whether residential premises are new residential premises if the residential premises are constructed pursuant to a particular arrangement.

The purpose of subsection 40-75(2C) is to ensure that the granting of individual strata lot leases over newly constructed residential premises upon a registration of a Units Plan (wholesale supply to the developer) is not, by itself sufficient to cause those premises to cease to be new residential premises (and to therefore be input taxed) when they are subsequently sold or supplied by way of long term lease.

Transitional provisions

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. Of relevance to your circumstances is Item 12 of Schedule 4 to the TLAA.

Item 12 excludes certain 'wholesale supplies' of residential premises (which can be vacant land) 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.

Under item 12, subsection 40-75(2B) does not apply if

(i) the wholesale supply happens on or after 27 January 2011; or

(ii) the wholesale supply happens before 27 January 2011 and the next supply of the residential premises happens on or after 27 January 2011

The wholesale supply is the supply of Consequent Leases from the Land Authority to the developer prior to the assignment of individual leases.

We consider that scenario (i) applies in your circumstances because the wholesale supply (by way of long term lease) to you will occur in the relevant year. The supplies of the newly constructed residences happen after 27 January 2011.

In your circumstances:

· The wholesale supply to you by the Government Authority is made after 27 January 2011. The Consequent Leases are expected to be granted in the relevant year.

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

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

· Prior to 27 January 2011 you entered into the arrangement with a government authority for the purposes specified under a clause 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 is legally binding arrangement that you have entered into immediate before 27 January 2011.

· The arrangement under the Holding Lease specifies in a clause that the land must be used for the purpose of multi-unit housing.

· The wholesale supply is conditional on specified building works being undertaken by you because a number of clauses of the Holding Lease and the Development Applications have specified the works required to be completed by you prior to the wholesale supply is made by the Authority.

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

You have provided that where the supply of the newly constructed residential premises is ruled to be input taxed it will review and amend any prior GST returns that have been lodged in relation to the development and supply of those residential premises to ensure that all relevant acquisitions are not being creditable.

As all of the conditions (subject to you amending its GST returns relating to the non-creditable acquisitions) in Item 12 of Schedule 4 to the TLAA are met, the wholesale supply to you from the government Authority is not disregarded (that is the new section 40-75(2B) does not apply). The supply of the newly constructed residential premises has not previously been the subject of a long-term lease.

Therefore, your supplies of residential premises are considered to be input taxed supplies, but only after you have amended your GST returns. Otherwise the requirements for item 12 of Schedule 4 to the TLAA to apply to disregard section 40-75(2B) of the GST are not met, and the supply will be taxable under section 40-75(2B) of the GST Act.

How to amend the GST returns to repay the input tax credits

Pursuant to subsection 7-1(2) of the GST Act, entitlements to input tax credit arise on creditable acquisitions. You have provided that during the development 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.

However, as considered above the correct treatment of the relevant supply is input taxed rather than taxable if you repay the input tax credits already claimed.

Under the 'Correcting GST mistakes' rules an entity can make a correction (for example to repay the input tax credits) on a later BAS, subject to the correction limits. For an entity whose turnover is:

· 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 the correction amount is greater than $50,000, you cannot apply the 'Correcting GST mistakes' rules. You are required to amend each BAS that you have over-claimed the input tax credits.

Question 2

Summary

No tax shortfall penalties will apply, and any interest attributable to the shortfall will be remitted to nil up to 19 April 2012.

GIC applies at the base rate as from 19 April 2012 to the actual date the repayment of the over-claimed input tax credits is made.

Detailed reasoning

The following events lead to you treating your supplies as input taxed:

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

§ On 24 May 2010 the Federal Court handed down its decision in Commissioner of Taxation v Gloxinia Investments (Trustee) [2010] FCAFC 46 (Gloxinia case), 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 provided that for all acquisitions made in relation to the development, for which relevant input tax credits have been claimed, you will undertake a review and repay the over-claimed input tax credits.

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 the fact sheet 'Goods and services tax treatment of new residential premises'.

Under the heading 'Administrative treatment' the fact sheet states that:

Administrative treatment

From 21 March 2012, the day of royal assent, each taxpayer will need to review their positions and do one of the following:

· revise their impacted activity statements lodged since 27 January 2011 (the date of effect of the amendments) if they did not anticipate the changes to the law correctly

· revise their impacted activity statement lodged since 27 January 2011 (the date of effect of the amendments) if they lodged it in accordance with the law as it was before 21 March 2012

· do nothing if they anticipated the changes correctly and lodged their activity statements in accordance with the amendments.

Taxpayers who revise their activity statements within 28 days of 21 March 2012 (that is, before 19 April 2012) will not be liable for any penalty or general interest charge (GIC) that may result from the revision. After this time, the normal ATO administrative treatment of penalties and GIC will apply.

In reaching a decision we have also considered the following:

· You did not anticipate the changes in the law and accordingly, in determining the extent of your entitlement to input tax credits, proceeded on the assumption that the supply of the consequent leases would be taxable rather than input taxed.

· An alternative classification of your supply was only recently brought to attention. As a consequence, you undertook its review, which has culminated in this private ruling request.

· The 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 reviewed in March 2012 (the date of Royal Assent of the amending legislation. However, this did not occur and you have now sought a private binding ruling on the correct GST treatment of the supplies.

In these circumstances it is appropriate for the Commissioner to exercise his discretion in relation to penalties and interest and apply 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 19 April 2012

· GIC applies at the base rate as from 19 April 2012 to the actual date the repayment of the over-claimed input tax credits is 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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