Edited version of your private ruling

Authorisation Number: 1012490648763

Ruling

Subject: GST and Development Lease arrangements

Question 1

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

Answer

No, your supplies of residential premises, by way of assignment of a long term lease from you to third party purchasers will not be input taxed supplies.

Relevant facts and circumstances

The Land was offered for Auction, with you being the successful bidder.

You entered into a contract to acquire the Land via a Crown Lease.

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

The sales information provided clauses in relation to the:

· works

· commencement date of the Crown Lease will be the date of the Contract for Sale.

· date for completion specified in the Contract for Sale is the earlier of:

· (a) - xx days from the date the Seller notifies the Buyer that the works have been completed; and

· (b) specified date

The Contract for Sale provides that:

· The Lease will be granted substantially upon the terms and conditions of the specimen Lease.

The Contract for Sale included a specimen Crown Lease for the Land.

The specimen Crown Lease contained clauses in relation to the Purpose; Commencement of Development; Completion of Development; and Associated Works.

Settlement of the sale occurred on a specified date, and the finalised Crown Lease (over 50 years) was issued to you, commencing on the same day.

The Crown Lease contained Clauses which were identical to those in the specimen Crown Lease.

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

The Authority issued a Notice of Decision (NOD) in relation to the DA. The NOD advised that the Authority had approved the proposal as lodged.

The subsequent DA was lodged with the Authority for subdivision of the Land and construction of a residential development on one of the proposed subdivided blocks.

The Authority issued a NOD in relation to the subsequent DA. The NOD advised that the Authority had approved the proposal as lodged and provided copies of draft Crown Leases to replace the existing Crown Lease over the Land upon registration of the subdivision.

Pursuant to the subsequent DA and NOD, the Crown Lease over the Land was surrendered to the authority, and new Crown Lease's were issued in its place over the subdivided land.

Each of the new Crown Leases contains clauses similar to those contained in the specimen Crown Lease and the original Crown Lease issued.

Specified clauses in the Crown Lease required you to commence construction of the development by a specified date, with completion by a specified date.

As at the date of this ruling request you have undertaken a residential development on a specified piece of land. The strata title plan for the development was approved on a specified date.

Upon registration of this units plan the provisions of the crown lease (purpose, clause, term etc for the Land) are carried over in the leases to the purchasers of each unit.

The leases will expire on a specified date. Settlement of these units (upon assignment of the unit titles leases to purchasers) commenced in xx/xx/xxxx, with the majority occurring in xx/xx/xxxx.

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

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 40-65(1)

A New Tax System (Goods and Services Tax) Act 1999 subsection 40-65(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 subsection 40-75(2C)

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

Reasons for decision

In this ruling, please note:

· All legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) unless otherwise specified.

· All terms marked by an *asterisk are defined terms in the GST Act.

Goods and services tax (GST) is payable on taxable supplies. Section 9-5 states:

You make a taxable supply if:

(a) you make a supply for *consideration; and

(b) the supply is made in the course or furtherance of an *enterprise that you *carry on; and

(c) the supply is *connected with Australia; and

(d) you are *registered, or *required to be registered.

However, the supply is not a *taxable supply to the extent that it is *GST-free or *input taxed.

In your case, the individual units will be sold for consideration, the supplies will be made in the course of your enterprise, the supplies are connected with Australia and you are registered for GST. Consequently, the supplies will be taxable unless the supplies are GST-free or input taxed. As your supplies are not GST-free, the only remaining issue to be determined is whether your supplies are input taxed.

Under subsection 40-65(1), a sale of real property is input taxed, but only to the extent that the property is residential premises to be used predominately for residential accommodation (regardless of the term of occupation). However, subsection 40-65(2) states that the sale is not input taxed to the extent that the residential premises are:

(a) *commercial residential premises, or

(b) *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 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 (regardless of the term of occupation or intended occupation).

Based on the information submitted, the premises either developed or intended to be developed are residential premises; are not commercial residential premises; and were not used for residential accommodation before 2 December 1998.

The meaning of new residential premises under section 40-75

The term 'new residential premises' has the meaning given by section 40-75, which in part 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;

(b) …; or

(c) ….

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

The Full Federal Court's decision in Gloxinia

Consistent with the Full Federal Court's reasoning in Commissioner of Taxation v Gloxinia Investments Ltd [2010] FCAFC 46 (Gloxinia), the grant of each of the individual unit title leases (for a term in excess of 50 years) upon approval and registration of a units plan will constitute a supply of residential premises by way of long term lease.

Therefore, having regard to the terms of paragraph 40-75(1)(a) in isolation, any subsequent supply of the individual residential units, by way of assignment of the unit title leases, would be an input taxed supply of residential premises. That is, the individual residential unit would have previously been the subject of a long term lease (by virtue of the grant of the unit title leases) and would no longer be new residential premises.

New subsection 40-75(2B) and subsection 40-75(2C)

However, following the Federal Court's decision in Gloxinia, sections 40-75 of the GST Act was amended by Tax Laws Amendment (2011 Measures No. 9) Act 2012 ("the amending Act") to include subsection 40-75(2B) and 40-75(2C).

The effect of subsections 40-75(2B) and 40-75(2C) is to disregard certain sales and supplies of residential premises when determining if the premises have been sold or have been subject to a long term lease for the purposes of paragraph 40-75(1)(a).

The date from which the new subsections 40-75 (2B) and 40-75(2C) apply is determined with reference to the application provisions at items 11 to 13 of schedule 4 to Tax Laws Amendment (2011 Measures No. 9) Act 2012.

In regards to the sales of strata titled residential units constructed by you on the Land, you have advised at the time of the ruling application;

· you have undertaken a residential development with an application made to register a units title plan, which was approved on xx/xx/xxxx. The unit title leases were granted to you in respect of the registered units plan having a term expiring in excess of 50 years.

· on completion of another residential development on the Land, you intend to apply for registration for unit plans. Subject to the Authority's approval and registration of that plan, you expect that individual unit title leases will be granted to you with a term that exceeds 50 years.

· you are required to undertake a further development on the Land in accordance with the Crown Lease. You have not provided a date when you expect to register the units title plan.

In respect to your completed residential development, consistent with the Full Federal Court's decision in Gloxinia, when you sell the residential units by way of assignment of the individual unit title leases to home buyers and investors, those residential units are considered to have previously been the subject of a long term lease.

Assuming that for your other residential development, the individual unit title leases for each of the residential units in the development are granted to you by the Authority, consistent with the decision in Gloxinia, when you sell the residential units, by way of assignment of the individual unit title leases to home buyers and investors, the residential units will have previously been the subject of a long term lease.

However, in determining whether or not your sales of the residential units will be taxable supplies of new residential premises or input taxed supplies of residential premises, it is necessary to consider whether or not subsection 40-75(2B) or subsection 40-75(2C) apply.

Application of Subsection 40-75(2B)

Subsection 40-75(2B) states:

(2B) A supply (the wholesale supply) of the *residential premises is disregarded as a sale or supply for the purposes of applying paragraph (1)(a) if:

(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) an arrangement (including an agreement) was made by:

(i) the supplier of the earlier supply, or one or more associates of the supplier; and

(ii) the recipient of the earlier supply, or one or more associates of the recipient; and

(c) under the arrangement, the wholesale supply was conditional on:

(i) specified building or renovation work being undertaken by the recipient of the earlier supply, or by one or more associates of the recipient; or

(ii) circumstances existing as specified in regulations made for the purposes of this subparagraph.

In summary, for the purposes of determining whether residential premises are new residential premises under paragraph 40-75(1)(a), subsection 40-75(2B) specifies that particular supplies ('wholesale supplies') of newly constructed residential premises are disregarded. That is, subsection 40-75(2B) is premised upon there being a sale or supply by way of long term lease that would otherwise disqualify the residential premises from being new residential premises under paragraph 40-75(1)(a) of the GST Act.

For the purposes of subsection 40-75(2B) (if this subsection were to apply), the relevant 'wholesale supply' with respect to your residential development, provided the units plan in registered for the developments would be the grant of the individual unit title leases to you by the Authority.

However, for subsection 40-75(2B) to apply to disregard the supply of the residential premises that will be made by way of long term lease of the individual unit title leases, requires the terms of paragraphs 40-75(2B)(a), (b) and (c) to be satisfied.

It is considered in your case that the requirements of paragraphs 40-75(2B)(a) and (b) are met.

In accordance with paragraph 40-75(2B)(a), there will have been an earlier supply of the premises upon which the development is to be undertaken, by virtue of the grant of the original Crown Lease to you.

For the purposes of paragraph 40-75(2B)(b) it is considered that the Crown Lease, together with the Contract for Sale and associated conditions all form part of an arrangement between you and the Authority.

However, we still need to determine whether paragraph 40-75(2B)(c) applies in relation to your arrangement. Paragraph 40-75(2B)(c) will apply if under the arrangement between you and the Authority if the intended grant of the unit title leases to you is conditional on you undertaking specified building or renovation work.

As a consequence of the arrangement between you and the Authority comprising the Crown Lease and the development approval subsequently obtained, you have or intend to undertake certain building or renovation works on the land. However, this alone is not sufficient to satisfy the terms of paragraph 40-75(2B)(c) which provides that under the arrangement the grant of the unit title leases (the wholesale supply) is conditional on you undertaking those building or renovation works.

In determining whether or not, the terms of paragraph 40-75(2B)(c) are satisfied, consideration must be given to the specific words "under the arrangement" in subparagraph 40-75(2B)(c)(i). Relevantly, in Chan v Cresdon [1989] HCA 63 ('Chan v Cresdon') the High Court considered the meaning of the word "under" appearing in a covenant to pay rent "under this lease". In that case the High Court stated:

"The word "under", in the context in which it appears, refers to an obligation created by, in accordance with, pursuant to or under the authority of, the lease. The obligation which arose under the common law tenancy at will does not answer this description."

Similarly, the words 'under a contract' in a provision of the income tax legislation about capital gains tax was considered by the High Court in Commissioner of Taxation (Cth) v. Sara Lee Household & Body Care (Aust) Pty Ltd [2000] HCA 35 ('Sara Lee'). That case was concerned with the issue of whether or not an asset was disposed of under a contract entered into in a particular income year, where some of the terms of the contract were amended by an agreement between the parties in a later income year.

Referring to the statement at [14] in Chan v Cresdon, in Sara Lee, the High Court held:

"The words "under a contract", in s 160U(3), direct attention to the source of the obligation which was performed by the transfer of assets which constituted the relevant disposal."²

In Asciano Services Pty Ltd v Chief Commissioner of State Revenue [2008] HCA 46 ('Asciano'), the High Court distinguished the meaning of the words 'by which' in a provision of the NSW Duties Act from the meaning of the word "under" in the term "under this lease" in Chan v Cresdon and the term "under a contract" as determined in Sara Lee.

With reference to the decisions in Chan v Cresdon and Sara Lee, the High Court noted in Asciano that the relevant provision of the NSW Duties Act did not refer to rights acquired "under a lease"; but refers to an agreement having the effect that ("by which") a right to use land is conferred or acquired by a person. In Asciano, the High Court held that the words 'by which' in the relevant provision identifies the means by which or owing to which a certain result or effect is obtained.

In this instance the Crown Lease granted to you by the Authority incorporates a purpose clause, in that the land can be used for the purpose of 'residential use'. However this is just one of the many types of uses and developments that may be constructed on the Land. It is not until you lodge the Development Applications with the Authority that the particulars of the development are confirmed.

The undertaking of the residential development specified in the Crown Lease and development approval, has the effect ("by which") that you are able to seek approval of a "units plan" and subsequently be granted individual unit title leases upon registration of that plan.

However, having regard to the decisions in Chan v Cresdon and Sara Lee, and the distinction between the words "under" and "by which" by the High Court in Asciano, we consider that the arrangement constituted by the Crown Lease together with the development approval, does not satisfy the requirements of paragraph 40-75(2B)(c).

To illustrate, an example of an arrangement that would satisfy the requirements of paragraph 40-75(2B)(c), is an arrangement of a kind described in the Commissioner's former ruling GSTR 2008/2, where a developer is required to undertake the development of land in accordance with the terms of a short term lease (commonly referred to as a 'development lease'), and the terms of the development lease or an associated deed provide that upon completion of the development, the land owner will, and is obliged, to transfer or grant the freehold or leasehold title to the land to the developer.

In this case it is considered that the 'arrangement' for the purposes of paragraph 40-75(2B)(b) does not provide as a condition that upon the undertaking of the specified building works that you are entitled to a grant of the individual unit title leases by the Authority, or that the Authority will make those supplies to you.

Therefore in conclusion, subsection 40-75(2B) will not apply and cause that supply of your newly constructed units which have been granted to you by the Authority on registration of a units plan, to be disregarded for the purposes of applying paragraph 40-75(1)(a).

In other words, in the absence of subsection 40-75(2C), your sales by way of assignment of the individual unit title leases, would not be taxable supplies of new residential premises by virtue of paragraph 40-75(1)(a) and subsection 40-75(2B), but would be input taxed supplies of residential premises.

However, as noted above, it is also necessary to consider the application of subsection 40-75(2C) which also provides for particular supplies of newly constructed residential premises made in other circumstances to be disregarded for the purposes of applying paragraph 40-75(1)(a).

Application of subsection 40-75(2C)

Subsection 40-75(2C) of the GST Act states:

(2C) A supply of the *residential premises is disregarded as a sale or supply for the purposes of applying paragraph (1)(a) if it is made because a *property subdivision plan relating to the premises was lodged for registration (however described) by the *recipient of the supply or the recipient's *associate.

Item 13 of Tax Laws Amendment (2011 Measures no. 9) Act 2012 provides:

Item 13 Exception - property subdivision plans lodged for registration before 27 January 2011  

Subsection 40-75(2C) of the A New Tax System (Goods and Services Tax) Act 1999 (as inserted by this Schedule) does not apply to a supply of residential premises on or after 27 January 2011 if the supply is made because a property subdivision plan relating to the premises was lodged for registration (however described) before 27 January 2011 by the recipient of the supply or the recipient's associate.

In your case you have developed, or are intending to develop premises, that are residential premises. You intend to supply the completed residential premises to third parties by way of an assignment of your interest in individual unit title leases.

To be granted the individual unit title leases you are required to lodge a 'units plan' for approval. In respect to one of your developments, you lodged an application to register a units plan, which was approved on a date after the 27 January 2011. In respect to your other developments, on completion of the development you will apply to the Authority for registration of the units plan. Subject to approval and registration of the units plan by the Authority, unit title leases (long term leases) for each of the individual units will be granted to you.

When you sell the individual units, by assigning the unit title leases, as referred to earlier, prima facie for the purposes of paragraph 40-75(1)(a) the residential premises would have been the subject of a long term lease. However, subsection 40-75(2C) operates to disregard a sale or supply for the purposes of applying 40-75(1)(a) if it is made because a property subdivision plan relating to the premises was lodged for registration (however described) by you.

Subsection 40-75(2C) is applicable in relation to supplies of residential premises on or after 27 January 2011, unless the property subdivision plan was lodged for registration before 27 January 2011 (Item 13 of Tax Laws Amendment (2011 Measures No. 9) Act 2012.

In relation to your developments and the proposed sale of completed units in those developments, you have not have made an application to lodge the units plan for the developments until after the 27 January 2011.

It is therefore considered that subsection 40-75(2C) will apply to your proposed sales of residential units. That is, any grant of the individual unit leases title leases by the Authority will be disregarded for the purposes of applying subsection 40-75(1)(a). Therefore, when you sell the individual residential units they will be residential units that have not previously been sold or the subject of a long term lease. By virtue of the operation of subsection 40-75(2C) your sales of the individual residential units will be taxable supplies of new residential premises.

In conclusion, your supplies of residential premises, by way of assignment of a long term lease from you to third party purchasers will be a taxable supply of new residential premises.

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