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This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law.

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Edited version of your private ruling

Authorisation Number: 1012497434592

Ruling

Subject: GST and new residential premises.

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

Relevant facts and circumstances

Entity A as trustee for Entity B (you) are registered for GST and lodge your Business Activity Statements (BASs) quarterly

You entered a Contract for Sale to acquire a Crown Lease (the Lease) over land.

Settlement of the sale occurred, at which time the Lease was issued to you.

The Lease contained clauses in relation to Purpose, the Commencement of development and the Completion of development.

A Development Application (DA) was lodged with an Authority for construction of a residential development on the Land, including a number of residential dwellings.

The Authority issued a Notice of Decision that approved your proposal (subject to conditions) for the construction of:

You have claimed all input tax credits (ITCs) on acquisitions made in relation to the development in accordance with the principles established in Goods and Services Tax Ruling GSTR 2008/2 Goods and services tax: development lease arrangements with government agencies (GSTR 2008/2). This ruling was withdrawn on dd/mm/yyyy. You have advised that you have claimed all ITCs up to and including the date of the private ruling request.

When you completed the development, you applied to register a units plan (i.e. strata title plan).

Upon registration of the units plan, the provisions of the Crown Lease (purpose, term etc) were carried over in the leases to the purchasers of each unit. The unit title leases granted to you in respect of the registered units plan expire in over 50 years.

Your private ruling request relates to the supply of a number of dwellings made on or after YYYY. You have asked for information on the GST treatment of the supplies made after that date, in particular, whether your supplies of those residential premises, by way of assignment of a long term lease, are input taxed supplies.

The following documentation was provided in support of your ruling request:

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(2B)

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

Reasons for decision

In this ruling, please note:

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

In your case, the individual residential units are sold for consideration, the supplies are made in the course of your enterprise, the supplies are connected with Australia and you are registered for GST. Consequently, the supply of the strata titled units will be taxable supplies 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 predominantly 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:

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).

In your case, the units constructed by Entity B, 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:

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 constitutes 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 Full Federal Court's decision in Gloxinia, section 40-75 of the GST Act was amended by Tax Laws Amendment (2011 Measures No. 9) Act 2012 ("the Amending Act") to include subsections 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 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.

Sales of strata titled residential units constructed by you.

You have advised that upon completion of the residential development, you applied to register a units plan (i.e. strata title plan) which was approved after 27 January 2011. The unit title leases granted to you in respect of registered units plan expire in over 50 years.

Consistent with the Full Federal Court's decision in Gloxinia, when the residential units are sold and the unit title leases granted to you by the ACTPLA are subsequently assigned 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) will apply.

Application of Subsection 40-75(2B)

Subsection 40-75(2B) states:

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).

In the case of the sale, by way of assignment of individual long term leasehold interest, of individual residential units constructed by you, consistent with the Full Federal Court's decision in Gloxinia, the relevant 'wholesale supply' for the purposes of subsection 40-75(2B) (if this subsection were to apply) would be the grant of the individual strata leases by the Authority.

The question as to whether or not subsection 40-75(2B) will apply, to disregard the supply of the residential premises that will be made by way of long term lease if the individual unit title leases are granted to you, requires consideration of paragraphs 40-75(2B)(a), (b) and (c).

In your case, it is considered 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 Crown Lease issued to you.

For the purposes of paragraph 40-75(2B)(b) it is considered that the Crown Lease, the Contract for sale and associated documents, 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, 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." 1

Similarly, the words 'under 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 Comissioner 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.

The undertaking of the residential development, as specified in the "building and development" provisions of the Crown Lease and the development approval has the effect that you are able to seek approval of a "units plan" and subsequently be granted individual unit title leases (wholesale supplies) 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).

There is a causal link between the undertaking of the building and infrastructure works under the arrangement and the grant of the individual unit title leases. However, it is not a condition under the arrangement that the unit title leases (the wholesale supply) will be granted upon completion or undertaking of the required building and infrastructure works.

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

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 conclusion, in your case, when you registered a units plan over the completed residential development and were granted individual unit title leases for each of the completed residential units, subsection 40-75(2B) will not apply and cause that supply of the newly constructed units 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) states:

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

You have developed premises that are 'residential premises'. You will supply the residential units by way of an assignment of your interest in individual unit title leases. The grant of the individual unit title leases to you requires you to lodge a 'unit titles plan for approval. Subject to approval and registration of that plan by the Authority, long term unit title leases (long term leases) of the residential premises, will be issued 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 will 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 paragraph 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 sale of completed units as part of the Development, the unit title plan (property subdivision plan) was lodged after 27 January 2011. Therefore subsection 40-75(2C) will apply to your sales of residential units in the Development.

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

1 at [14].

2 at [42]

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