Edited version of your private ruling

Authorisation Number: 1012622603307

Ruling

Subject: GST and transfer of property

Question 1

Are you entitled to input tax credits pursuant to Division 11, for costs incurred in constructing residential premises which are supplied to another entity by way of a lease, for the other entity to lease to eligible tenants?

Answer

No

Question 2

Where you construct residential premises with the intention of making a supply of new residential premises, but subsequently lease the property for a short time (ie less than 12 months) prior to transferring legal title, does the Commissioner consider that your proposed output based revenue method based on the nominal rent is a fair and reasonable method to calculate any adjustment required for the purposes of Division 129?

Answer

Yes.

Question 3

Where you construct residential premises with the intention of leasing them, but after the lease period expires, you subsequently supply them as new residential premises, does the Commissioner consider that an output based revenue method based on the nominal rent is a fair and reasonable method to calculate any adjustment required for the purposes of Division 129?

Answer

Yes

Question 4

Are you making a GST-free supply of a going concern, pursuant to section 38-325, when you grant a lease of residential premises to another entity, for a nominal rent, and also provide access to the joint waiting list and the right to collect rent from the tenants?

Answer

No

Question 5

When you lease residential premises, but subsequently supply the premises to another entity as a GST-free supply of a going concern (as per question 4), does the Commissioner consider that a time based apportionment method is a fair and reasonable method to calculate any adjustment for the purposes of Division 129?

Answer

As explained in paragraph 108 of GSTR 2002/5, we consider that it is not possible for you to lease the premises to another entity and then supply those premises to the same entity as a GST-free supply of a going concern.

Therefore, it is not necessary to address the issue of decreasing adjustments.

Relevant facts and circumstances

You are registered for GST from 1 July 2000.

You develop and construct residential housing to lease to eligible tenants.

In recent years, you have also developed and constructed residential housing to supply them, either by way of lease, or by way of transfer of legal title in the properties, to other entities who will use them to provide housing to eligible tenants.

There are 4 scenarios in which you will supply the houses to the other entity:

1 Construct premises to lease to the other entity. (This scenario is addressed in question 1)

2 Construct premises to transfer legal title in the property to the other entity. The residential premises will be constructed for supply by way of transfer of legal title in the properties. However, the transfer of legal title in the properties after completion of construction may be delayed, for a short time (ie less than 12 months), for one of the following reasons:

a. Waiting for all properties in a single development to be completed.

b. Ensuring that the other organisations can adequately fulfil their obligations before the transfer occurs and

c. Delays in obtaining the required documentation.

When these delays occur you may lease the premises in the interim. (These scenarios are addressed in question 2)

1 You construct the residential premises with the intention of leasing them to the other entity. After the lease period, you supply them to the other entity as new residential premises. (This scenario is dealt with in question 3).

2 You grant a lease of the residential premises to the other entity, for a nominal rent, along with access to the joint waiting list and the right to collect rent from the tenants. (This scenario is addressed in question 4)

Under either a lease agreement, or other agreement, (sample copy provided) you require the other entity to meet various requirements, including:

• Supply accommodation as a GST-free supply pursuant to Subdivision 38-G of the GST Act (i.e. for consideration equal to less than 75% of the market value).

• Deal with tenancy management in accordance with your policies and procedures.

• Maintain properties in a good state of repair and condition.

You provided a copy of a draft lease agreement. Whilst you do not have a standard lease agreement, most leases would be largely consistent with this draft lease. Under the lease:

• A nominal rent is specified

• Permitted Use is as specified in the other agreement ie provision of housing to eligible persons.

In the event that there is a minor delay (less than 12 months) in transferring the legal title in the properties to the other entity after completion of construction, you propose to use the following formula to calculate your increasing adjustment, pursuant to Division 129:

Market value of the new residential premises

Market value of the new residential premises plus nominal rent

Relevant legislative provisions:

A New Tax System (Goods and Services Tax) Act 1999, Division 9

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 38-325

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 stated otherwise.

• All terms marked by an asterisk are a defined term in the GST Act unless stated otherwise.

Question 1

You are entitled to the input tax credit for any creditable acquisition that you make.

Section 11-5 states:

You make a creditable acquisition if:

(a) you acquire anything solely or partly for a *creditable purpose; and

(b) the supply of the thing to you is a *taxable supply; and

(c) you provide, or are liable to provide, *consideration for the supply; and

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

In your case, the issue is whether your acquisition is for a creditable purpose when you construct premises with the intention of leasing them to other entities.

Section 11-15 states:

(1) You acquire a thing for a creditable purpose to the extent that you acquire it in *carrying on your *enterprise.

(2) However, you do not acquire the thing for a creditable purpose to the extent that:

(a) the acquisition relates to making supplies that would be *input taxed; or

…

Your relevant enterprise, for the purposes of the acquisitions, is the leasing of residential premises to other entities who sublease the premises to eligible tenants.

Acquisitions that you make in carrying on this enterprise will meet the requirement of subsection 11-15(1).

However, if they relate to your making input-taxed supplies, they will fall within the negative limb of paragraph 11-15(2)(a) and will not be for a creditable purpose.

Under section 40-35, a supply of residential premises by way of lease is input taxed. Accordingly, your supplies of the residential premises will be input taxed supplies and will fall within the negative limb of paragraph 11-15(2)(a). As your supplies of the residential premises will not be for a creditable purpose, you will not be entitled to input tax credits on the associated acquisitions.

Question 2

Section 11-20 provides that you are entitled to the input tax credit for any creditable acquisition that you make.

Subsections 11-15 (1) and (2) provide that:

(1) You acquire a thing for a creditable purpose to the extent that you acquire it in carrying on your *enterprise.

(2) However, you do not acquire the thing for a creditable purpose to the extent that:

(a) the acquisition relates to making supplies that would be input taxed; or

(b) the acquisition is of a private or domestic nature.

In this instance, you are constructing residential premises with the intention of transferring legal title in the premises to the other entities. This activity satisfies the positive requirements of subsection 11-15(1).

You do not intend to lease the premises to eligible tenants or to the other entities. Accordingly, your acquisitions will not meet the negative limb of paragraph 11-15(2)(a). Further, your acquisitions are not of a private or domestic nature. Therefore, your acquisitions are being made for a wholly creditable purpose.

If, due to the circumstances stated in the facts, you lease the property to the other entity for a short time before transferring legal title in the property to the other entity; you will be applying the premises partially to input taxed purposes. This will constitute a change in the extent to which you have applied a thing (acquisition) to a creditable purpose.

Under Division 129, you are required to monitor the extent to which your acquisition continues to be applied to a creditable purpose. Where there is a change in the extent to which you have applied a thing to a creditable purpose, you may be required to make an adjustment - in this circumstance, an increasing adjustment.

Goods and services tax ruling 2009/4: new residential premises and adjustments for changes in extent of creditable purpose (2009/4) is concerned with new residential premises and a change in creditable purpose. In particular, GSTR 2009/4 addresses the calculation of the extent of creditable purpose where the new residential premises are subject to a 'dual application', ie the supplier leases the residential premises, while at the same time making the new residential premises available for sale as a taxable supply.

The principle set out in GSTR 2009/4 is that the acquisitions in relation to the new residential premises are made for a creditable purpose to the extent that they relate to the subsequent taxable supply. The quantification of that extent is calculated using the following output based indirect formula:

Consideration for the taxable supply of the premises

Consideration for the taxable supply of the premises plus consideration for the input taxed supplies of residential premises by way of lease

GSTR 2009/4 contemplates that there is a taxable supply of the new residential premises. When you engage the contractors to construct residential housing on the properties, you are intending to transfer legal title in the properties to the other entity upon completion. Normally the supply of new residential premises by a GST registered entity would be a taxable supply. However, in your case you receive no consideration of value in relation to the supply of legal title to the premises. Therefore, your supply of legal title to the premises will not be a taxable supply. Accordingly, a strict application of the above formula will result in a NIL result.

In paragraphs 121 to 123 of GSTR 2009/4, there is discussion of a variation to the above calculation method when the supplier occupies the new residential premises, for no consideration, prior to sale. In effect the market value of rent payable is substituted for the consideration. It is reasonable therefore to substitute the market value of the new residential premises in this case for the consideration. The calculation would therefore be:

Market value of the new residential premises

Market value of the new residential premises plus nominal rent

Therefore, we consider that your proposed method is a fair and reasonable method of apportionment for the factual situation set out in question 2.

Question 3

As explained in question 1, your supplies of the residential premises will be input taxed supplies and will fall within the negative limb of paragraph 11-15(2)(a). As your supplies of the residential premises will not be for a creditable purpose, you will not be entitled to input tax credits on the associated acquisitions.

However, under Division 129, you are required to monitor the extent to which your acquisition continues to be applied to a creditable purpose. Where there is a change in the extent to which you have applied a thing to a creditable purpose, you may be required to make an adjustment - in this circumstance, a decreasing adjustment.

However, as stated in question 2, you receive no consideration of value in relation to the supply of legal title to the premises. Therefore, for the reasons stated in question 2, we consider that your proposed method based on the nominal rent is a fair and reasonable method of apportionment for the factual situation set out in question 3.

Question 4

'Going concern' is defined in subsection 38-325(2).

(2) A supply of a going concern is a supply under an arrangement under which:

(a) the supplier supplies to the *recipient all of the things that are necessary for the continued operation of an *enterprise; and

(b) the supplier carries on, or will carry on, the enterprise until the day of the supply (whether or not as a part of a larger enterprise carried on by the supplier).

Supply under an arrangement

The supply under an arrangement includes a supply under a single contract or supplies under multiple contracts which comprise a single arrangement. The things supplied under the arrangement must relate to the same enterprise. The supplier and the recipient may identify the arrangement and the supplies under the arrangement, which in aggregate, may comprise the supply of a going concern, in the written agreement or in any other written agreement that relates to the arrangements entered into on or prior to the day of the supply.

Paragraph 20 of Goods and Services Tax Ruling GSTR 2002/5 Goods and services tax: when is a 'supply of a going concern' GST-free? (GSTR2002/5) states:

…However, an arrangement between a supplier and a recipient is characterised not merely by the description which both parties give to the arrangement, but by objectively examining all the transactions entered into and the circumstances in which the transactions are made.

You will grant a lease of the premises to the other entity, for a nominal rent. You will also enter into another agreement, whereby the other entity has access to the joint waiting list and the right to collect rent from the tenants. The lease and the other agreement are the arrangement for the purposes of subsection 38-325(2).

Relevant enterprise

Paragraphs 38-325(2)(a) and (b) require the conditions to be satisfied in relation to an 'identified enterprise'. The relevant enterprise is determined before establishing if all things are supplied by the supplier to the recipient to continue that enterprise.

Paragraph 22 of GSTR 2002/5 states:

The term 'enterprise' is defined in section 9-20 as an activity, or series of activities, done:

• in the form of a business; or

• in the form of an adventure or concern in the nature of trade; or

• on a regular or continuous basis, in the form of a lease, licence, or other grant of an interest in property; or

…

• by the Commonwealth, a State or a Territory, or by a body corporate, or corporation sole, established for a public purpose by or under a law of the Commonwealth, a State or a Territory.

In granting the lease of the relevant properties to the other entity, you are conducting a leasing enterprise - leasing the properties to the other entity. This is the identified enterprise for the purposes of paragraphs 38-325(2)(a) and (b).

All the things necessary for the continued operations of the enterprise

The identified enterprise is the leasing enterprise whereby you as lessor derive income from the lessee (the other entity). What must be determined is whether you will supply to the other entity all the things necessary for the continued operation of your enterprise of leasing to the other entity.

Paragraph 108 of GSTR 2002/5 states that:

108. The owner of an enterprise which consists solely of the leasing of property cannot make a 'supply of a going concern' when supplying the real property subject to the lease to the lessee. All of the things that are necessary for the continued operation of the enterprise includes the supply of the property and the covenants. The owner is not able to supply to the lessee the benefit of the covenants which are necessary for the continued operation of the existing enterprise of leasing the property.

As explained in paragraph 108 of GSTR 2002/5, we consider that it is not possible for you to lease the premises to an entity and then supply those premises to the same entity as a supply of a going concern. This is because you are not able to supply to the lessee the benefit of the covenants which are necessary for the continued operation of the existing enterprise of leasing the property.

Therefore, you are not making a supply of a going concern, pursuant to subsection 38-325(2), when you grant a lease of residential premises to the other entity, for a nominal rent, and also provide access to the joint waiting list and the right to collect rent from the tenants.

In granting the lease of the premises to the other entity, and entering into an other agreement, whereby the other entity has access to the joint waiting list and the right to collect rent from the tenants, you are supplying the other entity with everything necessary for it to commence its own enterprise of subleasing to the eligible tenants.

As you have not satisfied the requirements of subsection 38-325(2), we have not given consideration to the requirements of subsection 38-325(1).

Question 5

We consider that you are not making a supply of a going concern, therefore it is not necessary to address the issue of decreasing adjustments.

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