Edited version of your written advice

Authorisation Number: 1012729607507

Subject: GST and supply of land

Ruling

Question 1

Is the supply of land under a lease an input taxed supply or a taxable supply under A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

The supply of the land by way of lease is an input taxed supply under section 40-35 of the GST Act.

Question 2

If the determination is that the supply is an input taxed supply, will the Commissioner restrict the refund of overpaid GST pursuant to section 105-65 of Schedule 1 to the Taxation Administration Act 1953 (TAA)?

Answer

No. The Commissioner will allow a refund of overpaid GST subject to time limits. Refer to question 3(a) for the time limits.

Question 3

If the determination is that the supply is an input taxed supply:

(a) does the four year time limit under section 105-55 of Schedule 1 to the TAA apply?

(b) does the four year time limit under section 105-50 of Schedule 1 to the TAA apply?

Answer

(a)Yes. The four year time limit under section 105-55 of Schedule 1 to the TAA will apply to deny any entitlement to a refund of overpaid GST for the tax periods before 1 July 2010.

(b) Yes. The four year time limit under section 105-50 of Schedule 1 to the TAA applies to prevent the Commissioner from recovering an unpaid net amount for tax periods before 1 January 2011.

Relevant facts and circumstances

You are registered for goods and services tax (GST) and you report GST obligations on a quarterly basis. You own land and you entered into an agreement for lease and a lease in respect of this land. You supplied copies of certain agreements in respect of the land.

Agreement to Lease

You entered into an agreement to lease the land. Under this agreement you allowed the Developer and the future Tenant access to enter the Land for the purposes of carrying out the Works to construct a retirement village.

Lease agreement

Upon completion of the retirement village you, as Landlord, entered into a lease agreement with Entity B, as Tenant. Rent is payable under the lease.

The lease agreement provides that consideration to be provided under the lease is exclusive of GST. No tax invoices were issued to the Tenant as you took the lease agreement to be the tax invoice.

Retirement Village

You supplied a copy of the Public Information Document and sample licence and loan agreements between the retirement village operator and the residents of the retirement village.

The retirement village comprises independent living units and a manager's unit, gardens, swimming pool, community centre and car park.

The community centre incorporates:

• a small consulting room for private consultations between for example, a resident and a medical practitioner;

• a separate small room for use by a hairdresser or others to visit the retirement village and provide services for the residents

• a reception and administration office

The licence agreement records that the retirement village operator enters into licence agreements with the residents in respect of the accommodation units. In addition the residents enter into loan agreements with the retirement village operator under which the resident agrees to lend the loan amount to the retirement village operator under certain terms. The loan amount is the amount of the ingoing contribution payable by the resident for the right to reside in the village.

You have never been a party to the licence or the loan agreements with the residents of the retirement village and you do not have an interest in the operation of the retirement village.

The Tenant has treated the supply as an input taxed supply because the Land is wholly used for the purposes of a retirement village since the commencement of the lease.

Refund of GST

You believe you are entitled to a refund or credit of GST for overpayments of GST as you incorrectly treated input taxed supplies as taxable supplies. In your ruling request you enclosed a listing of GST that you paid over a certain period.

You have not refunded the GST to the Tenant. The Tenant has not claimed input tax credits in relation to the lease payments.

Relevant legislative provisions

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

section 40-35

section 40-70

section 195-1

section 9-5

Schedule 1 of Taxation Administration Act 1953:

section 105-65

section 105-50

Subdivision 155B

Reasons for decision

The lease of the land will be a taxable supply if all the elements of section 9-5 of the GST Act are satisfied.

Under section 9-5 of the GST Act you make a taxable supply if:

a) you make the supply for consideration

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

c) the supply is connected with Australia, and

d) you are registered, or required to be registered, for GST.

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

Your supply of the land satisfies paragraphs 9-5(a), 9-5(b), 9-5(c) and 9-5(d) of the GST Act as the supply is made for consideration, made in the course or furtherance of your leasing enterprise, the property is located in Australia and you are registered for GST.

Therefore, the lease of the land will be a taxable supply under section 9-5 of the GST Act, unless the supply is GST-free or input taxed. This ruling concerns the question of whether the supply is an input taxed supply of residential premises. 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.

Prior to considering whether you are supplying an input taxed supply of residential premises, we will consider whether you are making a supply of land, or a supply of the land and the retirement village that has been constructed on the land.

Under the agreement to lease, you allowed the developer and the prospective tenant access to the land to construct a retirement village on the land.

The retirement village is a fixture to the land. Under property law, a fixture forms part of the land to which it is attached and, as a consequence, the legal owner of the land is the legal owner of the fixture.

The supreme court case Eon Metals NL v Commissioner of State Taxation (WA) 91 ATC 4841 states: 'There is no doubt that the general maxim of the law is, that what is annexed to the land becomes part of the land...' . .

The retirement village formed part of the land prior to the commencement of the lease, therefore your supply under the lease is a supply of land which incorporates the retirement village.

As you are supplying land and the premises on the land, we will consider whether you are supplying an input taxed supply of residential premises under section 40-35 of the GST Act.

Section 40-35 of the GST Act states:

(1) A supply of premises that is by way of lease, hire or licence (including a renewal or extension of a lease, hire or licence) is input taxed if:

(a) the supply is of *residential premises (other than a supply of *commercial residential premises or a supply of accommodation in commercial residential premises provided to an individual by the entity that owns or controls the commercial residential premises); or……

(b)...

(1A)………….

(2) However:

(a) the supply is input taxed only to the extent that the premises are to be used predominantly for residential accommodation (regardless of the term of occupation), and

(b) the supply is not input taxed under this section if the lease, hire or licence, or the renewal or extension of a lease, hire or licence, is a *long-term lease.

Long-term lease

The term 'long-term lease' is defined in section 195-1 of the GST Act to mean a supply by way of lease, hire or licence (including a renewal or extension of a lease, hire or licence) for at least 50 years if:

(a) at the time of the lease, hire or licence, or the renewal or extension of the lease, hire or licence, it was reasonable to expect that it would continue for at least 50 years; and

(b) unless the supplier is an *Australian government agency - the terms of the lease, or the renewal or extension of the lease, as they apply to the *recipient are substantially the same as those under which the supplier held the premises

ATO Interpretative Decision ATO ID 2006/113 GST and whether a lease with an option to renew is a long-term lease (ATO ID 2006/113) provides advice on long term leases. ATO ID 2006/113 advises that the renewal or extension of the lease is not considered in making a determination as to whether the lease is a long-term lease.

We consider that it was not reasonable to expect the lease to continue for 50 years at the time the lease was entered between you and the tenant. On this basis, the supply of your lease to the tenant is not a long term lease.

Residential premises

The definition of residential premises in section 195-1 of the GST Act refers to land or a building that is occupied as a residence, or for residential accommodation, or is intended and capable of being occupied as a residence or for residential accommodation (regardless of the term of occupation), and includes a floating home.

The residential units in the retirement village satisfy the definition of residential premises for the purposes of the GST Act.

Goods and Services Tax Ruling GSTR 2012/6 Goods and services tax: commercial residential premises (GSTR 2012/6) explains that the residential units in a retirement village are residential premises not commercial residential premises.

Relevantly, paragraphs 242 to 245 state:

242. Retirement villages provide living accommodation in 'communal or semi-communal' facilities.

243. Retirement village living units are residential premises to be used predominantly for residential accommodation based on their physical characteristics. In addition, some of the buildings and facilities that residents can directly enjoy in conjunction with their residency form part of the residential premises. This includes, for example, barbeque areas, gardens, car-parks and driveways.

244. A retirement village may also include parts that are not residential premises to be used predominantly for residential accommodation. This includes, for example, site offices, staff rooms, medical centres, and commercial premises, such as hairdressing salons, golf courses, shops, and restaurants or cafes. These are commercial premises the value of which should be apportioned or treated as separate supplies under the basic rules, depending on the circumstances of their supply.

245. A retirement village does not display sufficient physical, nor operational, features referred to at paragraphs 9 to 42 and 140 to 188 of this Ruling to be characterised as a hotel, motel, inn, hostel or boarding house, nor is it sufficiently similar to these premises for the purposes of paragraph (f) of the definition of commercial residential premises. See Example 1 at paragraph 43 of this Ruling.

We consider that the lease of the independent living units and the managers unit in the retirement village is a supply of residential premises. Therefore this supply is an input taxed supply pursuant to section 40-35 of the GST Act. However, the supply of the community centre in the retirement village which comprises a reception and administration office and rooms for consultations, hairdressing etc. are taxable supplies of commercial premises. In accordance with paragraph 244 of GSTR 2012/6 the value of these commercial premises should be apportioned.

Goods and Services Tax Ruling GSTR 2001/8 Goods and Services tax: apportioning the consideration for a supply that includes taxable and non-taxable parts provides guidelines on reasonable methods of apportionment.

Question 2

Under the general rules the Commissioner is required to give a refund or apply that amount in accordance with the running balance account provisions in Divisions 3 and 3A of Part IIB of the Taxation Administration Act 1953 (TAA).

However, the requirement to give a refund of overpaid GST is subject to section 105-65 of schedule 1 to the TAA (section 105-65) which modifies the general rules so that the Commissioner need not give a refund or apply that amount if an entity overpaid its net amount or an amount of GST where the requirements of section 105-65 are satisfied.

Section 105-65 applies to tax periods prior to 31 May 2014.

Subsection 105-65(1) states:

(1) The Commissioner need not give you a refund of an amount to which this section applies, or apply (under Division 3 or 3A of Part IIB) an amount to which this section applies, if:

(a) you overpaid the amount, or the amount was not refunded to you, because a *supply was treated as a *taxable supply, or an *arrangement was treated as giving rise to a taxable supply to any extent; and

(b) the supply is not a taxable supply, or the arrangement was treated as giving rise to a taxable supply, to that extent (for example, because it is *GST free); and

(c) one of the following applies:

(i) the Commissioner is not satisfied that you have reimbursed a corresponding amount to the recipient of the supply or (in the case of an arrangement treated as giving rise to a taxable supply) to an entity treated as the recipient;

(ii) the recipient of the supply, or (in the case of an arrangement treated as giving rise to a taxable supply) the entity treated as the recipient, is *registered or *required to be registered.

The restriction of refunds of overpaid GST under section 105-65 will apply if all three of the following conditions are present:

• there was an overpayment of GST

• a supply was treated as a taxable supply when it was not a taxable supply or was taxable to a lesser extent, and

• the recipient(s) has not been reimbursed a corresponding amount of the overpaid GST and/or the recipient(s) of the supply is registered or required to be registered for GST.

You have advised that you treated the supplies of the land as taxable even though the lease agreement provides that the consideration under the lease was GST exclusive.

You consider that as GST was not payable on those supplies, the amount legally payable was nil and you have overpaid a GST amount in relation to those supplies. You have not reimbursed the overpaid GST to the recipient.

Miscellaneous Tax Ruling MT 2010/1 restrictions on GST refunds under section 105-65 of Schedule 1 to the Taxation Administration Act 1953 (MT 2010/1) provides the Commissioner's view of the application of section 105-65.

Paragraphs 116 and 117 of MT 2010/1 state:

116.The operation of section 105-65 to deny the requirement to pay refunds that would otherwise be payable is not discretionary.…The words of the provision say that where the section applies the Commissioner need not give you a refund of the amount or apply the amount under the relevant RBA provisions….

117. The Commissioner considers that the words 'need not', in the context of section 105-65, do not prohibit the giving of a refund and accordingly the Commissioner has a discretion to pay a refund in appropriate circumstances. It is noted that this view is supported by the decision in Luxottica.

The question then is whether, in these circumstances, the discretion to pay the refund to the applicant should be exercised.

Paragraphs 127 and 128 of MT 2010/1 provide guiding principles to consider when exercising the discretion:

127. It is clear from the scope and purpose of section 105-65 that the provision is designed to prevent windfall gains to suppliers and to require the supplier to ensure that any refund ultimately compensates the person or entity who ultimately bore the cost. In relation to a refund of overpaid GST, the potential or otherwise for a windfall gain, the requirement to ensure the refund compensates the person or entity that ultimately bore the cost and the potential to disturb the symmetry envisaged by the GST system, are factors that must be taken into account in relation to the exercise of the discretion.

128. Section 105-65 does not specify what factors are relevant to the exercise of this discretion. In exercising the discretion, the Commissioner will have regard to the following guiding principles:

(a) The Commissioner must consider each case based on all the relevant facts and circumstances.

(b) The Commissioner needs to follow administrative law principles such as not fettering the discretion or taking into account irrelevant considerations.

(c) The Commissioner must have regard to the subject matter, scope and purpose of section 105-65. As explained in paragraph 127 of this Ruling, it clear from the scope and purpose that section 105-65 is designed to prevent windfall gains to suppliers and to maintain the inherent symmetry in the GST system and is based on the underlying design feature and presumption of the GST system that the cost of the GST is ultimately borne by the non-registered end consumer.

(d) The discretion should be exercised where it is fair and reasonable to do so and must not be exercised arbitrarily. The circumstances in which the Commissioner considers it may be fair and reasonable to exercise the discretion include, but are not limited to, the following:

(i) The overpayment of GST arises as a direct result of the actions of the Commissioner and the taxpayer has not had the opportunity to factor in the cost of the GST or otherwise pass on the GST, for instance through a gross up clause. For instance, an entity had treated its supply as GST-free, the Commissioner subsequently treats the supply as taxable, the entity pays an amount for GST on the supply, but the Commissioner later reverses that decision. In such circumstances it would not be necessary for the supplier to refund the recipient of the supply whether the recipient is registered or unregistered.

(ii) The taxpayer can demonstrate that, for other reasons, they did not otherwise pass on the GST. As mentioned in Avon, 'it is for the taxpayer to establish a circumstance out of the ordinary, namely that the amount of the overpayment ... has not been passed on'.

(iii) The supplier is able to satisfy the Commissioner that an amount corresponding to the refund will be, or has been, passed on to the party that ultimately bore the cost of the overpaid GST. In a business to business transaction it is generally not enough simply to show that the supplier refunded the immediate business recipient. A supplier must be able to prove that an unregistered end consumer is the one ultimately compensated.

Where the registered recipient is unable to claim input tax credits or is only allowed to partially claim input tax credits, then, before the Commissioner would pay a refund to the supplier, the supplier would have to refund the registered recipient and the registered recipient would have to show it either did not pass the foreseeable cost (that is denied input tax credits) to the next recipient or that they have also refunded that amount to the next recipient and the entity that ultimately has borne the cost is compensated.

(e) The discretion would generally not be exercised where it produces an unreasonable result, for example an asymmetrical revenue outcome. This could occur where, for example, a supplier reimburses a registered recipient for the overpaid GST but the Commissioner is unable to reclaim the overclaimed input tax credit from the recipient.

In your case, the lease states that the consideration under the lease is GST exclusive. Therefore we consider that the lease payments you received did not include any GST therefore you did not pass on any GST to the tenant when you incorrectly paid GST to the ATO. As you incurred the GST and not the tenant, you will not receive a windfall gain if the GST is refunded to you. Further, we consider that the symmetry of the GST system is maintained because the recipient cannot claim input tax credits in relation to the lease payments.

Therefore the Commissioner considers that it is appropriate to exercise the discretion in your circumstances and allow a refund of the overpaid GST for tax periods. See question 3(a) for the time limits that apply.

Question 3

(a) Section 105-55 of Schedule 1 to the TAA

You advised us in writing that you are entitled to a refund or credit of GST for overpayments of GST as you incorrectly treated input taxed supplies as taxable supplies. To quantify the claim you enclosed a listing of the GST that you overpaid.

Section 105-55 of Schedule 1 to the TAA (section 105-55) limits claims for certain refunds, other payments or credits to four years from the end of the tax period to which the entitlement relates, unless within that four year period:

• you notify the Commissioner of your entitlement to the refund, other payment or credit, or

• within that period, the Commissioner notifies you (in a notice of assessment or otherwise) that you are entitled to the refund, other payment or credit.

Miscellaneous Taxation Ruling MT 2009/1 notification requirements for an entity under section 105-55 of Schedule 1 to the Taxation Administration Act 1953 (MT 2009/1) explains the notification requirements.

Paragraph 12 of MT 2009/1 lists certain documents that are valid notifications for the purposes of section 105-55. The list includes correspondence from an entity which asserts that the entity has an entitlement and provides a description of the entitlement to a refund, other payment or credit, which is sufficient to bring the entitlement to the Commissioner's attention, such that when a subsequent claim is made it could reasonably be identified as being covered by the notification.

We accept that your letter is a valid notification for the purposes of section 105-55 for the tax periods from 1 July 2010 to 30 June 2012. However, your letter is not a valid notification for the tax periods prior to 1 July 2010 because it was not received before the expiry of the four year time limit for these earlier tax periods.

In relation to the tax periods from 1 July 2012, due to a recent law change, entities no longer have the option of lodging a notification to give them time to make a claim outside of the four year time limit.

From 1 July 2012, new self-assessment rules apply under Subdivision 155B of Schedule 1 to the TAA for tax periods that start from this date. That is, if entities are entitled to a GST refund or credit for a tax period after 1 July 2012, they will need to request an amendment to the relevant activity statement, provided they are within the time limit to do so.

Therefore, you are only entitled to a refund of the overpaid GST for the tax periods from 1 July 2010 to 30 June 2012, and for the tax periods from 1 July 2012 where the amendment is made before 1 July 2016.

It should be noted that the Commissioner has no discretion to extend the four year time limit. This was confirmed by the Administrative Appeals Tribunal (AAT) decision in Australian Leisure Marine Pty Ltd v FC of T [2010] AATA 620 where it was held that neither the Commissioner nor the AAT has a discretion to extend the time which is provided for by section 105-55.

(b) Section 105-50 of Schedule 1 to the Taxation Administration Act 1953 (TAA)

Section 105-50 of Schedule 1 to the TAA provides that any unpaid net amount or amount of indirect tax ceases to be payable four years after it became payable, unless the Commissioner:

• has notified the entity of the unpaid amount, and required payment of it, within four years of the date it was payable, or

• is satisfied that the payment of the amount was avoided due to fraud or evasion.

'Net amount' is defined in section 17-5 of the GST Act according to the following formula:

GST - input tax credits

GST is the sum of all of the GST for which an entity is liable on the taxable supplies that are attributable to the tax period. Input tax credits is the sum of all of the input tax credits to which an entity is entitled for the creditable acquisitions and creditable importations that are attributable to the tax period.

As the Commissioner has not notified you of a requirement to pay an unpaid GST amount, any unpaid net amounts for quarterly tax periods prior to 1 January 2011 cease to be payable.

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