Edited version of private ruling

Authorisation Number: 1011613185071

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Ruling

Subject: GST and the acquisition of development services

Questions

1. Will the sale of subdivided land, with or without any new residential premises constructed on such land, be considered a taxable supply for the purposes of Division 9 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

2. Will you be able to use the margin scheme concession contained in Division 75 of the GST Act?

3. Will the payments for the project costs made under the proposed Development Agreement (DA), be considered payments for creditable acquisitions for the purposes of Division 11 of the GST Act?

Answers

1. Yes, the sale of subdivided land, with or without new residential premises constructed on such land, will be considered a taxable supply for the purposes of Division 9 of the GST Act.

2. You may be able to use the margin scheme concession contained in Division 75 of the GST Act. (See reasons for decision below)

3. Yes, the payments for the project costs made under the proposed Development Agreement (DA), will be payments for creditable acquisitions for the purposes of Division 11 of the GST Act.

Relevant facts and circumstances

You are a public education institution which delivers tertiary education. As you are a public education institution, you are endorsed as having an income tax-exempt status from 1 July 2000.

You are presently considering undertaking a land development of land acquired post 20 September 1985, but before 1 July 2000, which is currently a part of one of your campuses.

You propose to develop this land by contracting with an external developer and pursuant to the DA, the land is to be divided into approximately a number of residential lots.

You will contract with the developer, to provide project development services for the development. You will retain ownership of the developed residential lots until such time as they are sold to third parties in accordance with the provisions of the DA.

The DA will outline the commercial agreement between you and the contractor, including the work to be undertaken the contractor and how the sale proceeds on settlement of each developed plot will be applied. In particular:

· The contractor will be responsible for the development of the land and as a result take on all the risks associated with the development;

· The contractor will engage directly with any party to perform the development works and will pay these parties directly for the supply of services; and

· The sale proceeds on settlement of each developed residential lot will be applied in the following manner by you:

- You will keep

§ an amount equal to the Goods and Services Tax (GST) payable in respect of each sale of an allotment and

§ your percentage (which is the agreed sale proceeds upon the sale of each allotment) in accordance with the DA;

- The contractor will receive from you

§ the proportion of project costs reasonably attributed to the sale of the relevant allotment. Per the relevant clause in the DA, project costs means all of the costs of the development of the project including:

· All land development costs;

· Project management fee;

· Project marketing fee;

· Community development management fee;

· The Realty sales commission; and

· Costs of marketing and selling the allotments.

· You and the contractor will receive an agreed share of the remaining project profit.

The Act under which you were established, does not specifically limit your ability to undertake this land development project.

All parties to the DA will be registered for GST.

Detailed reasoning

Question 1

Will the sale of subdivided land with or without any new residential premises constructed on your land be considered a taxable supply by you, for the purposes of Division 9 of the GST Act?

Subsection 7-1(1) of the GST Act provides that GST is payable on taxable supplies. For the sale of the vacant lots or the completed land and residences to be taxable supplies, they must satisfy the requirements under section 9-5 of the GST Act which provides that:

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.

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

Therefore, where the requirements of paragraphs 9-5(a) to 9-5(d) of the GST Act are satisfied, you will be liable for GST on the sale of the property unless the supply is GST-free or input taxed.

Based on the information you have provided, your sale of the vacant land and the new residential units will satisfy the conditions of paragraphs 9-5(a), to 9-5(d) of the GST Act.

Your supply of the vacant lots and residential units does not satisfy any of the GST-free provisions under the GST Act. Therefore, it is necessary to consider whether your supply of land and any residential units is an input taxed supply.

Section 40-65 of the GST Act provides that:

(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).

(2) However, 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.

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 to be occupied and is capable of being occupied as a residence or for residential accommodation (regardless of the term of the occupation or intended occupation).

The vacant lots will not be occupied as a residence or be capable of being occupied as residential premises and therefore are not input taxed supplies. Therefore the supply of the vacant lots will be a taxable supply as defined in section 9-5 of the GST Act.

However any residential units erected on the subdivided lots will meet the definition of residential premises as they are intended to be used for residential accommodation and therefore the requirement in subsection 40-65(1) of the GST Act will be satisfied.

The completed residential units will not be commercial residential premises. Therefore, it is necessary to consider whether the units are new residential premises.

Subsection 40-75(1) of the GST Act provides the meaning of new residential premises. It provides that:

(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) have been created through substantial renovations of a building; or

(c) have been built, or contain a building that has been built, to replace demolished premises on the same land.

The newly constructed residential premises you sell will meet the definition of new residential premises as found in 40-75(1)(a) of the GST Act. Therefore, they will not be input taxed under subsection 40-65(1) of the GST Act. Accordingly, the sales of the units will be taxable supplies as per section 9-5 of the GST Act.

Question 2

Will you be able to use the margin scheme concession contained in Division 75 of the GST Act?

Division 75 of the GST Act deals with the application of the margin scheme to sales of freehold interests.

Subsections 75-5(2), 75-5(3) and 75-5(4) of the GST Act set out when your supplies are ineligible for the margin scheme. From the facts you have supplied your supplies are not ineligible for the margin scheme. Therefore if you meet the criteria set out in subsections 75-5 (1) and 75-5(1A) of the GST Act you will be able to use the margin scheme concessions found in Division 75 of the GST Act.

For your information, we have enclosed the fact sheet dealing with the application of the margin scheme, and we hope that it will be of assistance to you.

Question 3

Will the payments for the project costs made under the proposed (DA, be considered payments for creditable acquisitions for the purposes of Division 11 of the GST Act?

Division 11 of the GST Act provides that you are entitled to input tax credits on your creditable acquisitions. Section 11-5 of the GST Act provides that you make a creditable acquisitions if

i. You acquire anything solely or partly for a creditable purpose

ii. The supply to you is a taxable supply

iii. You provide or are liable to provide consideration for the supply and

iv. You are registered for GST

Section 11-15 of the GST Act provides that you acquire a thing for a creditable purpose to the extent that you acquire it in carrying on your enterprise unless the acquisition relates to making input taxed supplies or supplies that are private in nature.

In your case:

· You are acquiring construction and development services for the development of blocks of land and or some residential premises in the course of your enterprise and therefore you are acquiring them for a creditable purpose

· The supplies to you will be taxable supplies.

· You will be paying consideration equal to the project costs and an amount equal to the suppliers share of the project profits for these acquisitions, and

· You are registered for GST.

Therefore your acquisitions of the construction costs/services will be creditable acquisitions and you are entitled to GST credits on these acquisitions.

Summary

In summary,

· the sale of both the vacant lots and any new residential units will be taxable supplies

· Your supplies are not ineligible for the margin scheme and if you meet the other requirements you will be able to apply the margin scheme to your taxable supplies, and

· you are entitled to claim input tax credits for the GST included in the price of the acquisitions that you acquired in relation to your subdivision and development enterprise.

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