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Ruling

Subject: GST and leases of Crown land

Question 1

(a) Are lease payments in relation to leases in perpetuity for the purpose of residence, entered into prior to 1 July 2000, subject to GST?

Answer

No

(b) Are lease payments in relation to leases in perpetuity for the purpose of residence, entered into after 1 July 2000, subject to GST?

Answer

Yes

Question 2

Is a payment for land, upon entering a lease in perpetuity subject to GST?

Answer

Yes

Question 3

Are lease payments in relation to leases for agricultural land subject to GST?

Answer

Yes

Relevant facts and circumstances

The land in question is Crown land vested in the Minister.

Perpetual leases are granted for vacant land that is up to X hectares in area and is for residency purposes. A requirement of the lease is that a residence must be built on the land within a number of months of the lease being granted and the lessee must then reside on the land. These residential leases are granted in perpetuity; there is no expiry date, and the lease can be bequeathed to someone in a will.

Historically there has been no fee for the grant of the lease, simply an annual rental fee. However it is anticipated that land released in the future will attract a fee for entering the lease. The fee will be equivalent to the value of the land, as determined by official valuation.

Land which is subject to perpetual lease has generally been partially cleared as it was previously used for stock grazing.

The relevant Act provides that annual rent is payable on these leases. The amount of the rent is specified in the Regulations to the Act.

95% of perpetual leases in existence were issued prior to 1 July 2000.

There have been no changes to the lease agreements. The only change is to the rent paid, which is prescribed by regulation.

In some instances the lease is transferred to another lessee. The only change to the lease in this instance is that the name on the lease is amended. All other aspects of the lease remain the same.

Leases for agricultural purposes are granted for land that is over a number of hectares in area. These leases may only be granted to a holder of a perpetual lease for residency purposes. These leases expire after a number of years, after which time they must be renewed. All of these leases expired during 2005 and were rolled over for another period.

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 Section 40-70.

A New Tax System (Goods and Services Tax) Act 1999 Section 38-445.

A New Tax System (Goods and Services Tax Transition) Act 1999 Subsection 6(3).

A New Tax System (Goods and Services Tax Transition) Act 1999 Subsection 7(1).

A New Tax System (Goods and Services Tax Transition) Act 1999 Section 11.

A New Tax System (Goods and Services Tax Transition) Act 1999 Section 12.

A New Tax System (Goods and Services Tax Transition) Act 1999 Section 13.

Reasons for decision

Issue 1

Question 1

Summary

Rental payments for leases entered prior to 1 July 2000 are not subject to GST as they are excluded under the A New Tax System (Goods and Services Tax Transition) Act 1999.

For leases entered after 1 July 2000 the relevant entity is making a taxable supply of land under section 9-5 of the GST Act when it grants a long term lease which is subject to the condition that the lessee constructs residential premises on the land. As such the lease payments in relation to leases in perpetuity for the purpose of residence, entered into after 1 July 2000 are subject to GST.

Detailed reasoning

Leases entered prior to 1 July 2000

Section 7 of the A New Tax System (Goods and Services Tax Transition) Act 1999 (the Transition Act) provides that GST is only payable on a supply or importation to the extent that it is made on or after 1 July 2000.

Section 11 of the Transition Act states: 

(1)     A supply of a right that has been or is granted on or after 2 December 1998 (other than a supply or a right granted on or after 1 July 2000) is taken to be a supply made on or after 1 July 2000 if, and to the extent that, the right could reasonably be exercised on or after 1 July 2000.

However, paragraph 11(1B)(a) of the Transition Act goes on to say: 

(1B) This section does not apply to:

(a)    A supply of a long-term lease made before 1 July 2000; or..

Section 12 of the Transition Act applies to supplies made under an agreement for a period, and the period begins before 1 July 2000 and ends on or after 1 July 2000. The effect of section 12 of the Transition Act is that a supply by way of lease, hire or similar arrangement is taken to be a supply for the period of the lease, hire or arrangement and is deemed to be made continuously and uniformly throughout the period.

However subsection 12(4) of the Transition Act states:

(4) This section does not apply to a supply of a long term-lease made before 1 July 2000.

 The term long-term lease is defined in section 195-1 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) as:

long-term lease means 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 50 years; and

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

(*denotes a defined term under the GST Act)

The perpetual leases granted by the entity will be long term leases, as defined in section 195-1 of the GST Act as they are leases in perpetuity and it is reasonable to expect that they would continue for more than 50 years. This is particularly the case given that the leases may be bequeathed in a will. Therefore sections 11 and 12 of the Transition Act will not apply to these leases.

Section 6 of the Transition Act sets out how to determine when a supply or acquisition is made for the purposes of that Act. In particular, subsection 6(3) of the Transition Act provides that a supply of real property is made when the property is made available to the recipient. Therefore for perpetual leases that were granted prior to 1 July 2000 the supply of land that is the subject of the lease, is taken to have been made prior to 1 July 2000.

As the supply of the real property by way of the perpetual lease took place prior to 1 July 2000, then pursuant to section 7 of the Transition Act there is no GST applicable to that supply.

However if there was a significant change in the perpetual lease agreements, after 1 July 2000, such that they become new agreements for the purposes of the GST Act, then the supplies under the long term lease agreements would become subject to GST as there would have been a new supply that would have been made after 1 July 2000.

You advise that there have been no significant changes to the perpetual lease agreements, other than rent amounts under the regulations, and therefore leases entered into prior to 1 July 2000 are not subject to GST.

This will also be the case even where the lease is transferred to a different lessee. Where there is a new lessee the only change to the lease is the name on the lease. No other details change. The assignment of rights under the lease to a new lessee does not disturb the existing agreement and as such a change in lessee does not result in a new lease.

Leases entered after 1 July 2000

Subdivision 40-C of the GST Act deals with sales of residential premises and supplies of residential premises by way of long term lease.

Under section 40-70 of the GST Act, a supply of residential premises by way of long term lease is input taxed. The policy intent in relation to section 40-70 is set out in the Explanatory Memorandum to the A New Tax System (Goods and Services Tax) Bill 1998 which states:

5.166 The supply of a long term lease (that is, a lease of 50 years or more) is not a supply of residential rent. The supply of a long term lease is to be treated as a sale of residential premises and input taxed under Subdivision 40-C. Subsection 40-35(2) and section 40-70.

The meaning of the term sale is considered in paragraph 18 of Goods and Services Tax Ruling GSTR 2003/3 which states:

The ordinary meaning of sale is the transfer, or agreement to transfer, property to a buyer for a price. For the purposes of section 40-65, we consider that sale and sold refer to the disposal of the land held in its entirety for consideration. The application of section 40-65 to residential premises means that sale and sold refer to the transfer of the full and complete ownership of land, that is, the maximum interest that the Crown has alienated whether it is freehold or leasehold

It follows that, in the context of the GST Act, a supply of vacant land by way of a long term lease for consideration should be treated as a sale of the land as it is a supply of the maximum interest in the land that the Crown has alienated. This is also parliament's intention as set out in the Explanatory Memorandum above.

However the Commissioner's view is that vacant land is not residential premises. Paragraph 36 of Goods and Services Tax Ruling GSTR 2001/D2 states:

Vacant land is not capable of being occupied as a residence or for residential accommodation as it does not provide shelter and basic living facilities. Vacant land is not residential premises.

Under the perpetual lease, the interest in the vacant land is supplied to the lessee by the entity when the lease is granted. The consideration for the grant of the lease is annual lease rental fees.

As the interest in the land obtained by the lessee under the lease is the maximum interest the Crown has alienated, the subsequent construction of residential premises on the land by the lessee will not change the nature or timing of the supply made by the entity to the lessee.

The supply under the perpetual lease is a supply of vacant land, made at the time the lease is entered. Therefore section 40-70 does not apply which means the lease rental payments are not input taxed.

Subdivision 38-N of the GST Act deals with grants of land by governments. Subsection 38-445(1) of the GST Act states that:

(1)    A supply by the Commonwealth, a State or a Territory of land on which there are no improvements is GST-free if:

(a)    the supply is of a freehold interest in the land; or

(b)    the supply is by way of *long-term lease.

Goods and Services Tax Ruling GSTR 2006/6 considers what constitutes improvements to the land for the purposes of Subdivision 38-N of the GST Act. At paragraph 25 the ruling lists clearing of timber, scrub or other vegetation as being an improvement to the land. You advised that the land has at some time in the past been subject to some clearing.

Therefore for the purposes of this ruling it is assumed that the land that is subject to perpetual lease is improved land. As such subsection 38-445(1) of the GST Act does not apply.

Given that subsection 38-445(1) of the GST Act does not apply, and given that the rental payments are not input taxed under section 40-70, it follows that the entity is making a taxable supply of land under section 9-5 of the GST Act when it grants a long term lease after 1 July 2000, which is subject to the condition that the lessee constructs residential premises on the land. As such the lease payments in relation to leases in perpetuity for the purpose of residence, entered into after 1 July 2000 are subject to GST.

Question 2

Summary

Payments for the supply of land under a perpetual lease are subject to GST as they are consideration for a taxable supply.

Detailed reasoning

Section 9-5 of the GST Act 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 for GST.

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

(*denotes a defined term under the GST Act)

Where land is allocated in future and the lessee must pay for the land in addition to paying the annual rental payments on the land, then the payment for the land will be subject to GST. Although the lease agreement specifies that a residence is to be built on the land within a number of months of the lease being issued, the supply at the time the lease is entered into is a supply of vacant land and is therefore not residential premises.

Further the land is not a supply of Crown land to which subsection 38-445 of the GST Act applies as the land is improved land. See reasoning for Question 1.

Under the relevant Act the entity administers the land on behalf of the Minister. As the Minister is not registered for GST it is the essentially the entity who is making the supply of the land to the lessee. The entity is registered for GST. The supply is made for consideration, being the payment as determined by an official valuation of the land. Furthermore, the entity makes the supply in furtherance of the enterprise they carry on and the supply of the lease is connected with Australia. As such the payment for the land on entering a lease is consideration for a taxable supply pursuant to section 9-5 of the GST Act and is therefore taxable

Question 3

Summary

Lease payments in relation to special leases are subject to GST as they are consideration for a taxable supply.

Detailed reasoning

Special leases for agricultural purposes are issued for 10 years. After this time they are generally renewed. The last renewal date for all leases was during 2005.

Subdivision 38N of the GST Act provides that in certain circumstances grants of freehold and similar interests by government are GST-free. In particular for a supply to be GST-free under this provision it must be a supply of a freehold interest or a supply of a long term lease.

Long term lease, as previously mentioned, is where the lease is for at least 50 years. As special leases are granted for only 10 years it is not reasonable to expect that the lease would continue for 50 years. As such these leases are not long term leases.

Therefore the initial grant of the land is not captured by subdivision 38N. The rental payments are simply consideration for the supply of the lease of the land.

The lease is made by the Minister to the lessee. Under the relevant Act the entity administers the land on behalf of the Minister. As the Minister is not registered for GST it is the essentially the entity who is making the supply of the lease to the lessee. The entity is registered for GST. The supply is made for consideration, being the rental payments specified in the relevant Act and Regulations. Furthermore, the entity makes the supply in furtherance of the enterprise they carry on and the supply of the lease is connected with Australia. As such the rental payments are consideration for a taxable supply pursuant to section 9-5 of the GST Act and are therefore taxable.