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Ruling

Subject: GST and supply by way of lease

Question 1

Is the supply of land that has been subject to a lease and is subsequently assigned by the taxpayer to a purchaser, an input taxed supply of residential premises under Subdivision 40-C of A New Tax System (Goods and Services Tax) Act 1999 ('GST Act')?

Answer

Yes

Relevant facts and circumstances

You are registered for GST.

You conduct an enterprise of housing construction.

You entered a contract to acquire leasehold land.

The contract for sale provides that the seller agrees to grant or procure the grant of, and the buyer agrees to accept the lease for the price subject to the terms of the contract.

You entered a lease with a land owner in respect of the leasehold land. Under the lease and development agreements, you agreed to undertake the design construction and completion of certain works at your own cost.

After the completion of the works, subsequent leases were granted to you. The lease term is for a period in excess of 50 years.

You commenced settling on contracts for sale of the subsequent leases to purchasers. Upon settlement of the contracts for sale, the subsequent leases were assigned from you to the purchasers.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Section 40-70

A New Tax System (Goods and Services Tax) Act 1999 Section 9-5.

A New Tax System (Goods and Services Tax) Act 1999 Section 40-65.

A New Tax System (Goods and Services Tax) Act 1999 Section 40-75

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

Reasons for decision

Under subsection 40-70(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), a supply of residential premises by way of long term lease is input taxed. However subsection 40-70(2) provides that the supply is not input taxed to the extent that the residential premises are:

· commercial residential premises; or

· new residential premises other than those used for residential accommodation (regardless of the term of occupation) before 2 December 1998

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 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, and is capable of being, occupied as a residence or for residential accommodation.

Subsection 40-75(1) of the GST Act provides that 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.

Based on the submitted information, the premises to be supplied by way of lease are residential premises and not commercial residential premises. In addition, the residential premises have not been used for residential accommodation before 2 December 1998 because they were constructed after this date.

If any of the provisions in subsection 40-75 (1) of the GST Act apply, the supply will, (subject to subsection 40-75 (2) of the GST Act) be new residential premises and will therefore be a taxable supply under section 9-5 of the GST Act.

The question to be determined is whether the residential premises that are supplied to the purchasers have ever been the subject of a long-term lease.

The definition of long-term lease in section 195-1 of the GST Act refers to 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:

· 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

· 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.

The subsequent lease you have entered into is for a term in excess of 50 years. The supply from the land owner to you is a supply by way of a long term lease. Therefore the subsequent supply of the lease from you to the purchasers is a supply which has previously been the subject of a long term lease. On this basis the supply of the residential premises is not a supply of new residential premises as defined in section 40-75 of the GST Act. Accordingly, the supply of the residential premises by way of long term lease is an input taxed supply.

The Federal Court decision Commissioner of Taxation v Gloxinia Investments (Trustee) [2010] FCAFC 46 (Gloxinia) handed down on 24 May 2010, held that a developer's sales of newly constructed residential premises, constructed under a particular arrangement with a land owner (sometimes referred to as a 'development lease' arrangement) are input taxed supplies of residential premises.

You have advised that you acted in accordance with the advice that is contained in Goods and Services Tax Ruling GSTR 2008/2: development lease arrangements with government agencies (GSTR 2008/2). GSTR 2008/2 provided the ATO view on specific development lease arrangements up until the ATO issued its Decision Impact Statement (DIS) on the Gloxinia decision. GSTR 2008/2 was withdrawn on 11 May 2011.

The Commissioner issued a Decision Impact Statement Commissioner of Taxation v Gloxinia Investments Ltd as trustee for Gloxinia Unit trust on 21 April 2011.

In relation to the sale of newly constructed residential premises, the DIS states:

The Commissioner considers the effect of the decision in this case, under the current law, to be as follows:

Sale of newly constructed residential stratum unit

The grant by a government agency, to a developer, of a long-term lease with respect to a newly constructed residential unit that is an individual lot in a strata leasehold plan will give effect to a supply of that residential unit to the developer. A subsequent sale of the residential unit, by way of assignment of the long-term leasehold interest, will be an input taxed supply of residential premises. In accordance with the decision, at the time of the subsequent sale, the residential unit will not be new residential premises because it will have previously been the subject of a long term lease.

On the facts provided, your arrangement is similar to the development lease arrangement that was the subject of the Gloxinia decision. Accordingly, the ATO view contained in the DIS applies. The supply of the land that has previously been subject to a long term lease and is subsequently assigned by way of lease to a purchaser, is an input taxed supply of residential premises under section 40-70 of the GST Act.