Edited version of your private ruling

Authorisation Number: 1012289701691

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Ruling

Subject: GST and supply of residential premises by way of long term lease

Question 1:

Are your supplies of the newly constructed residential premises correctly classified as an input taxed supply under Subdivision 40-C of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer:

Yes

Question 2:

Does the administrative treatment in the fact sheet 'Goods and services tax treatment of new residential premises' apply to your circumstances so that you are not liable for any penalty or any General Interest Charge (GIC) that may result from the revisions?.

Answer:

No

Question 3:

If the GIC is not remitted under the above fact sheet, will the GIC be remitted in full in accordance with Law Administration Practice Statement PS LA 2008/3 and PS LA 2007/11 or alternatively remitted to the base rate?

Answer:

The GIC is partially remitted.

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You are a building entity and are registered for goods and services (GST)

Prior to 27 January 2011 a short term Holding Lease was granted to you by a Government authority. The land is to be used for the purpose of subdivision and constructing the works and building in accordance with the requirements of the deed.

Under the lease and development deed, you agreed to undertake the design construction and completion of certain works at your own cost.

The Deed provides for commencement of works, completion of works and list of works.

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.

You have lodged amendments to all Business activity statements (BASs) in relation to this project to repay all input tax credits that have been claimed in relation to the supplies of residential premises that you make

Relevant legislative provisions

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

Section 9-5

Section 11-5

Sections 40-65,

Section 40-75.

Reasons for decision

Question 1:

Summary

The new section 40-75(2B) of the GST Act does not apply to disregard the wholesale supply. The supply of the premises was previously subject to a long term lease and therefore section 40-70 of the GST Act applies to make the supply input taxed.

Detailed reasoning

The GST treatment of a supply of residential premises is considered under sections 40-65 and 40-70 of the GST Act. Under those sections, the sale or long term lease of residential premises to be used predominantly for residential accommodation is input taxed to the extent that the premises are not commercial residential premises or new residential premises.

The term 'new residential premises' is defined in subsection 40-75(1) of the GST Act. Of relevant to the case is paragraph 40-75(1)(a) which states:

40-75 Meaning of new residential premises  

(1) *Residenntial 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) …; or

(c) …

(2)…

*asterisk denotes a defined term in the GST Act

The relevant supply in this case is a supply of new land and house packages made prior to November 2011. Whilst it is not disputed that the supply is a supply of residential premises as defined in the GST Act, the issue is whether the supply is a supply of new residential premises and therefore will not be treated as input taxed under sections 40-65 and 40-70 of the GST Act.

Under paragraph 40-70(1)(a) of the GST Act, we need to consider whether the underlying supply in question (the house and land package) has not been previously been subject to a long term lease.

Background of legislative changes

The GST treatment of development lease arrangement with government agencies (including the supply of residential premises by way of long term lease) was considered in GSTR 2008/2 effective as from the date of issue on 11 May 2008. Under this Ruling, it is considered that the government entity merely sells or leases land (not land and the attached development works) to the developer. Therefore, when the developer supplies the completed residential premises by way of sale or long-term lease, it is making supplies of new residential premises, as the premises 'have not previously been sold as residential premises and have not previously been the subject of a long-term lease'. It follows that the supply is a supply of new residential premises and paragraph 40-65(2)(b) of the GST Act applies to make the supply input taxed.

However, in Commissioner of Taxation v Gloxinia Investments (Trustee) [2010] FCAFC 46 (Gloxinia case) the Federal Court held that when strata lot leases are granted to Gloxinia there is a grant or assignment of real property, which effects a supply, pursuant to section 9-10 of the GST Act, by way of long term lease of each of the home units that is the subject of a lot in the Strata Leasehold Plan. The home units when sold by Gloxinia will have previously been the subject of a long term lease and will no longer be new residential premises pursuant to paragraph 40-75(1)(a) of the GST Act and are input taxed supplies of residential premises.

On 21 March 2012, the Tax Law Amendment (2011 Measures No 9) Act 2011 (TLAA) received Royal Assent.

Of relevance to this case is the new subsections 40-75(2B) and (2C) that apply to supply of residential premises on or after 27 January 2011 (subject to certain exceptions contained in items 12 and 13 of Schedule 4 to the TLAA).

The purpose of subsection 40-75(2B) is to ensure that the intended outcome of the GST treatment of residential premises is achieved. That is new residential premises constructed under development lease arrangement are treated as taxable supplies rather than input taxed where the premises are sold by developers to home buyers or investors. It is the outcome even though there may have been an 'earlier wholesale supply' of the premises. Under subsection 40-75(2B) of the GST Act the earlier supply is disregarded for the purpose of determining whether residential premises are new residential premises if the residential premises are constructed pursuant to a particular arrangement.

The purpose of subsection 40-75(2C) is to ensure that the granting of individual strata lot leases over newly constructed residential premises upon a registration of a property subdivision plan is not, by itself sufficient to cause those premises ceasing to be new residential premises and to be input taxed when they are subsequently sold or supplied by way of long term lease.

The relevant subsections are reproduced as follows:

Disregard certain supplies of the premises

(2A)…

(2B) A supply (the wholesale supply) of the *residential premises is disregarded as a sale or supply for the purposes of applying paragraph (1)(a) if:

(a)  the premises from which the residential premises were created had earlier been supplied to the *recipient of the wholesale supply or one or more of its *associates; and

(b)  an arrangement (including an agreement) was made by:

(i)  the supplier of the earlier supply, or one or more associates of the supplier; and

(ii)  the recipient of the earlier supply, or one or more associates of the recipient; and

(c)  under the arrangement, the wholesale supply was conditional on:

(i)  specified building or renovation work being undertaken by the recipient of the earlier supply, or by one or more associates of the recipient; or

(ii)  circumstances existing as specified in regulations made for the purposes of this subparagraph.

Note 1:

The premises referred to in paragraph (a) could be vacant land.

Note 2:

For subparagraph (c)(ii), circumstances may be specified by class (see subsection 13(3) of the Legislative Instruments Act 2003).

Note 3:

This subsection does not apply to a supply if certain commercial commitments were in place before 27 January 2011 (see item 12 of Schedule 4 to the Tax Laws Amendment (2011 Measures No. 9) Act 2012).

(2C) A supply of the *residential premises is disregarded as a sale or supply for the purposes of applying paragraph (1)(a) if it is made because a *property subdivision plan relating to the premises was lodged for registration (however described) by the *recipient of the supply or the recipient's *associate.

Transitional provisions

However, some supplies of residential premises after 27 January 2011 will not be subject to the amendments if the conditions contained in items 12 and 13 of Schedule 4 to the TLAA are satisfied.

Item 12 excludes certain 'wholesale supplies' of residential premises made on or after

27 January 2011, from the application of the new law [ss 40-75(2B)] subject to certain conditions being satisfied in relation to the wholesale supply.

Item 13 excludes supplies of residential premises made on or after 27 January 2011 from application of the new law [ss 40-75(2C)] if the supply was made because of a 'property subdivision' was lodged for registration before 27 January 2011 by the developer or their associate.The GST treatment of your supplies of residential premises

You have provided that:

· The supplies of newly constructed residential premises were made from February 2011 onwards.

· The residential premises have been constructed pursuant to a particular arrangement under an arrangement between you (developer) and the land owner (a Government Authority) whereby you became entitled to the long term lease hold title in the premises conditional on specified building work being undertaken by you.

· The supplies were made by way of long term leases.

As the supplies were made after 27 January 2011, the wholesale supply to you by the Authority is disregarded in determining whether the residential premises are new residential premises for the purpose of applying paragraph 40-70(1)(a) of the GST Act. The supplies are supplies of new residential premises subject to the exceptions under items 12 and 13 of Schedule 4 to the TLAA.

Your supplies of residential premises by way of long term lease will not be subject to the new law if the conditions under Item 12 or 13 of Schedule 4 to the TLAA are satisfied. That is, the wholesale supply will be excluded from the application of the new law and the supplies will be considered as have been previously subject to a long term lease. It then follows that paragraph 40-70(2)(b) applies and the supplies are input taxed supply of residential premises.Exception - arrangements made before 27 January 2011 to develop premises  

(1) Subsection 40-75(2B) of the GST Act does not apply to the wholesale supply of residential premises if:

(a)  the wholesale supply happens:

(i)  on or after 27 January 2011; or

(ii) before 27 January 2011, and the next supply of the residential premises happens on or after 27 January 2011; and

(b)  subitem (2) is satisfied in relation to the wholesale supply.

(2)  This subitem is satisfied in relation to the wholesale supply if:

(a)  the premises from which the residential premises were created had earlier been supplied to the recipient of the wholesale supply or one or more of its associates; and

(b)  immediately before 27 January 2011, the recipient of the wholesale supplyor one or more of its associates were commercially committed to an arrangement; and

(c)  under the arrangement, the wholesale supply was conditional on specified building or renovation work being undertaken by the recipient of the wholesale supply or by one or more of its associates; and no GST return (as amended) given to the Commissioner reports a net amount for a tax period that includes amounts equivalent to the input tax credits that the recipient of the wholesale supply would have been entitled to if its acquisitions relating to the next sale or long term lease of the residential premises were creditable acquisitions.

Note:

The premises referred to in paragraph (a) could be vacant land.

In your circumstances:

The wholesale supply to you by the Government Authority was made after 27 January 2011. The leases were granted in February 2011.

You were commercially committed to an arrangement under which the wholesale supply was or is to be made, immediately before 27 January 2011.

(a) The land from which the residential premises were created had earlier been supplied to you under the Holding Lease.

(b) On 23 February 2010 you entered into the arrangement with PALA for the purposes specified under clause 2(f) of the Holding Lease. Under sub-item 12(3) of Schedule 4 to the TLAA the term 'commercially committed' in relation to an arrangement means 'to be a party to the arrangement where the arrangement is legally binding'. The Holding Lease and the Deed are legally binding arrangement that you have entered into immediate before 27 January 2011.

The arrangement under the Holding Lease specified in clause 2(f) that the purpose is to use premises only for the purpose of subdivision and constructing the works and building on accordance with the requirements of the deed.

(c) The wholesale supply is conditional on specified building works being undertaken by you

The following key factors in the Holding Lease, the Deed and the Development Applications have specified that the works required to be completed by you prior to the wholesale supply:

The Holding Lease:

· Purpose of the arrangement

· Meaning of the term 'Works- Deed in the Interpretation

· Commencement of works

· Completion of works

· Application of lease

· Building approval

· Surrender of the Holding Lease (for separable leases)

· The Deed

· Estate Development Plan

· General

· Building

· Annexure A1 Estate Development Plan

· A1.1.1 List of Works

· Annexure A2 Special Project Conditions

· Annexure A3 Leases Plan and

· (Total Maximum dwellings of 460)

· The issue of Consequent Leases for individual lots in February 2011

Annexure A4 Stages and Programs

(d) Any acquisitions relating to subsequent supply by way of long term lease of the residential premises by you have not been treated as being creditable acquisitions for which entitlements to an input tax credit arises.

However, this condition is also satisfied where a GST return has subsequently been amended so that they do not include any input tax credit (or any part) mentioned above.

You have treated the supplies made from February 2011 to November 2011 as taxable. However, on 21 May 2011 you amended your relevant GST returns to reflect that the acquisitions are no longer creditable and have repaid all of the input tax credits previously claimed which relates to making of supplies that are input taxed.

As all of the conditions in Item 13 of Schedule 4 to the TLAA are met, the wholesale supply is not disregarded (that is the new section 40-75(2B) does not apply). Therefore, your supplies of residential premises are considered to be input taxed supplies.

Question 2:

Summary

You revised your relevant activity statements more than a month after a reasonable time given by the ATO.. Following the guidance in the fact sheet above the normal ATO administrative treatment of penalty and GIC will apply.

Detailed reasoning

Announcement of proposed retrospective law changes poses a dilemma for affected taxpayers about whether to follow the existing law or to attempt to anticipate proposed changes to the law.

The ATO will provide practical guidance setting out the ATO's administrative approach to particular retrospective law change proposals.

Following the Royal Assent on 21 March 2011 of the TLAA, the ATO has issued the fact sheet 'Goods and services tax treatment of new residential premises' which provides the ATO's position on penalty and interest on the amendment or revision of GST return

Under the heading 'Administrative treatment' the fact sheet states that:

From 21 March 2012, the day of royal assent, each taxpayer will need to review their positions and do one of the following things:

· revise their impacted activity statement lodged since 27 January 2011 (the date of effect of the amendments) if they do not anticipate the changes to the law correctly.

· revise their impacted activity statement lodged since 27 January 2011 (the date of effect of the amendments) if they lodged it in accordance with the law as it was before 21 March 2012.

Taxpayers who revise their activity statements within 28 days of 21 March 2012 (that is, before 19 April 2012) will not be liable for any penalty or general interest charge (GIC) that may result from the revision. After this time, the normal ATO administrative treatment of penalties and GIC will apply.

You did not anticipate the changes to the law correctly and treated the supply as taxable rather than input taxed (due to the application of Item 12 of Schedule 4 to the TLAA).

However, you revised all relevant activities statements to repay all input tax credits that you had claimed in relation to acquisitions to make input taxed supplies of residential premises.

You revised your relevant activity statements more than a month after trhe due date to do so. Following the guidance in the fact sheet above the normal ATO administrative treatment of penalty and GIC will apply. This is considered in question 3 below.

Question 3:

Summary

The GIC is partially remitted. Please refer to Detailed reasoning below.

Detailed reasoning

Where you seek a remission of GIC, your request should be considered having regard to the facts of the particular case, including your own situation and individual circumstances the guidelines contained in the following practice statements

Practice Statement Law Administration PS LA 2007/11 sets out the ATO policy on penalties and interest in the cases where taxpayers anticipate a change to the law in meeting their obligations and as a result are later found to have underpaid their tax.

PS LA 2008/3 The practice statement, amongst other things, also explains the level of protection available to taxpayers who rely on each form of advice and guidance.

Attachment A contains a quick reference summary of the level of protection provided for each form of advice and guidance. (The relevant GSTR 2008/2 was withdrawn as from 11 May 2011 because the decision in Gloxinia case meant that the ATO view outlined in that ruling with respect to the development lease arrangements with government agencies was now incorrect under the current law).

The Assistant Treasure announced in the Media Release No 20 on 27 January 2011 that the Government will amend the GST law to ensure that new residential premises constructed under a development leases arrangement since 3 October 2007 are treated as taxable supplies rather than input taxed supplies where the premise are sold by developers to home buyers or investors.

In the Media Release No 135 on 23 September 2009 the Assistant Treasurer confirmed that the new legislation would not apply to sales of residential premises constructed under eligible arrangement entered into prior to 27 January 2011.

It should be noted that the key provision, paragraph 40-75(1)(a) does not change. That is, residential premises are new residential premises if they 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. The change in the law is ensure that the 'wholesale supply' is disregarded in determining the application of paragraph 40-75(14)(a) subject to certain exceptions in Schedule 12 and 13 of the TLAA.

You have treated all of your supplies made in February 2011 to end of November 2011 as taxable supplies in meeting your GST obligations and as a result are later found to have underpaid GST. It is reasonable for you to follow the announcement in the first Press release on 27 January 2011 to treat the supplies as taxable and that the existence of the announcement represents special circumstances especially since the relevant GSTR was withdrawn on 11 May 2011.

Your remission request is considered under the light of all information provided to you, including the announcement in the two Press Releases and in accordance with the fact sheets 'Goods and services tax treatment of new residential premises' and 'The ATO's approach to dealing with retrospective law changes' and paragraph 31 of the PS LA 2007/11 and Attachment A of PS LA 2008/3.

It is considered appropriate for the Commissioner to exercise his discretion in respect to the ATO view as you have acted in good faith and apply an approach that is fair, reasonable and equitable in view of the circumstances surrounding your case. Accordingly the ATO view has been applied in the following manner

· no tax shortfall penalties will apply.

· any interest attributable to the shortfall will be remitted to nil up to the date of enactment of the amended legislation (21 March 2011).

· any interest will be remitted to nil up to 18 April 2011 as allowed under the fact sheet.

· GIC applies at the base rate as from 19 April 2011 to 21 May 2011.