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Authorisation Number: 1012413934980

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Ruling

Subject: GST and supply of residential property

GST and supply of residential property

Question

Will your supplies of residential premises be input taxed supplies?

Answer

Yes

Relevant facts and circumstances

You held Crown Leases over land.

The leases were acquired as GST-free going concerns.

You lodged a Development Application ("the DA") the relevant authority on ddmmyyyy for construction of a building, which includes residential units.

Your private ruling application relates only to supplies of residential premises that you will make.

The relevant Authority issued a Notice of Decision ("NOD") advising that it had approved the proposal, subject to conditions. One of the conditions noted was that the existing Crown Leases over the Land, be surrendered to allow consolidation of the blocks and a new Crown Lease (similar to the draft Crown Lease be granted over the Land.

The newly consolidated Crown Lease contained the following relevant clauses:

Purpose:

To use the land for the purpose of any one or more of the following uses:

o residential use

Interpretation:

In this lease unless the contrary intention appears:

o residential use means a caretaker's residence, multi-unit housing, single dwelling housing1 residential care accommodation and/or supportive housing;

Commencement of development:

That the lessee shall within xx months from the date of the commencement of the lease or within such further time as may be approved in writing by the Authority for that purpose commence to erect an approved development on the land in accordance with plans and specifications prepared by the lessee and previously submitted to and approved in writing by the Authority;

Completion of development:

That the lessee shall within yy months from the date of the commencement of the lease or within such further time as may be approved in writing by the Authority complete the erection of the said approved development on the land in accordance with the said plans and specifications and in accordance with every Statue Ordinance or Regulation to such development.

Accordingly, subsequent to approval of the DA, you were legally bound to complete the development (as approved in the DA) in accordance with clause 3(b) of the Crown Lease.

You entered a Development Deed in relation to development of the Land. Under the Development Deed, you engaged the services of a developer to procure and construct the development as approved in the DA.

Prior to entering the Development Deed, you acted in accordance with Goods and Services Tax Ruling GSTR 2008/2: development lease arrangements with government agencies (now withdrawn). Accordingly, prior to entering the Development Deed, you claimed all input tax credits on acquisitions made in relation to the development.

The Development Deed provides that upon settlement of sales of units in the development by you, the developer makes a supply of development services to you. At this time, the developer charges you a development fee. It is noted that the development fee is calculated and charged on a unit by unit basis, such that you are clearly able to demonstrate the development fee that is applicable to any individual unit. The development fee is a taxable supply made by the developer. The development fee will be a creditable acquisition to the extent that it relates to you making a taxable supply.

Upon completion of the development, an application was made to register a units plan (i.e. strata title plan). Registration of the units plan was completed in or after 27 January 2011. Prior to registration of the units plan, you were required by the relevant Authority to surrender the existing Crown Lease and accept a new Crown Lease dated after 27 January 2011. This new Crown Lease expires 99 years from the commencement date. The relevant Authority required that the surrender and re grant of the Crown Lease occur prior to registration of the units plan such that the underlying Crown Leases upon registration of the units plan would have a 99 year term.

Upon registration of the units plan, the provisions of the Crown Lease (purpose clause, term etc.) were carried over in the Units Plan. Accordingly, the unit title leases that were granted to the taxpayer in respect of registered units plan have a term of 99 years.

You have not claimed any input tax credits in relation to the development works undertaken to date by the developer. Furthermore, you have not claimed any other input tax credits since the time of the entering the Development Deed with the developer.

In the event that the future supplies are correctly classified as input taxed supplies, you will review and amend any GST returns that have been lodged in relation to the development of the Land to ensure that all acquisitions are treated as not being creditable acquisitions.

As at 27 January 2011, you had incurred preliminary costs in excess of $200,000 (excluding land acquisition costs) in relation to the residential development to be undertaken on the land.

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 subsection 40-70(1)

A New Tax System (Goods and Services Tax) Act 1999 subsection 40-70(2)

A New Tax System (Goods and Services Tax) Act 1999 subsection 40-75(1)

A New Tax System (Goods and Services Tax) Act 1999 subsection 40-75 (2)

A New Tax System (Goods and Services Tax) Act 1999 subsection 40-75(2B)

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:

(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.

You were granted a Crown Lease for the purpose of construction of a development on the Land, which includes residential units. Upon completion of the development, you made an application to register a units plan (i.e. strata title plan). Upon registration of the units plan, the provisions of the Crown Lease (purpose clause, term etc.) were carried over in the Units Plan, The unit title leases granted to you in respect of registered units plan have a term of 99 years.

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.

On the facts provided the arrangement between you and the Authority is similar to the development lease arrangement that was the subject of the Gloxinia decision. Therefore your subsequent supply of residential premises would be input taxed as they have previously been subject to a long term lease.

However, on 21 March 2012, Tax Laws Amendment (2011 Measures No.9) Bill 2012 ("the Bill") received Royal Assent. The Bill contains amendments to Division 40 of the GST Act that aim to overcome the issues identified in Gloxinia. In particular, a new section (section 40-75(2B)) has been inserted into the GST Act to disregard a 'wholesale supply' (such as the supply made by the Authority to you in granting the consequent leases) of residential premises as a supply for the purposes of section 40-75(1)(a).

Whilst the new section 40-75(2B) applies in relation to supplies of residential premises occurring on or after 27 January 2011, there is an exception whereby certain arrangements which were entered into before 27 January 2011 will not be subject to section 40-75(2B). The exception is contained at item 12 of Schedule 4 to Tax Laws Amendment (2011 Measures No. 9) Act 2012.

Where the wholesale supply of consequent leases occurs after 27 January 2011, in order to qualify for the exception, the following conditions must be satisfied:

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 supply or one of 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

d) 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: to be commercially committed, in relation to an arrangement, means:

(a) to be a party to the arrangement, where the arrangement is legally binding; or

(b) to be the preferred tenderer (however described) in the final step in a bidding or tendering process relating to the arrangement; or

(c) to have directly made (with associates) acquisitions, having a total GST exclusive value of at least $200,000, in relation to the arrangement; or

(d) to have directly incurred (with associates) internal direct costs, of at least $200,000, in relation to the arrangement.

Application of the exception to section 40-75(2B)

The wholesale supply of the unit title leases by the Authority to you occurred after 27 January 2011.

a) Earlier supply to you of the wholesale supply

The premises from which the residential premises was created was previously supplied to you under a Crown lease.

b) Commercially committed

You were party to an arrangement, where the arrangement was legally binding:

Subsequent to DA approval, you were granted a Crown Lease;

The Crown Lease is a legally binding agreement;

The Crown Lease required that you undertake "an approved development on the land in accordance with plans and specifications prepared by the Lessee and previously submitted to and approved by the Authority."

The DA was approved by the Authority before 27 January 2011;

The Crown Lease required that the development, as approved by the Authority:

i. commence within xx months of lease commencement;

ii be completed within yy months of lease commencement;

Further, as at 27 January 2011, you had incurred preliminary costs in excess of $200,000 (excluding land acquisition costs) in relation to the residential development to be undertaken on the land.

c) The wholesale supply was conditional on specified building or renovation work being undertaken by the recipient of the wholesale supply:

Under the arrangement, you are required to "erect an approved development on the land";

The DA approved a development of a building, including residential units;

The wholesale supply of the unit title leases cannot occur without the completion of the development;

Upon registration of the units plan, the relevant Authority will make the wholesale supply of unit title leases to you.

d) GST return details:

In the event that the future supplies are correctly classified as input taxed supplies, you review and amend any GST returns that have been lodged in relation to the development of the Land to ensure that all acquisitions are treated as not being creditable acquisitions.

Subject to amending any GST returns (if required), you will satisfy this requirement of the exception to section 40-75(2B) of the GST Act.

As you have satisfied all the preceding conditions to the exception to section 40-75(2B) of the OST Act, the premises are not new residential premises. Any supplies of the premises by you will be input taxed supplies of residential premises.

Further issues for you to consider

You acquired the property as a GST free going concern. Division 135 requires you to make an increasing adjustment to take into account the proportion of supplies that you will make which are neither taxable supplies nor GST-free supplies.