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Ruling

Subject: GST and supplies of residential premises

Question 1

Are your supplies of relevant residential premises, by way of assignment of a long term lease, input taxed supplies?

Answer

Your supplies of the newly constructed residential premises will be input taxed, but only where they are made after you have amended your goods and services tax (GST) returns to repay the input tax credits you have already claimed.

Relevant facts and circumstances

· You are registered for GST.

· In X you entered a Contract for Sale to acquire a Lease over land.

· Settlement of the sale occurred in Y at which time the Lease was issued to you.

· The Lease contains relevant clauses considering the allowed use or purpose of the land, which included for residential use.

· Your Lease also requires that development must commence (by erecting an approved development including building works, carparking, landscaping) within Z months of commencement of the Lease, or such further time as may be approved in writing by planning authorities.

· The Lease also required that the development be complete within W months of the date of commencement of the Lease, or such further time as approved in writing by the planning authorities.

· A development application was lodged with the planning authorities in Y for construction of a residential development on the Land, including a number of residential dwellings.

· The Authority issued a Notice of Decision several months later (also Y) that approved your proposal as lodged.

· You have claimed all input tax credits (ITCs) on acquisitions made in relation to the development in reliance on Goods and Services Tax Ruling GSTR 2008/2 Goods and services tax: development lease arrangements with government agencies (GSTR 2008/2). This ruling was withdrawn on 11 May 2011. You have advised that you have claimed all ITCs up to and including the date of this private ruling request.

· When you completed the development, you applied to register a units plan (strata title plan) which was approved in the relevant year.

· Upon registration of the units plan, the provisions of the Lease (purpose, term etc) were carried over to the units plan. The unit title leases granted to you in respect of the registered units plan do not expire for nearly 100 years.

· You lodge your Business Activity Statements (BASs) quarterly. The first settlements on the development were reported in your BAS for the period 1 July T to 30 September T. You remitted GST on these supplies. However, you are not requesting a private ruling on these supplies.

· Your private ruling request relates to supplies of dwellings made on or after

1 October T. You have asked for information on the GST treatment of the supplies made after that date, in particular whether your supplies of those residential premises, by way of assignment of a long term lease, are input taxed supplies.

· You require the advice in this private ruling in order to lodge your quarterly BAS by its due date.

· If your private ruling cannot be finalised within usual ATO service standards (28 days) you have requested that any general interest charges in relation to late lodgement and payment as a result of the delay be remitted in full.

· You have advised that in the event that the ruling determines that your supplies are input taxed supplies, you will review and amend any prior 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.

Relevant legislative provisions

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

Section 9-5

Subsection 40-70(1)

Subsection 40-70(2)

Subsection 40-75(1)

Subsection 40-75 (2)

Subsection 40-75(2B)

Section 195-1

Reasons for decision

Summary

Your supplies of the newly constructed residential premises will be input taxed if they are made after you have amended your GST returns to repay input tax credits already claimed.

Detailed reasoning

In your circumstances you acquire and supply (by assigning the lease) premises by way of lease. A long term lease is a lease, hire or licence for at least 50 years (section 195-1). We consider that your acquisitions and supplies are by way of long term leases.

The GST treatment of a supply of residential premises by way of long term lease is considered under section 40-70 of the A New Tax System (Goods and Services Tax) Act (GST Act).

Under that section, a supply of real property by way of long term lease is input taxed to the extent that the property is residential premises to be used predominantly for residential accommodation. However, the supply is not input taxed to the extent that the residential premises are new residential premises.

New residential premises

Under paragraph 40-75(1)(a) of the GST Act residential premises are new residential premises if they have not previously been sold as residential premises and have not previously been the subject of a long term lease (and certain other requirements have been met).

In your circumstances you supply newly constructed residential units by way of assignment of a long term lease. You have previously held a long term lease over the land on which these units have been constructed, which has been in place since Y. Your supplies in question have occurred from 1 October T.

Therefore the relevant issue is whether the supply of the premises has previously been subject to a long term lease. If they have been previously subject to a long term lease they will no longer be new residential premises, and are therefore not excluded from being input taxed by section 40-70 of the GST Act (see paragraph 40-70(2)(b)) (in other words the supplies are input taxed).

Supplies made on or after 27 January 2011

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

It introduced new subsection 40-75(2B) of the GST Act. This section applies to supplies of residential premises made on or after 27 January 2011. It allows a supplier to disregard certain prior supplies of the premises in determining whether residential premises supplied are new residential premises.

The section broadly provides that a previous supply (the wholesale supply) of residential premises (including vacant land) is disregarded as a supply for the purposes of paragraph 40-75(1)(a) if the premises/land from which the residential premises are created had earlier been supplied (to the recipient of the wholesale supply) subject to an arrangement whereby specified building or renovation work is to be undertaken (by the recipient).

In those circumstances, as the wholesale supply would be disregarded, the premises when supplied (again) are still new residential premises and are therefore not input taxed. Supplies of such premises are taxable supplies.

However, subsection 40-75(2B) does not apply to a supply if certain commercial commitments were in place before 27 January 2011. The requirements for this exemption are considered in detail in item 12 of Schedule 4 to the TLAA 2012 (item 12).

Under item 12, subsection 40-75(2B) does not apply if

(i) the wholesale supply happens on or after 27 January 2011; or

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

and certain other requirements (as detailed below) are met.

We consider that scenario (ii) applies in your circumstances because the wholesale supply (by way of long term lease) to you occurs in Y. Your supplies of the newly constructed residences happen after 27 January 2011.

Where the following requirements are met subsection 40-75(2B) does not apply:

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 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

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.

In your circumstances the following facts apply:

a) the land on which you constructed the units was supplied to you earlier under a long term lease,

b) in Y you entered into a binding Lease that remained in force immediately before 27 January 2011 (and thereafter),

c) as part of the conditions of the Lease that you entered into you were required to erect an approved development, and

d) currently your GST returns as already reported include input tax credits that you would have been entitled to if your acquisitions relating to your on-supply of the premises were creditable acquisitions.

You have advised that you have claimed all ITCs up to and including the date of this private ruling request. As your returns have not yet been amended all the requirements for the exception to apply are not satisfied. Therefore based on the current facts subsection 40-75(2B) does apply. This means that the wholesale supply to you is disregarded. Therefore as the supply is disregarded your on-supply of the premises is treated as if it has not previously been the subject of a long-term lease, and therefore the residential premises are new residential premises (section 40-75(1)(a)). The result is that based on the current facts presented the supply of the (new) residential premises is not input taxed. That is, the supply is taxable.

However, you have advised that in the event that the ruling determines that your supplies are input taxed supplies, you will review and amend any prior 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.

We note that in that factual scenario, once you have amended your GST returns to repay any input tax credits claimed relating to those supplies, all of the requirements of item 12 (as detailed above) will have been met.

It is then (and only then) that subsection 40-75(2B) will not apply under the transitional provisions, with the result being that we acknowledge that the residential premises have been previously subject to a long-term lease and are therefore not new residential premises under section 40-75(1)(a). As they are not new residential premises a supply of the residential premises by way of long-term lease will be an input taxed supply.

Should you wish to utilise the latter treatment (as input taxed) in your next BAS, as you have indicated, it is essential that you first repay the input tax credits that you have already claimed. The normal way to correct these mistakes is to revise the previous activity statement(s), but in some cases you can correct it on a later activity statement. Please refer to our publication 'Correcting GST Mistakes' on our website (www.ato.gov.au).

As our ruling has been prepared in accordance with our usual service standards it is not necessary to consider your request regarding an extension for lodgement or waiver of general interest charges.