Edited version of your private ruling

Authorisation Number: 1012431508177

Ruling

Subject: GST and supply of residential property

Question

Will your supplies of residential premises in Australia be input taxed supplies?

Answer

Yes

Relevant facts and circumstances

You are a partnership that is not registered for GST.

On ddmmyyyy, you entered into an agreement for the development of the land. Under the agreement, Entity B was required, as your agent, to acquire, develop and hold the Land.

Although you are not currently registered for GST, the GST registration and Business Activity Statement lodgement in relation to this project has occurred in the name of Entity B, in its capacity as your agent.

In a telephone conversation between your agent and office, it was ascertained that you were the appropriate reporting entity in relation to this development rather than Entity B.

In accordance with this, you will register for GST with effect from the commencement of the project and lodge the BAS for the development. In anticipation of our ruling that your supplies of the residential units will be input taxed supplies, you will not claim input tax credits on the related acquisitions.

Entity B will amend its BAS to nil.

On ddmmyyyy, you entered into a Contract for Sale over Land situated in Australia ("the Land") for $x,xxx.

The Contract for Sale provides that:

· The Seller will grant or will procure the grant of, the Lease to the Buyer on Completion."

· The Lease will be granted substantially upon the terms and conditions of the Specimen Lease."

The Specimen Lease was attached as Annexure A to the Contract for Sale.

The Specimen Lease contained the following relevant clauses:

· Clause A(a) - Commencement of development:

o That the lessee shall within twelve months from the date of the commencement of the lease or within such further time as may be approved in writing by the relevant authority for that purpose commence to erect an approved development on the land at a cost of not less than the sum of ninety thousand dollars per dwelling in accordance with plans and specifications prepared by the lessee and previously submitted to the and approved in writing by the relevant authority;

· Clause B(b) - Completion of development:

o That the lessee shall within twenty four months from the date of the commencement of the lease or within such further time as may be approved in writing by the relevant 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 lawe or regulation applicable to such development.

· Clause C(c) - Purpose:

o To use the land for the purpose of multi-unit housing for not less than xx nor more than yy dwellings;

Accordingly, at the time of entering the Contract for Sale, you were legally bound to complete the development in accordance with clauses A(a) and B(b) of the Specimen Lease.

Whilst the Contract for Sale was entered into on ddmmyyyy, settlement of the sale did not occur until after 27 January 2011. At settlement, the finalised Crown Lease was issued to you.

The Crown Lease was for a xx year term, commencing on ddmmyyyy.

The Crown Lease contained Clause 1 - Interpretation which repeated the definitions of Authority, dwelling and multi unit housing from the Specimen Lease.

The Crown Lease also contained Clauses A (a), B(b) and C (c) which were repeated from the Specimen Lease.

Development Application ("DA") No. xxx was lodged with the relevant authority on ddmmyyyy for construction of a residential development on the Land, which included yy apartments. The DA also sought to subdivide the Land into Y blocks, such that the development could be undertaken in a staged manner.

On ddmmyyyy, the relevant authority issued a Notice of Decision ('NOD"). The NOD advised that the relevant authority had approved the proposal as lodged. The NOD advised that the Crown Lease over the Land must be surrendered and new Crown Leases issued to effect the subdivision, with the Crown Leases being substantially in accordance with those shown at Attachments A and B to the NOD.

Each Draft Lease contained the following relevant clauses:

· Clause A(a) - Prohibition on lease variation

o that a variation of the purpose clause in the Crown lease, under the relevant Act, is not permitted for a period of (x) years from the date the Crown lease is granted.

· Clause B(b) - Commencement of development:

o That the lessee shall prior to ddmmyyyy 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 the and approved in writing by the Authority;

· Clause C(c) - Completion of development:

o That the lessee shall prior to ddmmyyyz 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 law or regulation applicable to such development.

· Clause 3(d) - Purpose:

o To use the land for the purposes of residential use limited to multi-unit housing for not less than xx dwellings and not more than:

xy dwellings for Block A, and

xz dwellings for Block B

On ddmmyyyy, the new Crown Leases were issued for Blocks A and B, being the subdivided blocks of land.

The new Crown Leases contained Clauses A (a), B(b) and C(c) which were repeated from the Draft Crown Lease attached to the NOD dated.

Clauses C (c) varied the minimum number of dwellings to vx for Block A and wx for Block B.

As at the date of this ruling request, you have undertaken a residential development on Block B, only. Notwithstanding you only having undertaken a residential development on Block B, a residential development was approved by the relevant authority on Block A.

Up to and including the date of this Private Ruling Request, you have acted in accordance with, the principles as established in Goods and Services Tax Ruling GSTR 2008/2 - development lease arrangements with government agencies (now withdrawn). Accordingly, Entity B has claimed all input tax credits on acquisitions made in relation to the development,

Upon completion of the residential development on Block B, an application was made 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 the registered units plan have a term expiring after more than 50 years.

Upon completion of the residential development on Block A, an application will be made 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.) will be carried over in the Units Plan. The unit title leases granted to you in respect of the registered units plan are anticipated to have a term expiring after more than 50 years.

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.

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.

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.

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 within Australia, subsequent to the approval of the DA, for the purpose of construction of a residential development on the Land, which includes xx dwellings. Upon completion of the development on Block B, 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 the registered units plan have a term expiring after at least 50 years.

Upon completion of the development on Block A, you will make 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.) will be carried over in the Units Plan. The unit title leases granted to you in respect of the registered units plan are anticipated to have a term expiring after at least 50 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 as they had previously been subject to a long term lease.

On the facts provided the arrangement between you and the relevant 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 also 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 relevant 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.

Commercially committed is a defined term. To be commercially committed, in relation to an arrangement, means:

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

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

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

· 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 to Entity B occurred in Z.

a) Earlier supply to you of the wholesale supply:

The premises from which the residential premises was created was previously supplied to you.

b) Commercially committed to an arrangement

You have entered into a legally binding arrangement to construct xx dwellings on the Land. Therefore, you were commercially committed.

c) Wholesale supply conditional on specified building or renovation work being undertaken by the recipient of the wholesale supply.

Under the arrangement, you are constructing xx dwellings on the Land (refer to DA application);

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

You will register for GST with effect from commencement of the project and lodge the BAS for the development. In anticipation of our ruling that your supplies of the residential units will be input taxed supplies, you will not claim input tax credits on the related acquisitions.

Entity B will amend its BAS to nil.

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

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