Edited version of your private ruling

Authorisation Number: 1012439179885

Ruling

Subject: GST and supply of residential property

Development lease

Question

Are your supplies of residential premises input taxed supplies?

Answer

Yes

Relevant facts and circumstances

On ddmmyyyy, you, Entity A and Entity B entered into a trust deed with the Trustee, with the objective of purchasing the crown lease for the Land.

Under the terms of the deed:

· Entity A was to receive specified residential units.

· Entity B was to receive specified residential and non-residential units.

You advised that you have formed a joint venture to develop the Land and that Entity A is registered with the ATO as the joint venture operator for this joint venture.

On ddmmyyyy the Trustee entered into a Contract for Sale to acquire land situated in Australia.

Settlement for the purchase of the Land occurred on ddmmyyyy, at which time a Crown Lease was issued to the Trustee. The Crown Lease was for term exceeding 50 years.

The Crown Lease contains the following relevant clauses:

· Interpretation:

o In this lease unless the contrary intention appears:

§ Authority means xxxx;

§ residential use means xxxx

· Commencement of development:

o 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 the and approved in writing by the Authority;

· Completion of development:

o 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 complete the erection of the said approved development on the land in accordance with the said plans and specifications and in accordance with every Statute Ordinance or Regulation to such development.

· Purpose:

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

§ (x) residential use

On ddmmyyyy a Development Application was lodged with the Authority by the Trustee for construction of a mixed use development on the Land, which included xx residential units. Amended DA's were later lodged.

On ddmmyyyy the Authority issued a Notice of Decision ("NOD") in relation to these DA's to the Trustee. The NOD advised that the Authority had approved the proposal subject to conditions. The DA approval was for construction of a mixed use development, which included xx residential units.

Throughout the development, you have acted in accordance with Goods and Services Tax Ruling GSTR 2008/2: development lease arrangements with government agencies (now withdrawn).

Accordingly, Entity A, as the registered joint venture operator for this joint venture, claimed all input tax credits on acquisitions made in relation to the development.

Upon completion of the development, which is anticipated to be in mmyyyy, an application by the Trustee 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. Accordingly it is expected that the unit title leases granted to the Trustee in respect of the registered units plan will have a term exceeding 50 years.

As noted previously, the Crown Lease contained clauses requiring development to:

· commence within xx months of the date of commencement of the lease; and

· be completed within yy months of the date of commencement of the lease.

With the development not anticipated to be completed until mmyyyy, you would otherwise be in breach of Clause x of the Crown Lease. On ddmmyyyy the Authority approved an extension of time for the completion of the development as follows:

· Completion of Development - ddmmyyyy.

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.

The Trustee was granted a Crown Lease subsequent to the approval of the DA for the purpose of construction of a mixed use development on the Land, which includes xx dwellings. After completion of the development, which is anticipated to occur in mmyyyy, the Trustee 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 have a term expiring on 10 April 2109 (96 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 Authority is similar to the development lease arrangement that was the subject of the Gloxinia decision. Therefore, your subsequent supplies 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 ACTPLA 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:

(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 ACTPLA to you will occur 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.

b) Commercially committed to an arrangement

You 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 constructed a mixed used development, including xx dwellings, on the Land;

The DA application which contained the proposal was approved on ddmmyyyy;

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

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

d) GST return details

You advised that in the event that the supplies are correctly classified as 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.

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

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

Under the terms of the agreement, Entity A was to receive specified residential units. Entity A's supplies of those residential units will be input taxed supplies.

Entity B was to receive specified residential and non-residential units. Entity B's supplies of the residential units will be input taxed supplies.