Edited version of your private ruling

Authorisation Number: 1012450381321

Ruling

Subject: GST and supplies of residential premises

Question 1

Are the supplies of the newly constructed residential premises (the consequent leases) made by you to the purchasers by way of long-term lease input taxed supplies?

Answer

Yes. However, only for supplies of real property where settlement is after 27 January 2011 and where you have first repaid the input tax credits claimed.

Question 2

If the answer to question 1 is yes, will the Commissioner exercise his discretion to refund the overpaid GST on those supplies?

Answer

No.

Where you elect to provide amended GST returns to repay the input tax credits, such that the supply is an input taxed supply under the transitional provisions, the Commissioner will not exercise the discretion to refund the overpaid GST.

Question 3

Are you entitled to input tax credits claimed in relation to those supplies?

Answer

Where you wish to use the transitional provisions to treat the consequent supply as input taxed, and give amended GST returns to the Commissioner, you cease to be entitled to the input tax credits already claimed in relation to those supplies.

However, if you do not give an amended GST return to the Commissioner that includes amounts equivalent to the input tax credits the supplies remain taxable. You therefore remain entitled to the input tax credits in relation to those supplies.

Question 4

If the outcome to question 3 is that you are required to amend your BAS, will the Commissioner remit, in part or in full, any penalties and/or general interest charges (GIC) that would otherwise accrue in relation to the input tax credits that you have previously claimed?

Answer

You are not required to amend your BAS. However, should you choose to amend, please refer to our reasons for decision for information on penalties and interest.

Relevant facts and circumstances

· You are registered for GST. You are a property developer based in the relevant state.

· You report and pay GST on a quarterly basis.

· In 200X, you entered into a contract to acquire leasehold land (the Land) from the Land Development Agency (LDA) as delegate of the Planning and Land Authority (PLA) on behalf of the Commonwealth.

· Some months earlier the PLA had granted you a long-term lease (the Lease) over the Land.

· The Lease requires the Land to be used for the purpose of multi-unit housing for a number of dwellings.

· The Lease contains numerous development conditions. In particular, you must erect an approved development (the Works) on the land at a cost of not less than a certain value.

· Following completion of the Works, you are required to prepare and lodge a Plan for approval and registration in order to convert the leasehold Land into individually titled unit leases. The Units Plan was registered prior to 27 January 2011.

· The terms of each individual unit lease are all in excess of 50 years.

· You have sold all the units. Contracts for all units were exchanged prior to 27 January 2011, except for one which was exchanged some months after. All units settled after 27 January 2011, except for one which settled just before.

· You have provided a sales summary schedule that shows the price, exchange date and settlement date for each of the units sold in the relevant development.

· The purchasers of the units were unregistered homeowners. You have advised that no purchaser was entitled to claim an input tax credit.

· During the construction phase you followed the ATO's view in GSTR 2003/3 (when is a sale of real property a sale of new residential premises) and GSTR 2008/2 (development lease arrangements with government agencies, now withdrawn). You treated the acquisitions as creditable and therefore claimed input tax credits on all relevant acquisitions.

· You have advised in your submissions that:

o the contract prices were GST-inclusive at the contract dates

o no GST was stated in the settlement statements

o no contract contained a GST gross-up clause.

· You have provided a copy of the standard Contract for sale to purchasers of the units. While the price section is blank, it advises that the price is GST inclusive unless otherwise specified.

· The Contract advises that if a party must pay the Price or provide any other consideration to another party under the contract, GST is not to be added to the Price or amount, unless the Contract provides otherwise.

· The Contract also provides that if the Contract says the Buyer and Seller agree that the margin scheme applies to the supply of the Property, the seller warrants that it can use the margin scheme and promises that it will.

· The Contract also provides that if the Contract says the sale is a taxable supply, does not say the margin scheme applies to the sale of the Property, and the sale is in fact not a taxable supply, then the Seller must pay the Buyer an amount of one-eleventh of the Price on Completion.

· The Contract states that on Completion the Seller must give the Buyer a tax invoice for any taxable supply by the Seller by or under the Contract.

· You have also provided working papers that show a profitability analysis for the project. The final GST-inclusive price that you set is based on the GST being a cost.

· At the completion date, the supplies were treated as a taxable supply of new residential premises (acting conservatively in accordance with the Government's press release of 27 January 2011). A GST amount, being 1/11^th of the margin, was remitted to the ATO in each relevant GST return.

· Your accountant was not aware that transitional provisions of the legislation were subsequently introduced (announced in a press release 23 September 2011) such that the amended legislation to treat supplies as taxable would not apply to sales of residential premises constructed under eligible arrangements entered into prior to 27 January 2011.

Relevant legislative provisions

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

Section 195-1

Section 40-70

Section 40-75

Section 75-5

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

Section 6

Taxation Administration Act 1953

Section 105-65 of Schedule 1

Reasons for decision

Question 1

Summary

The supplies of the newly constructed residential premises (by way of consequent leases that are long-term leases) are eligible to be treated as input taxed supplies, but only where you first repay the input tax credits already paid.

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 200X.

Your units plan was registered prior to 27 January 2011. Your end supplies in question have been made after 27 January 2011 (all except for one).

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 to you occurs before 27 January 2011. Your supplies of the newly constructed residences happen after 27 January 2011 (all except for one supply which is made on 25 January 2011).

This is because under section 6(3) of the A New Tax System (Goods and Services Tax Transition) Act 1999, a supply or acquisition of real property is made when the property is made available to the recipient.

This is further explained in Property and Construction Industry Partnership - Issues Register - Section 15 - Sale of real property (P & C Issues Register) which provides that 'made available to the recipient' to be the time of settlement of the sale contract. This is because it is at this time that equitable ownership and possession of the property transfers to the recipient and the recipient has full use and enjoyment of the property. Therefore the relevant date of your supply of real property is the date of settlement. The property that settled before 27 January 2011 must be treated as a taxable supply. You remain entitled to input tax credits in relation to this supply.

For the other properties, the further requirements that must also be met for subsection 40-75(2B) not to apply are:

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 200X you entered into a binding contract to acquire leasehold land that remained in force immediately before 27 January 2011 (and thereafter),

c) as part of the conditions of the contract and 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.

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 intend to 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), you must 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).

Question 2

Summary

Where you choose to repay the input tax credits, and therefore the supplies become input taxed supplies, the result is that you will have overpaid GST on those supplies (as they were treated as taxable rather than input taxed at the time of the supply).

However, where you do, the Commissioner will not exercise his discretion to refund the overpaid GST on those supplies.

Detailed reasoning

Where you have made an input taxed supply, but have remitted GST in connection with this supply, you will have therefore remitted an amount in excess of what was legally payable on the supply. That is, you will have overpaid an amount of GST.

Before any refund of the overpaid amount can be claimed, the impact of section 105-65 of Schedule 1 to the Taxation Administration Act 1953 (section 105-65) must be considered. Section 105-65 places a restriction on refunds that arise from the overpayment of GST in certain circumstances.

Section 105-65 applies and the Commissioner need not give you a refund if you overpaid an amount because a supply was treated as a taxable supply when the supply was not a taxable supply and one of the following applies: either the recipients have not been reimbursed an amount corresponding to the overpaid GST, or the recipient of the supply was registered or required to be registered.

You have treated the supplies as taxable as you have remitted an amount as GST to the Commissioner on those supplies in the calculation of your net amount. You have advised that you have remitted a GST amount being 1/11^th of the margin for the supply. As you have not reimbursed a GST amount to the unregistered purchasers, section 105-65 applies such that the Commissioner need not give you a refund of the overpaid GST amount.

Paragraph 85 of Miscellaneous Taxation Ruling MT 2010/1 confirms that section 105-65 applies where supplies are treated as taxable under the margin scheme but are actually GST-free or input taxed. As discussed above your supplies would be input taxed should you repay the input tax credits, and therefore as you have treated your supply as taxable under the margin scheme section 105-65 applies.

Exercise of the discretion available under section 105-65

Section 105-65 applies such that the Commissioner need not give a refund of the overpaid amount, but has discretion to do so in appropriate circumstances. This discretion is explained, and guidance as to its use is given, in MT 2010/1.

In deciding whether to exercise the discretion the Commissioner must consider each case based on all the relevant facts and circumstances.

The Commissioner must also have regard to the subject matter, scope and purpose of section 105-65. In particular, section 105-65 is designed to prevent windfall gains to suppliers and is based on the presumption of the GST system that the cost of the GST is ultimately borne by unregistered end consumers.

We acknowledge that MT 2010/1 provides that it may be appropriate for the Commissioner to exercise the discretion to allow a refund where an overpayment of GST arises as a direct result of the actions of the Commissioner and the taxpayer has not had the opportunity to factor in the cost of the GST or otherwise pass on the GST, for instance through a gross up clause (see paragraph (d)(i) of MT 2010/1).

We are aware that there has been uncertainty surrounding the correct GST treatment in this type of scenario. However, the prevailing ATO view has been that supplies of newly constructed residential premises should be treated as taxable. This was the view in GSTR 2008/3, and is the view that is given effect in the amended legislation (subject to the transitional provisions that are intended to prevent disadvantage in relevant circumstances). In the current circumstances you have acted conservatively in treating the supplies as taxable supplies.

We note that the ATO does not accept that pricing to a market price (or using other pricing mechanisms such as fixed prices, price points or legislated prices) means that the supplier has necessarily borne the cost of the GST at the time of pricing (or thereafter).

It is a general presumption that business entities will set prices so as to recover costs (see Avon Products Pty Ltd v Commissioner of Taxation (2006) HCA 29 (Avon)).

We consider that you have had the opportunity to factor in the cost of the GST, and have demonstrated that you have actually considered this cost. You have provided working documents (profitability analysis) that shows you have factored in the cost of the GST in the price charged to your purchasers. Rather, your prices were set knowing that you would treat the supplies as taxable and GST would be payable, and the contact prices were GST-inclusive (and specified as GST-inclusive) at the contract date.

Therefore, GST has been included in the price and accordingly has been passed on to the purchasers. That is, it has been borne by them (as intended by the GST regime). While you may have made a greater profit if GST was not a cost to you (and if the market price had remained the same), this does not mean that the GST has not been passed on to the purchasers.

You have calculated your GST payable under the margin scheme, and it is a requirement that to use the margin scheme the parties must agree in writing that the margin scheme is to apply (see section 75-5 of the GST Act). Your contract specifies that where the parties agree that the margin scheme applies to the supply of the property, you warrant that you can use the margin scheme and promise that you will. Your contract also advises that on Completion you must give the buyer a tax invoice for any taxable supply that you make under the Contract (which would include a supply made under the margin scheme). Where the terms of the Contract have been followed and an invoice has been given, a buyer would therefore be aware that they have paid the amount of GST you have remitted under the Contract.

Based on the factors above, we consider that refunding the GST paid to you would result in a windfall gain to you at the expense of your purchasers.

The Commissioner would therefore not exercise the discretion to allow you to claim a refund of overpaid GST in a situation where you were to repay input tax credits already claimed.

Other matters

We also note for the sake of completeness that your circumstances are distinguishable from those in Luxottica Retail Australia Pty Ltd v FC of T [2010] AATA 22 (Luxottica).

In Luxottica, spectacle frames were offered to customers at a discount from the normal selling price on the condition that the customers also purchased lenses for those frames. There was no discount on the lenses, which were GST-free.

The GST amount was intended to be calculated on the basis of the whole discount being applied to the frames only. The amount to be paid by the customer was the agreed amount for each component: the frames (full discount) and the lens (without any discount). This was the amount that the customer contracted and paid for the purchase, and the Court found that this was the correct GST amount.

However, GST was overpaid because point of sale processing errors meant that on some transactions the discount was allocated to the lenses as well as the supply of (taxable) frames. This was found to be similar to an arithmetic error, and the amount the customer paid was what they had always agreed despite the incorrectly allocated discount and over-paid GST component. It was therefore appropriate to allow the refund to Luxottica, who had borne the burden of the overpayment.

In your circumstances the amount the purchasers contracted to pay (and paid) for the real property included GST on the single supply of the property. Therefore the customer paid the GST. The principles in Luxottica do not apply to your circumstances.

Question 3

Summary

As previously advised, where you take steps (by providing amended GST return/s repaying input tax credits) such that the supplies of real property become input taxed you are not entitled to the input tax credits claimed in relation to those supplies.

However, if you do not give an amended GST return to the Commissioner (that includes amounts equivalent to the input tax credits) the supplies remain taxable. You therefore remain entitled to the input tax credits in relation to those supplies.

Detailed reasoning

As discussed at question 1, should you wish to treat eligible supplies as input taxed you must 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).

However, if you do not give an amended GST return to the Commissioner (that includes amounts equivalent to the input tax credits) the supplies remain taxable. You therefore remain entitled to the input tax credits in relation to those supplies.

We also refer you to our advice at question 1 that you remain entitled to the input tax credits on the property that settled just prior to 27 January 2011, as this property must be treated as a taxable supply as it is not eligible for the transitional treatment.

Question 4

Summary

Should you choose to amend your BAS to utilise the input taxed GST treatment, the Commissioner will not apply any tax shortfall penalties in relation to the input tax credits that you have previously claimed.

Any interest attributable to the shortfall will be remitted to nil up to 19 April 2012, and GIC will only apply at the base rate from that date until the actual date the repayment of the input tax credits is made.

Detailed reasoning

The Commissioner adopts this administrative treatment in regard to penalties and GIC that would otherwise be payable as we accept that the following events lead to you treating your supplies as input taxed:

· The input tax credits were claimed in accordance with GSTR 2008/2 which is now considered incorrect and has been withdrawn (issued on 7 May 2008 and withdrawn 11 May 2011).

· The amending legislation received royal assent on 21 March 2012.

Taxpayers were advised to review their positions from the date that the new legislation applies, and our administrative treatment was outlined in the fact sheet Goods and services tax treatment of new residential premises (issued 29 March 2012. This advised that 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 GIC that may result from this revision.

The fact sheet advises that after this time, the normal ATO administrative treatment of penalties and GIC will apply. However, we accept that there has been a level of uncertainty surrounding the treatment of these supplies and that it is reasonable to expect that it may take some time to become aware of the changes and apply them to your circumstances. It is appropriate for the Commissioner to exercise his discretion in relation to penalties and interest and apply an approach that is fair, reasonable and equitable in view of the circumstances.

Therefore, in your particular circumstances, no tax shortfall penalties will apply in relation to the input tax credits already claimed should you repay them. Any interest attributable to the shortfall will be remitted in full until 19 April 2012 in accordance with the approach outlined in the fact sheet above.

From 19 April 2012 until the date of the repayment of the input tax credits, GIC will apply at the base rate. This reflects the Commissioner's lack of access to these funds rather than an element of punishment, and serves as an encouragement to resolve tax positions as soon as possible.