Edited version of your private ruling

Authorisation Number: 1012453039188

Ruling

Subject: GST and Property

1. Whether the supply of the Lots in the form of completed residential premises by way of lease which otherwise constitute residential premises is a taxable supply of real property;

2. Whether the supply of incomplete Lots by way of lease which otherwise do not constitute residential premises is a taxable supply of real property;

3. If the supply of the incomplete Lots is a taxable supply of real property, whether the margin scheme can be applied to the supply of the real property; and

Answers

1. No, the supply of Lots in the form of completed residential premises by way of lease is an input taxed supply under section 40-35 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

2. Yes, the supply of incomplete Lots by way of lease are taxable supplies under section 9-5 of the GST Act.

3. No the margin scheme cannot apply. This is because for paragraph (a) and (b) of 75-5(1) to apply there must be a sale. And for paragraph (c) to apply there must be a long term lease as defined in the GST Act. There is no long term lease in this case because the Entity A holds a freehold interest and supplies a lease hold interest.

Relevant Facts and Circumstances

Entity A

Entity A is the property owning entity. It is a body corporate.

Entity A holds title to land (Land) in Australia.

Entity A wishes to retain title to the Land. Accordingly, any development proposal for the Land is necessarily based on the granting of leasehold (and not freehold) interests to end purchasers.

Entity A will make the supplies of the Land by selling developed lots (Lots) by way of the grant of a lease with a term of up to 99 years. It will also make acquisitions of development services from Entity B.

The Supplies of the Lots - Complete and Incomplete

The supplies of the Lots may occur at a time when certain Lots are in the form of completed residential premises and some which are less than completed residential premises. These premises which will either constitute a house, townhouse or apartment with all of the features which would make it qualify as residential premises to be used predominantly for residential accommodation.

The supply by Entity A is the supply of a Lot under a Lease Contract for upfront consideration payable by the purchaser;

the term of the Lease is X years with the purchaser having an option to extend for another Y years (ie a total of 99 years); and

the dwelling has not previously been sold as residential premises and has not previously been the subject of a long-term lease and hence seems to constitute new residential premises under section 40-75.

There will also be supplies of incomplete Lots. The condition of these Lots are less than complete and would not qualify as residential premises as they are less than fit for human habitation.

The Land

Entity A is the current proprietor of the Land under freehold title. Entity A has owned the Land that is the subject of an Agreement (AGREEMENT).

Development approval has been obtained for the construction of residential dwellings at the site, currently for:

• residential townhouses;

• an apartment block containing dwellings;

• detached dwellings; and

• related access roads and common areas.

Entity B

Entity B has been engaged by Entity A to undertake the development project in accordance with the terms of the AGREEMENT.

The AGREEMENT and the Project

The Project is regulated by the terms of the AGREEMENT agreed between Entity A and Entity B. We have been provided with a copy of the AGREEMENT.

The key terms of the AGREEMENT are as follows:

Entity A grants to Entity B the Development Rights (that is, the right to undertake the Project) for the Development Rights Payment.

The Project is defined as:

"undertaking and managing the development and lease of the Land as a multi-staged residential lot, apartment and townhouse development ... in accordance with the Project Plan ... including the obtainment of all necessary or desirable Approvals for the subdivision of the Land, including strata subdivisions, the registration of Subdivision Plan and the marketing and sale of leasehold interests in the Lots to Completion."

The Development Rights Payment is a payment exclusive of GST) payable in instalments over time. The payment gives Entity B the right to undertake the Project and derive income from its activities.

Entity B derives income from supplying Development Services to Entity A. In this regard, Entity A must pay to Entity B a fee equal to the Lease Proceeds in respect of the settlement of each Lot and certain other moneys

Entity B has no proprietary interest in the Land.

Entity B is responsible for the Project Costs.

Entity B must implement the Project in accordance with an agreed Project Plan and related documentation included in the AGREEMENT.

Entity A agrees to enter into Lease Contracts with end purchasers at the request of Entity B.

Entity B has the exclusive right and is responsible for managing, marketing and leasing the Lots to purchasers in accordance with an approved form of Lease Contract.

Entity A will agree with the purchaser to apply the margin scheme and calculate GST accordingly.

Amounts payable by the parties under the AGREEMENT are generally exclusive of GST and the recipient of the taxable supply generally must pay an additional amount in respect of GST to the supplier.

However, if Entity A is not entitled to an input tax credit in respect of acquisitions from the Entity B, then the amount payable by Entity A will be adjusted under the Agreement. This clause may impact, for example, on the amount payable by Entity A to Entity B.

The parties agreed that Entity A will seek a private ruling from the Commissioner to clarify certain GST issues in relation to the supplies and acquisitions under the AGREEMENT.

The parties executed the AGREEMENT, Site clearing and infrastructure works commenced, as at the date of this ruling request, and are well progressed. Construction of the apartments, townhouses and detached dwellings are forecast to commence in the future.

Entity B paid the Development Rights Payment to Entity A on or shortly after execution of the AGREEMENT. Entity B also paid an additional amount on account of the GST on the Development Rights Payment. Entity A remitted this GST and the Entity B claimed an input tax credit.

As at the date of this ruling request, Entity A has not yet entered into any Lease Contracts and no development fees have been paid by Entity A to Entity B.

Relevant legislative provisions

Section 11-5 of the A New Tax System (Goods and Services Tax) Act 1999

Section 11-15 of the A New Tax System (Goods and Services Tax) Act 1999

Section 11-20 of the A New Tax System (Goods and Services Tax) Act 1999

Section 40-35 of the A New Tax System (Goods and Services Tax) Act 1999

Section 40-65 of the A New Tax System (Goods and Services Tax) Act 1999

Section 40-75 of the A New Tax System (Goods and Services Tax) Act 1999

Section 195 of the A New Tax System (Goods and Services Tax) Act 1999

Reasons for decision

Sub section 7-1(1) provides that GST is payable on taxable supplies. Subject to the conditions in section 9-5 of the GST Act a supply is taxable, except to the extent that it is GST free or input taxed.

Residential Rent

Section 40-35 of the GST Act provides:

(1) A supply of premises that is by way of lease ... is input taxed if:

(a) the supply is of residential premises ... ; or

. (b)... ……..

…………

(2) However:

(a) the supply is input taxed only to the extent that the premises are to
be used predominantly for residential accommodation (regardless of the term of occupation); and

(b) the supply is not input taxed under this section if the lease ... is a long term lease."

You have raised two issues surrounding new residential premises and long term lease.

Residential premises

The term "Residential Premises" is defined in section 195-1 of the GST Act to mean 'land or a building that:

(a) is occupied as a residence or for residential accommodation; or

(b) is intended to be occupied, and is capable of being occupied, as a residence or for residential accommodation.

The premises on the Lots are completed dwellings fit for human habitation and therefore, will clearly meet the definition of Residential Premises.

The supply here is by way of lease and accordingly, none of the sections in relation to a "sale" of residential premises will apply. The only issue to address is if this supply is done by way of long term lease.

Long term lease is defined in section 195-1 of the GST Act. Broadly, it is a lease for at least 50 years, which is expected to continue for at least 50 years and, unless the lessor is an Australian government agency, the lessee has substantially the same rights to the premises as those enjoyed by the lessor.

In this particular case the term of the lease is over 50 years however, it is not a lease where the same rights enjoyed by the lessor are provided to the lessee. This is because the lessor holds free hold interest in the land and only supplies the leasehold interest to the lessee.

In conclusion, the supply of each Lot in this case is merely a supply of a lease which falls within section 40-35 of the GST Act and is input taxed. This conclusion is in line with your conclusion namely, that this supply should be an input taxed supply.

The Supply of Incomplete Lots

You submit that the supply of incomplete Lots is a taxable supply under section 9-5 of the GST Act. We agree with your submission provided the conditions in section 9-5 of the GST Act are met. We also agree with your reasoning that because the construction works on these Lots are incomplete and they do not qualify as residential premises within the meaning of the GST Act they would fall within the ambit of section 9-5 of the GST Act.

The Margin Scheme - For the Supply of Incomplete Lots

Subsection 75-5(1) of the GST Act provides that the margin scheme applies in working out the amount of GST on a taxable supply of real property that an entity makes by:

(a) selling a freehold interest in land; or

(b) selling a stratum unit; or

(c) granting or selling a long term lease;

if the entity and the recipient of the supply have agreed in writing that the margin scheme is to apply.

In the present case paragraphs (a) and (b) of subsection 75-5(1) of the GST Act clearly does not apply because there is no selling involved. The property interests are supplied by way of leases. Paragraph (c) of subsection 75-5(1) could only apply if there is a long term lease. A long term lease is defined in the GST Act and, as outlined above, the lease in the present case does not fit within this definition. Accordingly, the margin scheme cannot apply to the supply of incomplete Lots.