Edited version of your private ruling

Authorisation Number: 1012466604060

Ruling

Subject: Goods and services tax (GST) and new residential premises

Question

Will supplies of individual strata titled residential units constructed by you, by way of assignment of a long term lease, be input taxed?

Answer

No.

Relevant facts and circumstances

You are registered for GST.

Entity A entered a Deed of Put and Call Option (Deed) for the acquisition of land (Land).

You have provided a copy of the Deed.

You have provided a copy of the Contract for Sale.

A Development Application (DA) was lodged to amend the lease over the Land.

DA was approved.

DA was lodged for a proposed redevelopment of the Land.

DA was approved for construction of a mixed use development with residential units.

You exercised the Call Option under the Deed to acquire the Land from the Seller in accordance with the Contract for sale annexed to the Deed.

The surrender and re-grant of the Lease (as required under the DA) was finalised.

Upon completion of the residential development, an application will be made to register a units plan (i.e. strata title plan).

This private ruling applies only to the residential dwellings that will be constructed on the Land.

Relevant legislative provisions

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 Section 195-1,

A New Tax System (Goods and Services Tax) Act 1999 Section 40-75(1),

A New Tax System (Goods and Services Tax) Act 1999 Section 40-75(2),

A New Tax System (Goods and Services Tax) Act 1999 Section 40-75(2B) and

A New Tax System (Goods and Services Tax) Act 1999 Section 40-75(2C).

Reasons for decision

Under subsection 40-70(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), a supply by way of long term lease of residential premises to be used predominately for residential accommodation (residential premises) is input taxed. However, subsection 40-70(2) of the GST Act states that the supply is not input taxed to the extent that the residential premises are:

(a) *commercial residential premises, or

(b) *new residential premises other than those used for residential accommodation (regardless of the term of occupation) before 2 December 1998

Note: In this ruling all terms marked by *asterisk are a defined term in the GST Act.

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 (regardless of the term of occupation or intended occupation).

The one and two bedroom apartments are residential premises. Under the facts that make up the arrangement on which the private ruling is based, the premises are not commercial residential premises and they were not used for residential accommodation before 2 December 1998.

The meaning of new residential premises under section 40-75

The term 'new residential premises' has the meaning given by section 40-75 of the GST Act, which in part states:

40-75 Meaning of new residential premises

When premises are new residential premises

(1) *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;

(b) …; or

(c) ….

Paragraphs (b) and (c) have effect subject to paragraph (a).

The Full Federal Court's decision in Gloxinia

In Commissioner of Taxation v Gloxinia Investments (Trustee) [2010] FCAFC 46 (Gloxinia), the majority of the Full Federal Court 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) were not taxable supplies of new residential premises. This was because for the purposes of paragraph 40-75(1)(a), at the time of their sale by the developer, the residential units in question had previously been the subject of a long term lease, by virtue of 99 year strata lot leases granted by the Council (the land owner) over each of the units. Therefore the sale of the units by the developer, by way of assignment of the developer's interest in the strata lot leases, were input taxed supplies of residential premises.

In Gloxinia, the terms of a pre-existing arrangement governing the terms of the redevelopment project, the Agreement for Lease ("AFL"), specifically provided for the grant of the strata lot leases by the Council subject to satisfactory completion of the development works and registration of the strata leasehold plan by the developer. That is, in accordance with the terms of the AFL, subject to the completion of the building works as specified in the AFL, the developer was entitled to the grant of the strata lot leases over each of the individual residential units and the Council was required to grant those strata lot leases to the developer.

New subsection 40-75(2B) and subsection 40-75(2C)

Following the Federal Court's decision in Gloxinia, the GST Act was amended to include subsections 40-75(2B) and 40-75(2C). The date from which new subsections 40-75(2B) and 40-75(2C) apply is determined with reference to the application provisions at items 11 to 13 of schedule 4 to Tax Laws Amendment (2011 Measures No. 9) Act 2012 (TLAB (2011 No 9) Act).

The effect of subsections 40-75(2B) and 40-75(2C) is to disregard certain sales and supplies of residential premises when determining if the premises have been sold or have been subject to a long term lease for the purposes of section 40-75(1)(a).

Sales of strata titled residential units constructed by you

You have advised that upon completion of the residential development that you intend to apply for registration of the units plan. Subject to the Government's approval and registration of that plan, you expect that individual unit title leases will be granted to you.

Assuming that the individual unit title leases are granted to you by the Government, consistent with the Full Federal Court's decision in Gloxinia, when you sell the residential units, by way of assignment of the individual unit title leases to home buyers and investors, the residential units will have previously been the subject of a long term lease.

However, in determining whether or not your sales of the residential units will be taxable supplies of new residential premises or input taxed supplies of residential premises, it is necessary to consider whether or not subsection 40-75(2B) or subsection 40-75(2C) apply.

Subsection 40-75(2B)

Subsection 40-75(2B) of the GST Act states:

(2B) A supply (the wholesale supply) of the *residential premises is disregarded as a sale or supply for the purposes of applying paragraph (1)(a) if:

(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) an arrangement (including an agreement) was made by:

(i) the supplier of the earlier supply, or one or more associates of the supplier; and

(ii) the recipient of the earlier supply, or one or more associates of the recipient; and

(c) under the arrangement, the wholesale supply was conditional on:

(i) specified building or renovation work being undertaken by the recipient of the earlier supply, or by one or more associates of the recipient; or

(ii) circumstances existing as specified in regulations made for the purposes of this subparagraph.

In summary, for the purposes of determining whether residential premises are new residential premises under paragraph 40-75(1)(a), subsection 40-75(2B) specifies that particular supplies ('wholesale supplies') of newly constructed residential premises are disregarded. That is, a wholesale supply of newly constructed residential premises will not exclude a subsequent sale of the premises being a taxable supply of new residential premises if the wholesale supply is made in accordance with the conditions set out in paragraphs 40-75(2B)(a), (b) and (c).

In the case of your proposed sale, by way of assignment of individual long term leasehold interests, of individual residential units constructed by you ('the Development'), consistent with the Full Federal Court's decision in Gloxinia, the relevant 'wholesale supply' for the purposes of subsection 40-75(2B) will be the grant of the individual strata leases by the Government.

However, as noted above, the application of subsection 40-75(2B) is only invoked if paragraphs 40-75(2B)(a), (b) and (c) are satisfied.

In the case of your proposed sale of residential units in the Development, the premises from which the residential units are created have previously been supplied to you and paragraph (a) is satisfied. It may also be argued that paragraph 40-75(2B)(b) is satisfied because the Crown lease that was granted to you constitutes an 'arrangement' for the purposes of that provision.

However, paragraph 40-75(2B)(c) is not satisfied. Even if the Crown lease granted to you constitutes and arrangement for the purposes of paragraph 40-75(2B)(b) that 'arrangement' does not provide as a condition of the arrangement that upon the undertaking of specified building works that you are entitled to a grant of the individual strata leases by the Government, or that the Government is compelled to make those 'wholesale supplies' to you.

It may be that as a consequence of the ordinary processes involved in developing and selling property that you will lodge a strata plan and be granted individual strata leases over the completed residential development. However, the grant of those individual strata lot leases will not be made in accordance with an arrangement between you and the Government or other land owner as contemplated by paragraph 40-75(2B)(b).

As 40-75(2B) doesn't apply it is therefore not necessary to consider the application provisions at item 12 of schedule 4 to Tax Laws Amendment (2011 Measures No. 9) Act 2012 (TLAB (2011 No 9) Act).

The abovementioned interpretation and application of paragraph 40-75(2B) is consistent with the stated intent set out in paragraph 6.26 of the Explanatory Memorandum to the Tax Laws Amendment (2011 Measures no. 9) Act 2012 (EM).

Paragraph 6.26 of the EM states:

The intention of new subsection 40-75(2B) is to ensure that certain sales of newly constructed residential premises by a developer to home buyers and investors will be taxable supplies of new residential premises even though there may have been an earlier `wholesale supply' of the premises. The earlier supply is disregarded for the purposes of determining whether or not residential premises are new residential premises if the residential premises have been constructed pursuant to a particular arrangement (including an agreement). The particular arrangement being an arrangement between a developer or builder and a land holder, whereby the developer or builder (or an associate of the developer or builder) becomes entitled to the freehold or long-term leasehold title in the premises conditional on specified building or renovation work being undertaken by the developer or builder.

In conclusion, in your case, if the matters proceed as intended and you register a strata plan over the completed Development and the Government proceeds to grant individual long term leases of the completed residential units, subsection 40-75(2B) will not apply and cause that supply of the newly constructed units to be disregarded for the purposes of applying paragraph 40-75(1)(a).

In other words, in the absence of subsection 40-75(2C), your sales by way of assignment of the individual strata leases, would not be taxable supplies of new residential premises by virtue of paragraph 40-75(1)(a) and subsection 40-75(2B) but would be input taxed supplies of residential premises.

However, as noted above, it is also necessary to consider the application of subsection 40-75(2C) which also provides for particular supplies of newly constructed residential premises made in other circumstances to be disregarded for the purposes of applying paragraph 40-75(1)(a).

Application of subsection 40-75(2C)

Subsection 40-75(2C) of the GST Act states:

(2C) A supply of the *residential premises is disregarded as a sale or supply for the purposes of applying paragraph (1)(a) if it is made because a *property subdivision plan relating to the premises was lodged for registration (however described) by the *recipient of the supply or the recipient's *associate.

Item 13 of Tax Laws Amendment (2011 Measures no. 9) Act 2012 provides:

Item 13 Exception - property subdivision plans lodged for registration before 27 January 2011  
Subsection 40-75(2C) of the A New Tax System (Goods and Services Tax) Act 1999 (as inserted by this Schedule) does not apply to a supply of residential premises on or after 27 January 2011 if the supply is made because a property subdivision plan relating to the premises was lodged for registration (however described) before 27 January 2011 by the recipient of the supply or the recipient's associate.

You are developing premises that will be part 'residential premises' and part 'commercial premises'. You intend to supply the residential premises consisting of one and two bedroom units by way of an assignment of your interest in individual strata leases. The grant of the individual strata leases to you will require you to lodge a 'units plan' (strata plan). Subject to approval and registration of that plan by the Government, Long term strata leases of the residential premises will then be issued to you.

When you sell the individual units, by assigning the strata leases, as referred to earlier, prima facie for the purposes of paragraph 40-75(1)(a) the residential premises would have been the subject of a long term lease. However, subsection 40-75(2C) operates to disregard a sale or supply for the purposes of applying 40-75(1)(a) if it is made because a property subdivision plan relating to the premises was lodged for registration (however described) by you.

Subsection 40-75(2C) is applicable in relation to supplies of residential premises on or after 27 January 2011, unless the property subdivision plan was lodged for registration before 27 January 2011 (Item 13 of Tax Laws Amendment (2011 Measures No. 9) Act 2012). In relation to your proposed sale of completed units as part of the Development, the strata plan (property subdivision plan) has not yet been registered (i.e. it wasn't registered before 27 January 2011). Therefore subsection 40-75(2C) will apply to your proposed sales of residential units in the Development.

That is, any grant of the individual strata leases by the Government will be disregarded for the purposes of applying subsection 40-75(1)(a). Therefore, when you sell the individual residential units they will be residential units that have not previously been sold or the subject of a long term lease. By virtue of the operation of subsection 40-75(2C) your sales of the individual residential units will be taxable supplies of new residential premises.