Edited version of your private ruling

Authorisation Number: 1012496612490

Ruling

Subject: GST and sale of new residential premises.

Question

Will your supplies of residential premises, by way of assignment of a long term lease from you to third party purchasers, be input taxed supplies?

Answer

No

Relevant facts and circumstances

You (Entity A and Entity B) are a partnership that is now registered for GST.

You entered into a Syndicated Venture Agreement (the Agreement) to develop land. Under the agreement, Entity C was required, as your agent, to acquire, develop and hold the Land.

All references to Entity C in this ruling are in relation to its role as your agent.

At the time the previous ruling was issued to you, you were not registered for GST. The GST registration and Business Activity Statement lodgement in relation to this project occurred in the name of Entity C, in its capacity as your agent.

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

You subsequently registered for GST.

You advised at that time that once you were registered for GST, Entity C would amend its BAS to nil.

Entity C entered into a Contract for Sale over Land ("the Land").

The Contract for Sale included a Specimen Lease, Deposited Plan, Development Guidelines and Lease and Development Conditions.

The Specimen Lease contained clauses in relation to Purpose, the Commencement of development and the Completion of development.

Accordingly, at the time of entering the Contract for Sale, Entity C was legally bound to complete the development in accordance with clauses of the Specimen Lease.

At settlement, the finalised Crown Lease was issued to the taxpayer.

The Crown Lease was for a ninety nine year term.

The Crown Lease repeated the Clauses from the Specimen Lease.

A Development Application ("DA") was lodged with an Authority for construction of a residential development on the Land, which included a number of apartments. The DA also sought to subdivide the Land into 2 blocks, such that the development could be undertaken in a staged manner.

The Authority issued a Notice of Decision ("NOD") in relation to the DA lodged. The NOD advised that the 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.

The new Crown Leases were issued for the subdivided blocks of land.

Each new Crown Lease contained clauses in relation to Purpose, Completion of development and Prohibition on lease variation.

At the time of your ruling request, Entity C had undertaken a residential development on Block D only. Notwithstanding Entity C only having undertaken a residential development on Block D, a residential development was approved by the Authority on Block C.

Up to and including the date of the Private Ruling Request, Entity C 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 A claimed all input tax credits on acquisitions made in relation to the development,

Upon completion of the residential development on Block D, 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 Form 4 of the Units Plan. The unit title leases to be granted to Entity A in respect of the registered units plan were anticipated to have a term expiring in over 50 years.

Upon completion of the residential development on the Block C, 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 leases to the purchasers of each unit. The unit title leases to be granted to Entity C in respect of the registered units plan were anticipated to have a term expiring in over 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 40-65(1)

A New Tax System (Goods and Services Tax) Act 1999 Subsection 40-65(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 Subsection 40-75(2C)

A New Tax System (Goods and Services Tax) Act 1999 Section 195-1

Reasons for decision

In this ruling, please note that, unless otherwise stated:

· All legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

· All terms marked by an *asterisk are defined terms in the GST Act.

Goods and Services Tax (GST) is payable on taxable supplies. Section 9-5 states:

You make a taxable supply if:

(a) you make a supply for *consideration; and

(b) the supply is made in the course or furtherance of an *enterprise that you *carry on; and

(c) the supply is *connected with Australia; and

(d) you are *registered, or *required to be registered.

However, the supply is not a *taxable supply to the extent that it is *GST-free or *input taxed.

In your case, the individual units are sold for consideration, the supply is made in the course of your enterprise, the supply is connected with Australia and you are registered for GST. Consequently, the supply of the strata titled units will be taxable supplies unless the supplies are GST-free or input taxed. As your supplies are not GST-free, the only remaining issue to be determined is whether your supplies are input taxed.

Under subsection 40-65(1), a sale of real property is input taxed, but only to the extent the property is residential premises to be used predominantly for residential accommodation (regardless of the term of occupation). However, subsection 40-65(2) states that the sale 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.

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 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).

In your case, the units are residential premises. According to the facts that make up the arrangement on which this 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, 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

Consistent with the Full Federal Court's reasoning in Commissioner of Taxation v Gloxinia Investments ltd [2010] FCAFC 46 (Gloxinia), the grant of each of the individual unit title leases (for a term in excess of 50 years) upon approval and registration of a units plan will constitute a supply of residential premises by way of long term lease.

Therefore, having regard to the terms of paragraph 40-75(1)(a) in isolation, any subsequent supply of the individual residential units, by way of assignment of the unit title leases, would be an input taxed supply of residential premises. That is, the individual residential unit would have previously been the subject of a long term lease (by virtue of the grant of the unit title leases) and would no longer be new residential premises.

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

However, following the Federal Court's decision in Gloxinia, section 40-75 of the GST Act was amended by Tax Laws Amendment (2011 Measures No. 9) Act 2012 ("the amending Act") to include subsection 40-75(2B) and 40-75(2C).

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 paragraph 40-75(1)(a).

The date from which the 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.

Sales of strata titled residential units constructed by you

You have advised that upon completion of the residential development at Blocks C and D, you will apply for registration of unit titles. The term of the lease of each of the units will expire in over 50 years.

Consistent with the Full Federal Court's decision in Gloxinia, when the residential units are sold and the unit title leases granted to you by the Authority are subsequently assigned 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) will apply.

Application of Subsection 40-75(2B)

Subsection 40-75(2B) 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, subsection 40-75(2B) is premised upon there being a sale or supply by way of long term lease that would otherwise disqualify the residential premises from being new residential premises under subsection 40-75(1)(a).

In the case of the sale by way of assignment of individual long term leasehold interests, of individual residential units constructed by you on Blocks C and D, consistent with the Full Federal Court's decision in Gloxinia, the relevant 'wholesale supply' for the purposes of subsection 40-75(2B) (if this subsection were to apply) would be the grant of the individual unit title leases by the Authority.

The question as to whether or not subsection 40-75(2B) will apply, to disregard the supply of the residential premises that will be made by way of long term lease if the individual unit title leases are granted to you, requires consideration of the terms of paragraphs 40-75(2B)(a), (b) and (c) to be satisfied.

In your case, it is considered that the requirements of paragraphs 40-75(2B)(a) and (b) are met.

In accordance with paragraph 40-75(2B)(a), there will have been an earlier supply of the premises upon which the development is to be undertaken, by virtue of the Crown Lease issued to you in respect of Block B and then the subsequent surrender of this lease and the grant of Crown Leases over Blocks C and D (being subdivided Block B).

For the purposes of paragraph 40-75(2B)(b) it is considered that the Crown Lease, together with the Contract for Sale and associated documents, all form part of an arrangement between you and the Authority.

However, we still need to determine whether paragraph 40-75(2B)(c) applies in relation to your arrangement. Paragraph 40-75(2B)(c) will apply if under the arrangement between you and the Authority, the intended grant of the unit title leases to you is conditional on you undertaking specified building or renovation work.

As a consequence of the arrangement between you and the Authority comprising the Crown Lease and the development approval subsequently obtained, you have, or intend, to undertake certain building or renovation works on the land. However, this alone is not sufficient to satisfy the terms of paragraph 40-75(2B)(c) which provides that under the arrangement, the grant of the unit title leases (the wholesale supply) is conditional on you undertaking those building or renovation works.

In determining whether or not, the terms of paragraph 40-75(2B)(c) are satisfied, consideration must be given to the specific words "under the arrangement" in subparagraph 40-75(2B)(c)(i). Relevantly, in Chan v Cresdon [1989] HCA 63 ('Chan v Cresdon') the High Court considered the meaning of the word "under" appearing in a covenant to pay rent "under this lease". In that case the High Court stated:

"The word "under", in the context in which it appears, refers to an obligation created by, in accordance with, pursuant to or under the authority of, the lease. The obligation which arose under the common law tenancy at will does not answer this description."

Similarly, the words 'under contract' in a provision of the income tax legislation about capital gains tax was considered by the High Court in Commissioner of Taxation (Cth) v. Sara Lee Household & Body Care (Aust) Pty Ltd [2000] HCA 35 ('Sara Lee'). That case was concerned with the issue of whether or not an asset was disposed of under a contract entered into in a particular income year, where some of the terms of the contract were amended by an agreement between the parties in a later income year.

Referring to the statement at [14] in Chan v Cresdon, in Sara Lee, the High Court held:

"The words "under a contract", in s 160U(3), direct attention to the source of the obligation which was performed by the transfer of assets which constituted the relevant disposal."

In Asciano Services Pty Ltd v Chief Commissioner of State Revenue [2008] HCA 46 ('Asciano') the High Court distinguished the meaning of the words 'by which' in a provision of the NSW Duties Act from the meaning of the word "under" in the term "under this lease" in Chan v Cresdon and the term "under a contract" as determined in Sara Lee.

With reference to the decisions in Chan v Cresdon and Sara Lee, the High Court noted in Asciano that the relevant provision of the NSW Duties Act did not refer to rights acquired "under a lease", but refers to an agreement having the effect that ("by which") a right to use land is conferred or acquired by a person. In Asciano, the High Court held that the words 'by which' in the relevant provision identifies the means by which or owing to which a certain result or effect is obtained.

The undertaking of the residential development, as specified in the "building and development" provisions of the Crown Lease and the development approval, has the effect that you are able to seek approval of a "units plan" and subsequently be granted individual unit title leases (wholesale supplies) upon registration of that plan.

However, having regard to the decisions in Chan v Cresdon and Sara Lee and the distinction between the words "under" and "by which" by the High Court in Asciano, we consider that the arrangement constituted by the Crown Lease together with the development approval, does not satisfy the requirements of paragraph 40-75(2B)(c).

There is a causal link between the undertaking of the building and infrastructure works under the arrangement and the grant of the individual unit title leases. However, it is not a condition under the arrangement that the unit title leases (the wholesale supply) will be granted upon completion or undertaking of the required building and infrastructure works.

That is, the 'arrangement' for the purposes of paragraph 40-75(2B)(b) does not provide as a condition that upon the undertaking of specified building works that you are entitled to a grant of the individual unit title lease by the Authority, or that the Authority will make those 'wholesale supplies' to you.

To illustrate, an example of an arrangement that would satisfy the requirements of paragraph

40-75(2B)(c), is an arrangement of a kind described in the Commissioner's former ruling GSTR 2008/2, where a developer is required to undertake the development of land in accordance with the terms of a short term lease (commonly referred to as a 'development lease'), and the terms of the development lease or an associated deed provide that upon completion of the development, the land owner will, and is obliged, to transfer or grant the freehold or leasehold title to the land to the developer.

In conclusion, in your case, when you register a units plan over the completed residential development and are granted individual unit title leases for each 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 unit title 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) 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 have developed premises that are 'residential premises'. You will supply the residential units by way of an assignment of your interest in individual unit title leases. The grant of the individual unit title leases to you requires you to lodge a 'unit title plan' for approval. Subject to approval and registration of that plan by the Authority, long term unit title leases of the residential premises will be issued to you.

When you sell the individual units, by assigning the unit title leases, as referred to earlier, prima facie for the purposes of paragraph 40-75(1)(a), the residential premises will 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 paragraph 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 sale of completed units as part of the Development, the unit title plan (property subdivision plan) was lodged after 27 January 2011. Therefore subsection 40-75(2C) will apply to your sales of residential units in the Development.

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