Edited version of your private ruling

Authorisation Number: 1012499784164

Ruling

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

Question

Will supplies of individual strata titled units constructed by you, by way of assignment of individual unit title leases, be input taxed supplies of residential premises?

Answer

No.

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You are registered for GST.

An Authority issued a Guide in relation to a land release.

You entered in to a Contract for Sale to acquire the land described in the Guide from the Authority.

You have provided a copy of the Contract for Sale, and a copy of the Guide.

Upon entering the Contract for Sale, you entered into an Agreement. You have provided a copy of this Agreement.

The Contract for Sale, Guide and Agreement provide specified terms and conditions.

The Contract for Sale settled. Upon settlement, the finalised Crown Lease was issued to you. The Lease was for a ninety nine year term. You have provided a copy of the Lease.

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

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 Section 195-1,

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) and

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

Reasons for decision

Goods and services tax (GST) is payable on taxable supplies. Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 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 this ruling, please note:

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

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

In your case, the individual units will be sold for consideration, the supplies will be made in the course of your enterprise, the supplies are connected with Australia and you are registered for GST. Consequently, the supplies will be taxable 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 40-70(1), 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) 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

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).

Based on the information submitted, the premises to be developed on the land, are residential premises, are not commercial residential premises, and 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 (Trustee) [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 titles 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 Full 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 subsections 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 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).

Sales of strata titled residential units constructed by you in the Australian Capital Territory

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

On the assumption that, upon completion of the development, you do in fact seek approval and registration of a units plan, and individual unit title leases for each of the residential units in the development 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.

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. In other words, 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 paragraph 40-75(1)(a) of the GST Act.

The relevant 'wholesale supply' with respect to your residential development ('the Development'), provided that a units plan is registered, will be the grant of the individual unit title leases to you by the Government Agency.

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 requirements of paragraphs 40-75(2B)(a), (b) and (c).

In this case, both paragraphs 40-75(2B)(a) and (b) are satisfied.

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 grant of the Crown lease to you.

For the purposes of paragraph 40-75(2B)(b), the Crown lease, the associated Agreement and the Guide, all form part of an arrangement between you and the Government agency and its associate, the Authority.

The key issue for determination is whether or not paragraph 40-75(2B)(c) applies in relation to your arrangement with the Government agency and the Authority. Relevantly, paragraph 40-75(2B)(c) will apply in this case if under the arrangement between you and the Government agency and Authority, the intended grant of unit title leases to you is conditional on you undertaking specified building or renovation work.

The Crown lease granted to you by the Government agency, together with the Agreement between you and the Authority and the Guide require you to undertake a multi-unit housing development on the land, comprising not less than a number of dwellings or more than a number of dwellings. Furthermore, the Guide and associated development guidelines provide design requirements and other standards for the residential development that you are required to comply with.

Therefore, there is little doubt that the arrangement between you, the Government agency and the Authority ('the arrangement') requires you to undertake specified building and 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 and renovation works.

In determining whether or not, paragraph 40-75(2B)(c) is 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."¹

Similarly, the words 'under a 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."²

In Asciano Services Pty Ltd v Chief Commissioner of State Revenue [2008] HCA 46 ('Asciano') 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 required by the building and development provisions of the Crown lease, and in accordance with the requirements of the Agreement and the Guide, may have the effect ("by which") 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, the Agreement and the Guide does not satisfy paragraph 40-75(2B)(c).

There is a causal link between the undertaking of the required works under the arrangement and the grant of the individual unit title leases (on the assumption that, as intended, you seek approval and registration of a unit title plan). In addition, to ensure that you comply with your obligations under the arrangement, the Agreement, places certain restrictions upon your dealings in the land and the completed units. 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 works.

That is, the 'arrangement' for the purposes of paragraph 40-75(2B)(b) 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 agency, or that the Government Agency 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, if you proceed as intended to 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 are developing residential premises. You intend to supply the residential premises by way of an assignment of individual unit title leases. The grant of the individual unit title leases to you will require you to lodge a 'units plan' for approval. Subject to approval and registration of that plan by the Government agency, unit title leases (long term leases) for each of the individual units in the development will be granted 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 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 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 intended sale of completed units as part of the Development, approval has not yet been sought for the units plan and the units plan has, therefore, not been lodged for registration (i.e. it won't have been lodged for registration before 27 January 2011). Therefore, subsection 40-75(2C) will apply to your proposed sales of residential units.

That is, any grant of the individual unit title leases by the Government agency 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 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.

¹ at [14].

² at [42].