Edited version of your private ruling

Authorisation Number: 1012511124488

Ruling

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

Question

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

Answer

No.

Relevant facts and circumstances

All references to you are references to Entity A as trustee for Entity B.

A Crown Lease was issued to Entity C over land situated in Australia ("the Land"). The term of the Crown Lease was ninety nine years.

A Put and Call Option agreement was entered into by you and Entity C. The Call Option allowed you the option to acquire the Crown Lease over the Land for the price as stipulated in the Contract for Sale which was annexed to the Put and Call Option. The Put Option allowed Entity C the option to require you to acquire the Crown Lease over the Land for the price as stipulated in the Contract for Sale which was annexed to the Put and Call Option.

You exercised the Call Option and entered into a Contract for Sale to acquire the Crown Lease over the Land from Entity C.

You have provided a copy of the Crown Lease over the Land.

Accordingly, subsequent to you acquiring the Crown Lease over the Land, you were legally bound to complete the development in accordance with the Crown Lease.

You lodged Development Application ("the DA") with the Government for (amongst other things) construction of mixed use development, comprising residential apartments.

The Government issued a Notice of Decision ("NOD") in relation to the DA. The NOD advised that Government had approved the proposal, subject to conditions. One of the conditions was that 'the building and development provisions of the Crown Lease' over the Land be extended to permit the construction of the development. That is, you were required to have the construction commencement and completion dates extended.

Subsequent to approval of the DA, further minor amendments were made to the DA approval such that the final development contains a total of a specific number of residential apartments.

In brief, the development (as approved in the DA) is a mixed use development, which comprises:

o 1 bedroom apartments;

o 2 bedroom apartments;

o 3 bedroom apartments; and

o commercial space.

This private ruling relates only to supplies of the residential premises by you.

You lodged a Development Application ("the subsequent DA") with the Government, varying the provisions of the Crown Lease over the Land to change the proportions of permitted uses.

The Government issued a Notice of Decision ("NOD") in relation to the subsequent DA. The NOD advised that the relevant Authority had approved the proposal, subject to conditions. One of the conditions was you were required to have the construction commencement and completion dates extended.

At all times up to and including the date of this private ruling request, you acted in accordance with the principles outlined in Goods and Services Tax Ruling GSTR 2008/2, Goods and services tax: development lease arrangements with government agencies (now withdrawn) and section 40-75 of A New Tax System (Goods and Services Tax) Act 1999 (without application of the transitional provisions contained in item 12 of Schedule 4 of Tax Laws Amendment (2011 Measures No.9) Bill 2012). Accordingly you have claimed all input tax credits on acquisitions made in relation to the development to date.

In the event that your future supplies of the residential premises are input taxed supplies, you will review and amend any 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.

Upon completion of the development 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 X of the Units Plan. Accordingly, the unit title leases that were granted to you in respect of registered units plan have a term expiring in more than 50 years.

With the DA not approved (prior to which time the development had not commenced) and with the units plan not being registered, you were in breach of the conditions of the Crown Lease. You advised that the breach of the conditions of the Crown Lease arose due to you being in negotiations with the Government in relation to the terms of the Crown Lease and the clauses contained therein.

The Government approved an extension of time for the commencement and completion of the development.

Accordingly, whilst you were previously in breach of the commence and complete conditions contained in the Crown Lease, subsequent to receipt of the approval for the extension of the periods within which the development must be commenced and completed, you are no longer in breach of the Crown Lease.

The supplies of residential premises (upon assignment of the unit title leases to purchasers) have commenced.

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:

o All legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) unless otherwise specified.

o 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:

you make a supply for *consideration; and

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

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

(c) 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 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 40-65(1), a sale of real property to be used predominately for residential accommodation (residential premises) is input taxed. 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).

Based on the information submitted, the units in question 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 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 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.

Sales of strata titled residential units constructed by you

You have advised that upon completion of the development an application was made to register a Units Plan (i.e. strata title plan). Unit title leases were granted to you in respect of the registered units plan with a term expiring in more than 50 years.

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, those units would 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' (if subdivision 40-75(2B) were to apply) with respect to your residential development ("the Development"), would be the grant of the individual strata leases by Government.

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).

In this case, the requirements of 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), it may be argued that the Crown Lease and Notice of Decisions (development approvals), all form part of an arrangement between you and Government.

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

As a consequence of the arrangement between you and Government, comprising the Crown Lease and the development approval subsequently obtained, you have, or intend, to undertake specified 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 requirements 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 at [14].:

"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 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 at [42].:

"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 specified in the Crown Lease and development approvals 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 and the development approvals does not satisfy the requirements of paragraph 40-75(2B)(c).

There is a causal link between the undertaking of the 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 building 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 you are entitled to a grant of the individual strata leases by Government, or that Government 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, 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 part 'residential premises' and part 'commercial premises'. In order to obtain the long term individual strata leases over the one, two and three bedroom apartments you lodged a 'units plan' (strata plan). Long term strata leases for the residential premises were then granted to you. You expected to commence making supplies of residential premises consisting of one, two and three bedroom apartments by way of an assignment of your interest in individual strata leases.

When you sell the individual units, by assigning the unit title leases, prima facie, for the purposes of paragraph 40-75(1)(a), those units would have previously 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 sales of completed units as part of the Development, you have not provided the date of lodgement of the units plan (property subdivision plan) that was registered. However, the Government granted an extension to the building and development conditions in your Crown Lease. It is therefore concluded that you lodged the units plan after 27 January 2011. Therefore subsection 40-75(2C) will apply to the sales of residential units in the Development.

That is, the grant of the individual strata leases by Government are disregarded for the purposes of applying paragraph 40-75(1)(a). Therefore, the sales of the individual residential units are sales of 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 are taxable supplies of new residential premises.