Edited version of your private ruling

Authorisation Number: 1012511145696

Ruling

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

Question

Will your sales of individual strata titled units constructed by you, by way of assignment of long term leases be input taxed?

Answer

No.

Relevant facts and circumstances

You (Entity A as trustee for Entity B [Entity A] and Entity C as trustee for Entity D [Entity C]) entered into a trust deed with Entity A [the Trustee] with the objective of purchasing the Crown Lease (the Land).

Under the terms of the deed:

o Entity A was to receive all of the gross sellable area on specific floors of the Building (all being residential units), including all car spaces associated with these residential units.

o Entity C was to receive all of the gross sellable area on specific floors of the building of the Building (being residential and non-residential units), including all car spaces associated with these units.

You advised that you have formed a joint venture to develop the Land and that Entity A is registered with the ATO as the joint venture operator for this joint venture. In this ruling all acts of the Trustee are on behalf of the joint venturers.

The Trustee entered into a Contract for Sale to acquire land ("the Land") from the Government.

Settlement for the purchase of the Land occurred, at which time a Crown Lease was issued to the Trustee. The Crown Lease was for a ninety nine year term.

You have provided a copy of the Crown Lease.

A DA was lodged with the Government by the Trustee for construction of a mixed use development on the Land, which included residential units. Amended DA's were lodged.

The Government issued a Notice of Decision ("NOD") in relation to these DA's to the Trustee. The NOD advised that the Government had approved the proposal subject to conditions. The DA approval was for construction of a mixed use development, which included residential units.

Throughout the development, you have acted in accordance with Goods and Services Tax Ruling GSTR 2008/2, Goods and services tax: development lease arrangements with government agencies (now withdrawn).

Accordingly, Entity A, as the registered joint venture operator for this joint venture, claimed all input tax credits on acquisitions made in relation to the development.

Upon completion of the development, an application by the Trustee 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 Form 4 of the Units Plan. Accordingly it is expected that the unit title leases granted to the Trustee in respect of the registered units plan will have a term expiring in more than 50 years.

The Crown Lease contained commencement and completion clauses.

With the development not anticipated to be completed, you would be in breach. The Government consequently approved an extension of time for the completion of the development.

For the purposes of this private ruling we include the following additional facts obtained from the supporting information you provided in your original private ruling application, but were not listed in ruling.

You have provided a copy of the Contract for Sale.

You have not provided a copy of documents specified in the Contract of Sale.

This private ruling does not address the joint venture arrangement or any supply made by way of a partition of land.

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:

(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 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 premises 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 residential development you will seek approval and registration of the units plan. Upon Government's approval and registration of that plan, individual unit title leases will be granted to you with a term expiring in more than 50 years.

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 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' (if subsection 40-75(2B) were to apply) with respect to your residential development ("the Development"), provided that a units plan is registered, would be the grant of the individual unit title leases to you 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), the Crown Lease, the associated conditions of the contract for sale and the Notice of Decisions (development approvals), all form part of an arrangement between you and Government and its associate.

The remaining 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 approvals 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 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."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'), 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 Crown Lease and development approvals, may have 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 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 (on the assumption that, as intended, you seek approval and registration of a unit title plan). 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 that 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, 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 Government, 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 therefore the units plan has not been lodged for registration (i.e. the property subdivision plan was not 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 Government 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.

Further information on partitions and joint ventures

You may need to consider whether there has been a supply by way of partition made between Entity A and Entity C of their respective interests in the strata leases as you have advised that you have formed a joint venture to develop the land and that Entity A is the joint venture operator for this joint venture.

Goods and Services Tax Ruling GSTR 2009/2, Goods and services tax: partitioning of land (GSTR 2009/2) considers a partition of land under a joint venture.

Paragraphs 161 to 163 of GSTR 2009/2 consider the supply of land held jointly by the participants (including joint venture operator in capacity as a participant), and provide:

161. Under a partition the transfer by each participant in a joint venture of their interests in the land is a taxable supply provided all the requirements of section 9-5 are met. It makes no difference whether the joint venture is a GST joint venture or not.

162. An arrangement between two or more parties entered into for the construction of residential or commercial premises may be a joint venture. The participant's share of the product or output may, for example, be a share of the premises or a specified number of stratum units in a strata title development.

163. For each participant in a joint venture to obtain their share of the land, it is necessary for each participant to mutually convey their interest in the land to the other. This is a supply that is made for consideration.

164. Subsection 51-30(2) does not apply to the supply of an interest in land under a partition by a joint venture participant, in its capacity as a joint venture operator, to the other participant(s) as the participant acquiring the land does not do so for consumption, use or supply in the course of activities for which the joint venture was entered into. The supply is a taxable supply.

Paragraph 97 of GSTR 2009/2 provides that the value of consideration is the sum of the GST inclusive market value of all the other co-owners interests in the part of the land acquired by a co-owner plus any owelty money received in respect of the partition.

Paragraphs 138 to 156 of Goods and Services Tax Ruling GSTR 2001/6, Goods and services tax: non-monetary consideration (GSTR 2001/6) provides an explanation of reasonable methods for determining the GST inclusive market value of non-monetary consideration. Paragraphs 159 to 165 of GSTR 2001/6 provide guidance as to the time when the GST inclusive market value of non-monetary consideration is worked out.

¹ at [14].

² at [42].