Edited version of your private ruling

Authorisation Number: 1012529572541

Ruling

Subject: GST and sale of strata titled residential units

Question 1

Are your sales by way of assignment of a long term lease, of strata titled residential premises to third party purchases, input taxed supplies of residential premises?

Answer

No.

Relevant facts and circumstances

You entered into an option agreement to execute a Contract for Sale to acquire a property and commercial business situated on the 'Land' for a specified combined cost.

You acquired the property as a GST-free going concern.

Settlement in relation to the above transaction was completed on ddmmyyyy. The settlement statement specified that the value ascribed to the business and land was a specified amount.

You lodged a Development Application (DA) with a Government Authority (Authority) for the demolition of the existing business premises and construction of multi level residential premises on the Land. As settlement had not occurred as at the time of lodging the DA, the application was made in the vendor's name (the lessee at the time).

The DA was approved by the Authority on a specified date. In addition to approving the residential development, the DA approved a variation in the Purpose clause of the Crown Lease to permit 'residential use' on the Land. As settlement had occurred by this time, the DA was issued in your name (the lessee at the time).

The DA Notice of Decision ("NOD") in relation to the DA advised that the Authority had approved the proposal, subject to conditions. One of the conditions noted was that the existing Crown Lease over the Land be surrendered and a new Crown Lease be granted substantially in accordance with the sample Crown Lease shown at the attachment to the DA.

The Crown Lease was surrendered on ddmmyyyy. The new Crown Lease was granted to you on ddmmyyyy. The new Crown Lease expires on ddmmyyyy.

The new Crown Lease contained the following relevant clauses:

Clause xx - Purpose:

(x) To use the land for the purpose of one or more of the following uses:

(yy) - multi unit housing limited to a maximum of xx dwellings;

At all times prior to the tax period commencing ddmmyyyy, you 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Services Tax Ruling GSTR 2008/2, Goods and services tax: development lease arrangements with government agencies (now withdrawn).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, prior to ddmmyyyy, you claimed all input tax credits on acquisitions made in relation to the development.

In the event that the supplies are correctly classified as 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.

After completion of the development, you made an application to register a units plan on a date after 27 January 2011. Prior to registration of the units plan, you were required by the Authority to surrender the existing Crown Lease and accept a new Crown Lease dated ddmmyyyy.

The new Crown Lease expires in over 50 years from the date it was issued. The Authority required that the surrender and re grant of the Crown Lease occur prior to registration of the units plan such that the underlying Crown Leases upon registration of the units plan would have a term in excess of a 50 year term.

Upon registration of the units plan, the provisions of the Crown Lease (purpose clause, term etc.) were carried over in the Units Plan. Accordingly, the unit title leases that were granted to you in respect of the registered units plan have a term exceeding 50 years.

Settlements in relation to this development commenced on ddmmyyyy.

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 Section 40-65

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

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:

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

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

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 residential premises 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 developed premises are residential premises, are not commercial residential premises, and were not used for residential accommodation before 2 December 1998 because they were constructed after this date.

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 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 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.

In regards to the sales of strata titled residential units constructed by you on the Land, on a specified date you have made an application to an Authority to register a units title plan. You have advised that the unit title leases that have been granted to you in respect of the registered units plan have a term which exceeds 50 years.

In respect of the Land, 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 are considered to 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. 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 paragraph 40-75(1)(a) of the GST Act.

For the purposes of subsection 40-75(2B) (if this subsection were to apply), the relevant 'wholesale supply' with respect to your residential development on the Land, would be the grant of the individual unit title leases to you by the Authority.

However, for subsection 40-75(2B) to apply to disregard the supply of the residential premises that will be made by way of long term lease of the individual unit title leases, the requirements of paragraphs 40-75(2B)(a), (b) and (c) must be satisfied.

It is considered in your case 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 grant of the original Crown Lease to you for the Land.

For the purposes of paragraph 40-75(2B)(b) it is considered that the Crown lease, together with the Development Approval form part of an arrangement between you and the Authority and its associate.

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 and its associate, the 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 had permission to undertake 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 this case it is considered that the 'arrangement' for the purposes of paragraph 40-75(2B)(b) does not provide as a condition that upon the undertaking of the specified building works you are entitled to a grant of the individual unit title leases by the Authority, or that Authority will make those 'wholesale supplies' to you. That is, while you have been approved to undertake a residential development on the land by way of DA, there are no terms in the Crown Lease which require or bind you to undertaking this specific development on the land, or that the grant of the unit title leases will be conditional upon you undertaking this development.

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.

Therefore, in conclusion, subsection 40-75(2B) will not apply and cause that supply of your newly constructed units which have been granted to you by the Authority, on registration of a units plan, 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) 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.

In your case, you have developed premises that are residential premises on the Land. You intend to supply the completed residential premises to third parties by way of an assignment of your interest in individual unit title leases. To be granted the individual unit title leases, you are required to lodge a 'units plan' for approval. In this case you lodged an application to register a units plan on ddmmyyyy. Upon approval of the units plan by the Authority, the unit title leases (long term leases) for each of the individual units were granted to you with a term exceeding 50 years.

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 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, the unit plan for the Land was lodged after 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 unit title leases by the Authority 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 are not considered to have 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.

In conclusion, your supplies of residential premises, by way of assignment of a long term lease from you to third party purchasers, will be a taxable supply of new residential premises.