Edited version of your private ruling

Authorisation Number: 1012540304972

Ruling

Subject: GST and sale of strata titled residential units

Question 1

Are the sales, by way of assignment of long-term leases, of strata titled residential premises to third party purchasers, input taxed supplies of residential premises?

Answer

No

Relevant facts and circumstances

You held long term lease Leases over land.

The leases were acquired as GST-free going concerns.

You lodged a Development Application ("the DA") with the relevant Authority on ddmmyyyy for construction of a building, which includes residential units.

Your private ruling application relates only to supplies of residential premises that you will make.

The Authority issued a Notice of Decision ("NOD") advising that it had approved the proposal, subject to conditions. One of the conditions noted was that the existing Leases over the Land be surrendered to allow consolidation of the blocks and a new Lease (similar to the draft Lease shown in the Attachment to the DA) be granted over the Land.

The newly consolidated Lease contained the following relevant clauses:

Purpose:

To use the land for the purpose of any one or more of the following uses:

o residential use

Interpretation:

In this lease unless the contrary intention appears:

o residential use means a caretaker's residence, multi-unit housing, single dwelling housing, residential care accommodation and/or supportive housing;

Commencement of development:

That the lessee shall within xx months from the date of the commencement of the lease or within such further time as may be approved in writing by the Authority for that purpose commence to erect an approved development on the land in accordance with plans and specifications prepared by the lessee and previously submitted to and approved in writing by the Authority;

Completion of development:

That the lessee shall within yy months from the date of the commencement of the lease or within such further time as may be approved in writing by the Authority complete the erection of the said approved development on the land in accordance with the said plans and specifications and in accordance with every Statue Ordinance or Regulation to such development.

Accordingly, subsequent to approval of the DA, you were legally bound to complete the development (as approved in the DA) in accordance with clause 3(b) of the Lease.

You entered into an agreement in relation to development of the Land. Under the agreement, you engaged the services of a developer to procure and construct the development as approved in the DA.

Prior to entering the agreement, you acted in accordance with Goods and Services Tax Ruling GSTR 2008/2: development lease arrangements with government agencies (now withdrawn). Accordingly, prior to entering the agreement, you claimed all input tax credits on acquisitions made in relation to the development.

Upon completion of the development, an application was made to register a units plan (i.e. strata title plan). Registration of the units plan was completed in after 27 January 2011. Prior to registration of the units plan, you were required by the relevant Authority to surrender the existing Lease and accept a new Lease dated after 27 January 2011. This new Lease expires 99 years from the commencement date. The relevant Authority required that the surrender and re grant of the Lease occur prior to registration of the units plan such that the underlying Leases upon registration of the units plan would have a 99 year term.

Upon registration of the units plan, the provisions of the Lease (purpose clause, term etc.) were carried over in the units plan. Accordingly, the unit title leases that were granted to the taxpayer in respect of registered units plan have a term of 99 years.

You have not claimed any input tax credits in relation to the development works undertaken to date by the developer. Furthermore, you have not claimed any other input tax credits since the time of entering the Development agreement with the developer.

In the event that the future 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.

As at 27 January 2011, you had incurred preliminary costs in excess of $200,000 (excluding land acquisition costs) in relation to the residential development to be undertaken on the land.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Section 40-35

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

Tax Laws Amendment (2011 Measures No.9) Bill 2012, Item 12 and 13 of Schedule 4

Reasons for decision

In this ruling,

· 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, and

· all reference materials, published by the Australian Taxation Office (ATO), that are referred to are available on the ATO website www.ato.gov.au.

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.

You will be supplying residential units 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, your supplies will be taxable, unless they are GST-free or input taxed. In your circumstances, there is no provision in the GST Act whereby your supplies will be GST-free. Therefore, 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 of the GST Act 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 submitted information, the premises to be supplied by way of leases are residential premises and not commercial residential premises. In addition, the residential premises have not been 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, sections 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 .

In regards to the sales of strata titled residential units constructed by you on the land, you have made an application to an Authority to register a units title plan which was completed in ddmmyyyy. You have advised that the unit title leases that have been granted to you in respect of the registered units plan have a term exceeding 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 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, a wholesale supply of newly constructed residential premises will not exclude a subsequent sale of the premises being a taxable supply of new residential premises if the wholesale supply is made in accordance with the conditions set out in paragraphs 40-75(2B)(a), (b) and (c).

With respect to your development, the '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.

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) and (b) must be satisfied.

For the purposes of paragraph 40-75(2B)(a), there has been an earlier supply of the premises upon which the development is to be undertaken, by virtue of the Lease that was granted to you on ddmmyyyy.

We consider that the Lease issued to you on ddmmyyyy together with the DA, constitutes an 'arrangement' for the purposes of paragraph 40-75(2B)(b).

Therefore the requirements of paragraphs 40-75(2B)(a) and (b) are met. However, it remains to be determined whether the requirements of paragraph 40-75(2B)(c) are satisfied.

Paragraph 40-75(2B)(c) will apply if, under the arrangement between you and the Authority, 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 lease and DA, you have, or intend, to undertake certain building work 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 that building work.

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."

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."

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.

In this case, the Lease granted to you by the Authority incorporates a purpose clause, in that the land can be used for the purpose of 'residential use'. However, this is just one of the many types of uses and developments that may be constructed on the land. It is not until you lodge the DA with the Authority that the particulars of the development are confirmed.

The undertaking of the residential development, as specified by the provisions of the lease and DA 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 Lease together with the DA does not satisfy the requirements of paragraph 40-75(2B)(c).

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 Goods and Services Tax Ruling, GSTR 2008/2, Goods and services tax: development lease arrangements with government agencies, 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 your 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 that you are entitled to a grant of the individual unit title leases by the Authority, or that the Authority will make those 'wholesale supplies' to you.

In conclusion, subsection 40-75(2B) will not apply to cause the Authority's supply of leases of the newly constructed units to you, 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.

You are developing premises that will be part 'residential premises' and part 'commercial premises'. You have commenced supplying the residential premises by way of an assignment of your interest in individual unit title leases. However to be granted the individual unit title leases, you were required to lodged a 'units plan' for a 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 a leases) were issued to you for each of the individual units with a term expiring on ddmmyyyy.

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 the sale of the completed units in your Development, the unit plan was lodged on ddmmyyyy. Therefore subsection 40-75(2C) will apply to your sales of residential units.

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 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 taxable supplies of new residential premises.