Edited version of private advice

Authorisation Number: 1012649049198

Ruling

Subject: GST and leasehold supply of strata titled residential property

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

Yes

Question 2

Do you, have an increasing adjustment under Division 135 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) in relation to your supplies of residential units at the Property?

Answer

Yes.

Relevant facts and circumstances

You are registered for GST.

On ddmmyyyy, you entered into a put and call option arrangement with XYZ Company Limited to purchase the Property.

During the put and call option period, you submitted an expression of interest for the provision of a new purpose built commercial office on the land for Entity X.

On ddmmyyyy, you acquired a leasehold interest in the Property from XYZ Company Limited for $xxxx as a GST-free going concern. There was an existing tenanted commercial office building.

Subsequent to the sale of the going concern to you, the tenants vacated the premises and you continued the process of negotiating with Entity X, culminating in a response to their request for proposal, which was submitted in mmyyyy.

On ddmmyyyy, you submitted the Development Application ("DA") number xxxx to the relevant authority to construct a mixed use development, which included residential apartments.

On ddmmyyyy, the relevant authority issued a Notice of Decision ("NOD") in relation to the DA which advised that the relevant authority had approved the proposal, subject to conditions. One of the conditions was that the existing Crown Lease over the Property be surrendered and a new Crown Lease be granted.

In mmyyyy, Entity X advised that they were suspending the commercial office proposal indefinitely.

The new Crown Lease, issued on ddmmyyyy, contained an amended Purpose clause which allows residential use to a maximum of xxx dwellings. It provides that the lessee is to hold the lease for a term commencing on ddmmyyyy and terminating on ddmmyyyy.

At clause 3 the Crown lease provides:

(a) Commencement of development:

That the lessee shall within twelve months (12) 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;

(b) Completion of development

That the lessee shall within thirty six (36) 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 Statute Ordinance or Regulation applicable to such development

(c) sets out that the purpose is to use the land for one or more of the following uses:

(i) non retail commercial use

(ii) residential use

(iii) restaurant

(iv) shop

You conducted development activities on the land from the time you acquired the property and claimed GST credits on the costs in accordance with the Public ruling, Goods and Services Tax Ruling GSTR 2008/2, Goods and services tax: development lease arrangements with government agencies. This Public ruling was withdrawn on 11 May 2011 following the Full Federal Court decision in Federal Commissioner of Taxation v Gloxinia Investments Ltd [2010] FCAFC 46.

On ddmmyyyy you entered into a Development Deed with a third party for them to construct the premises for you. The Development Deed provides that:

n Upon settlement of the units the Developer makes a supply of development services

n The Developer will charge a development fee calculated and charged on a unit by unit basis.

Upon completion of the construction of the residential units, anticipated in mmyyyy, an application to register a units plan, (i.e. a strata plan) was to be lodged with the the relevant authority. Upon registration of the units plan, the provisions of the Crown lease (e.g. residential construction, start and completion dates, etc.) will be carried over in the units plan and the unit title leases will be granted to you in respect of registered unit plans having a term exceeding 50 years.

Sales of the individual residential units were expected to commence from mmyyyy.

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 40-70

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 Division 135

A New Tax System (Goods and Services Tax) Act 1999 Section 195-1

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.

Supply of property

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 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 submitted information, the units in question are residential premises and are 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).

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 subsections 40-75(2B) and 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).

For subsection 40-75(2B) to apply, firstly paragraph 40-75(2B)(a) requires the premises from which the residential premises were created to have earlier been supplied to the recipient of the wholesale supply, or their associates. In this case paragraph 40-75(2B)(a) is satisfied because the land¹ from which the residential premises were created have previously been supplied to you when you received the grant of the Crown lease.

Secondly, paragraph 40-75(2B)(b) requires that an arrangement (including an agreement) be made between the supplier of the earlier supply, or their associate, and the recipient of that earlier supply, or their associate. Here, paragraph 40-75(2B)(b) is satisfied as there is an arrangement between the supplier of the earlier supply (the government body that granted the Crown lease) and the recipient of that earlier supply (you).

Lastly, paragraph 40-75(2B)(c) requires that under the arrangement the wholesale supply of the residential premises is conditional upon specified building or renovation work being undertaken by the recipient of the earlier supply (in this case, the entity). The wholesale supply in this case is the granting of the individual strata lot leases by the government body to you.

The arrangement between you and the government body includes the development approval and the Crown lease, which set out the requirements for the type of development including the specified building works. The specified building works are also governed by the statutory requirements covering the construction of residential premises under which the development approval has been given and the Crown lease granted by the government body.

Accordingly, this would be an arrangement to which subsection 40-75(2B) applies, however, there is an exception for certain arrangements entered into before 27 January 2011. The exception is contained at item 12 of Schedule 4 to the Amending Act.

Application of the exception to section 40-75(2B)

The item 12 to the Amending Act exception for the wholesale supply is satisfied as:

• The premises from which the residential premises were created were previously supplied to you by the relevant authority by way of the grant of the new Crown lease on ddmmyyyy.

• You were commercially committed to the arrangement prior to 27 January 2011 as you had acquired the existing lease for $xxxx on ddmmyyyy and incurred additional direct costs in relation to the arrangement.

• The arrangement is considered to include the approved DA setting out the specified building works, the new Crown lease which set out the timeframes for the development and the registration of the units plan. The registration of the units plan is the wholesale supply and that was conditional on the terms of the DA and new Crown lease been satisfied.

• You advised that in the event that the supplies are correctly classified as input taxed supplies, you will review and amend any prior GST returns that have been lodged in relation to the development of the Property to ensure that all acquisitions are treated as not being creditable acquisitions.

Subsection 40-75(2C)

Under subsection 40-75(2C), a supply of the newly constructed residential premises is disregarded as a sale or supply for the purposes of applying paragraph 40-75(1)(a) if it is made because a property sub-division plan relating to the premises was lodged for registration (however described) by the recipient of the supply or their associate.

In this case, the strata leasehold plan is a property sub-division plan as defined in section 195-1 and the granting of the individual strata lot leases would therefore be captured by subsection 40-75(2C). The transitional provision exception to subsection 40-75(2C) provided by item 13 of Schedule 4 to the Amending Act does not apply, but regard must be had to the overall intent and operation of all the transitional provisions relating to these legislative amendments.

Accordingly, although both subsections 40-75(2B) and 40-75(2C) apply to this supply, subsection 40-75(2C) does not prevail to prevent the exception provided by the transitional provision of item 12 to the Amending Act. Therefore, the subsequent supply by you of the residential units to home owners and investors will be input taxed supplies.

In conclusion, subject to you amending any prior GST returns that have been lodged in relation to the development of the Property to ensure that all acquisitions are treated as not being creditable acquisitions, your supplies of individual residential units by way of assignment of a long term lease to third party purchasers will be input taxed supplies of residential premises.

Increasing adjustment

Division 135 provides that the recipient of a supply of a going concern has an increasing adjustment to take into account the proportion (if any) of supplies that will be made in running the concern and that will not be taxable supplies or GST-free supplies. Later adjustments are needed if this proportion changes over time.

The GST-free going concern was acquired on ddmmyyyy and prior to that an expression of interest had been lodged with Entity X to build a commercial office building. This culminated in a request for proposal from Entity X which was submitted in mmyyyy.

This indicates that, when the existing lease was acquired, the intention was a commercial office development, which would have resulted in taxable supplies. Noting, the existing retail businesses continued to be leased until the building was demolished in yyyy.

On this basis, section 135-5 would not apply as at the time the GST-free going concern was acquired, there was not an intention to make neither taxable nor GST-free supplies.

However, on ddmmyyyy a DA was submitted with the relevant authority to build a mixed use development, which included residential apartments. The new Crown lease, which was a condition of the approval, was obtained on ddmmyyyy.

As discussed previously the supplies of the newly constructed residential premises to third party purchasers will be input taxed. Therefore, as the residential development was a change from the initial intent section 135-10 applies.

¹ Note 1 of subsection 40-75(2B) provides that the premises referred to in paragraph 40-75(2B)(a) includes vacant land.