Edited version of private advice

Authorisation Number: 1012652743638

Ruling

Subject: GST and leasehold supply of strata titled residential property

Question

Will your supplies of residential premises by way of assignment of a long term lease from you to third party purchasers be input taxed supplies?

Advice/Answers

Yes

Relevant facts and circumstances

On ddmmyyyy, you entered into an option agreement to execute a Contract for Sale to acquire land and a business situated on the Land for $xxxx.

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 was $x. Accordingly, the value ascribed to the Land was $xxx.

On ddmmyyyy, a Development Application was lodged with the relevant authority for the demolition of the existing structure and the construction of residential dwellings on the Land.

Development Application No. XXXX ("the DA") was approved by the relevant authority on ddmmyyyy. 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.

The DA Notice of Decision ("NOD") in relation to the DA advised that the relevant 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 Attachment X to the DA.

The Crown Lease was surrendered on ddmmyyyy. The new Crown Lease was granted to you on ddmmyyyy. The new Crown Lease expired on ddmmyyyy (approx. xx years).

The new Crown Lease contained the following relevant clauses:

Clause - Purpose:

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

(ii) - multi unit housing limited to a maximum of seventy dwellings;

Clause 1 - Interpretation: In this lease unless the contrary intention appears:

(x) - Authority means the relevant authority

(x) - multi unit housing means the use of the land for more than one dwelling and includes but is not limited to dual occupancy housing and triple occupancy housing.

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Services Tax Ruling GSTR 2008/2: Goods and services tax: development lease arrangements with government agencies (now withdrawn).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 ddmmyyyy. Prior to registration of the units plan, you were required by the relevant authority to surrender the existing Crown Lease (which was granted on ddmmyyyy) and accept a new Crown Lease ddmmyyyy.

The new Crown Lease expires xx years from ddmmyyyy. The relevant 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 xx 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 expiring on ddmmyyyy (xx years).

Settlements in relation to this development commenced in mmyyyy.

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 40-70(1)

A New Tax System (Goods and Services Tax) Act 1999 subsection 40-70(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 section 195-1

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 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 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).

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 99 year 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 relevant authority (supplier of the earlier supply) and you (the recipient of that earlier supply).

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 relevant authority to you.

The arrangement between you and the relevant authority 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 DA has been given and the Crown lease granted by the relevant authority.

The arrangement also includes the lodging of the strata leasehold plan and granting of the individual strata lot leases. This is because the intent of the parties in entering into the development was for the construction and sale of individual residential premises to home owners and investors, and the sale of the individual residential units can only occur following the lodgement of a strata leasehold plan and the subsequent grant of the individual strata lot leases.

Whilst the new section 40-75(2B) applies in relation to supplies of residential premises occurring on or after 27 January 2011, there is an exception whereby certain arrangements which were entered into before 27 January 2011 will not be subject to section 40-75(2B). The exception is contained at item 12 of Schedule 4 to the Amending Act (item 12).

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 supplied to by the relevant authority by way of grant of the new Crown lease on you on ddmmyyyy.

• You were commercially committed to the arrangement prior to 27 January 2011 as you had acquired preliminary costs in excess of $200,000 in relation to the residential development undertaken on the Land.

• 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.

Subject to you amending any prior GST returns that have been lodged in relation to the residential component of the development to ensure that all acquisitions are treated as not being creditable acquisitions, you have satisfied all the preceding conditions to the exception to section 40-75(2B) of the GST Act, the premises are not new residential premises. Any supplies of the premises by you will be input taxed supplies of residential premises.

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 Tax Laws Amendment (2011 Measures No. 9) Act 2012 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. Therefore, the subsequent supply by the entity 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 residential component of the development to ensure that all acquisitions are treated as not being creditable acquisitions, your supplies of the residential premises by way of assignment of a long term lease from you to third party purchasers will be input taxed supplies of residential premises.

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