Edited version of private advice

Authorisation Number: 1012675531921

Ruling

Subject: GST and residential premises

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?

Answer

Yes.

Relevant facts and circumstances

You are registered for GST.

You were granted a Lease over land (the land). The land was acquired under the margin scheme.

You have provided a copy of the Lease.

Subsequent to the purchase of the land, a development application was approved for a mixed use development on the land. Following the approval of the development application, an unrelated party objected against the approval of the development.

You redesigned the building and submitted a new development application.

The Development Application (DA) was lodged for (amongst other things) construction of a mixed use development, which includes residential units.

The DA was approved.

For the period from the purchase of the land to late January 2011 you incurred costs (excluding the land) in relation to the development.

Upon completion of the development an application will be made to register a units plan (i.e. strata title plan).

This private ruling application relates only to supplies of residential premises that are made by you.

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 Land to ensure that all acquisitions are treated as not being creditable acquisitions.

Relevant legislative provisions

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) and

A New Tax System (Goods and Services Tax) Act 1999 Subsection 40-75(2C).

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).

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 ACTPLA (the 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 you (the recipient of the earlier supply). The wholesale supply in this case is the granting of the individual strata lot leases by the government body to the entity.

The arrangement between you and the ACTPLA includes 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 ACTPLA.

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 late January 2011, there is an exception whereby certain arrangements which were entered into before late 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.

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 lease on ddmmyyyy.

• You were commercially committed to the arrangement prior to late January 2011 as you entered into a legally binding arrangement in relation to the lease issued in ddmmyyyy requiring you to undertake a mixed use development on the land. You made acquisitions of $xxx prior to late January 2011, in relation to the arrangement.

• The arrangement is considered to include the development approval setting out the specified building works and the new lease which set out the timeframes for 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 development approval and new lease being 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 the GST returns, you have satisfied all the preceding conditions to the exception to section 40-75(2B). Accordingly, the premises are not new residential premises. Any supplies of the residential premises by you will be input taxed supplies.

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, in accordance with ATO ID 2014/19 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, your supplies of 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.