Edited version of your written advice

Authorisation Number: 1012713972066

Ruling

Subject: GST and residential premises

Question 1

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.

Question 2

Will the Commissioner of Taxation exercise his discretion under section 105-65 of Schedule 1 to the Taxation Administration Act 1953 to refund overpaid GST?

Answer

Yes.

Relevant facts and circumstances

You are a partnership registered for GST.

All references to Trustee are references to their capacity as Bare Trustee for you.

A private ruling request in relation to this matter was lodged previously and you withdrew the private ruling after the ATO verbally advised your representative the ATO's view in relation to the GST treatment of residential developments, subsequently confirmed in ATO ID 2013/57.

However, as a result of the ATO issuing ATOID 2014/19, you are of the view that your development meets the criteria for input taxed treatment.

A Bare Trust deed was entered between the Trustee and you. The Bare Trust deed was in relation to the acquisition of land by the Trustee on behalf of you.

A Contract for Sale was entered by the Trustee to acquire land.

A Contract for Sale was entered by the Trustee to acquire more land.

A Contract for Sale was entered by the Trustee to acquire more land.

A Partnership Agreement was entered into by you to formalise the partnership you had commenced.

A Nominee Agreement was entered into by the Trustee and you to appoint the Trustee as your agent.

A Bare Trust deed was entered into between the Trustee and you. The Bare Trust deed was in relation to the acquisition of land by the Trustee on your behalf.

A Contract for Sale was entered into by the Trustee to acquire land.

A Bare Trust deed was entered into between the Trustee and you. The Bare Trust deed was in relation to the acquisition of land by the Trustee on your behalf.

A Contract for Sale was entered into by the Trustee to acquire land.

References to the Land in this private ruling application are references to all Land and any Land formed as a result of the consolidation of these Lands.

A Development Application was lodged with the government authority for the consolidation of the Land and a variation of the Lease to permit construction of dwellings on the Land.

The decision in relation to the DA advised that the government authority had approved the proposal (to permit dwellings on the Land), subject to conditions. One of the conditions noted was that the existing Lease over the Land be surrendered and a new Lease be granted substantially in accordance with the sample Lease shown at Attachment 1 to the DA. The purpose clause of the draft Lease provided that the purpose of the land was multi-unit housing.

The decision in relation to the DA advised that the government authority had approved a proposal to demolish the existing dwellings on the Land and erect units.

Subsequent to approval of the DA to demolish the existing dwellings and erect units on the Land, an objection was lodged with a government tribunal in relation to the proposed development. The tribunal in relation to this matter was substantially delayed. The tribunal held that the development as approved in the DA could proceed.

Subsequent to the tribunal decision, the Leases for each of the lands that comprise the Land were surrendered with a new Lease granted to the Trustee on the same day for the newly created Land.

The new Lease was for the purpose of multi-unit housing.

Upon completion of the development, an application was made to register a units plan. Upon registration of the units plan, the provisions of the Lease (purpose clause, term etc.) were carried over in Form 4 of the Units Plan. Accordingly the unit title leases that will be granted to the Trustee in respect of registered units plan have a term of 99 years.

Settlements in relation to this development commenced upon finalisation of the registration of the units plan and were finalised.

You have provided a representative example of the Contracts for Sale. The price includes the statement, 'GST inclusive unless otherwise specified'. Within the GST terms section the following statements have been check marked, 'Taxable Supply (including new residential premises)', and 'Buyer and seller agree to apply the margin scheme'.

At the commencement of the development, you entered a Development Management Deed in relation to development of the Land. Under the Development Management Deed, you have engaged the services of a developer to procure and construct the development as approved in the DA.

The Development Deed provides that upon settlement of sales of units in the development by you, the developer makes a supply of development services to you. At this time, the developer will charge you a development fee. The development fee will be a taxable supply made by the developer. You have treated the development fee as a creditable acquisition, as in accordance with the ATO's view as expressed in ATO ID 2013/57, the supplies of residential premises were understood to be taxable supplies of new residential premises.

Furthermore, as a result of ATO ID 2013/57, you treated all sales of residential premises as taxable and have remitted GST in relation to these taxable supplies to the ATO.

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.

You advise that you did not factor in the cost of the GST or otherwise pass on the GST as the price did not increase as a result of learning the supplies would be taxable. You have submitted a letter from your selling agent for the units advising that there were no increases in the pricing of residential stock.

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)

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

Taxation Administration Act 1953 Section 105-65 of Schedule 1.

Reasons for decision

Question 1

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

• all reference materials, published by the Australian Taxation Office (ATO), that are referred to are available on the ATO website 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 land from which the residential premises were created have previously been supplied to you when you received the grant of the 99 year 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 government body (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 government body includes development approval and the lease, which sets 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 lease granted by the government 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.

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 government body by way of the grant of the new lease.

• You were commercially committed to the arrangement prior to 27 January 2011 as you had incurred direct costs of at least $200,000 (GST exclusive).

• The arrangement is considered to include the development approval setting out the specified building works and the new lease. 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 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, 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 were input taxed supplies of residential premises.

Question 2

The exchange of contracts for residential units commenced in XX.

The terms of the contract for sale provide that the sale was a taxable supply and that the buyer and seller agree to apply the margin scheme.

The majority of settlements occurred in XX and you treated the supply of the developed apartments as 'new residential premises' for GST purposes.

A private ruling application was lodged and subsequently withdrawn when the ATO advised your representative the ATO view in relation to the GST treatment of residential developments. This view was later confirmed in ATO ID 2013/57.

ATOID 2013/57 was withdrawn and replaced with ATO ID 2014/19 and you are of the view that your development meets the criteria for input taxed treatment.

You contend that the overpayment of GST is a direct result of the ATO advice and that the sales should have been treated as input-taxed supplies, not taxable supplies.

Under the general rules, the Commissioner is required to give a refund or apply that amount in accordance with the running balance account provisions in Divisions 3 and 3A of Part IIB of the Taxation Administration Act 1953 (TAA).

However, the requirement to give a refund of overpaid GST is subject to section 105-65 of Schedule 1 to the TAA which modifies the general rules so that the Commissioner need not give a refund or apply that amount if an entity overpaid its net amount or an amount of GST where the requirements of the section are satisfied.

Subsection 105-65(1) of Schedule 1 to the TAA states:

(1) The Commissioner need not give you a refund of an amount to which this section applies, or apply (under Division 3 or 3A of Part IIB) an amount to which this section applies, if:

(a) you overpaid the amount, or the amount was not refunded to you, because a *supply was treated as a *taxable supply, or an *arrangement was treated as giving rise to a taxable supply to any extent; and

(b) the supply is not a taxable supply, or the arrangement was treated as giving rise to a taxable supply, to that extent (for example, because it is *GST free); and

(c) one of the following applies:

(i) the Commissioner is not satisfied that you have reimbursed a corresponding amount to the recipient of the supply or (in the case of an arrangement treated as giving rise to a taxable supply) to an entity treated as the recipient;

(ii) the recipient of the supply, or (in the case of an arrangement treated as giving rise to a taxable supply) the entity treated as the recipient, is *registered or *required to be registered.

Miscellaneous Tax Ruling MT 2010/1 Miscellaneous tax: restrictions on GST refunds under section 105-65 of Schedule 1 to the Taxation Administration Act 1953 (MT 2010/1) provides the view of the Commissioner on section 105-65 of Schedule 1 to the TAA.

Paragraph 20 of MT 2010/1 states:

For section 105-65 to apply, there must firstly be an amount of GST taken into account in an entity's assessed net amount which is in excess of what was legally payable on the particular supply in the relevant tax period ('incorrect GST')…

You have treated all sales of the residential premises as taxable supplies of new residential premises and have remitted GST in relation to these taxable supplies calculated under the margin scheme. However, the supply was in fact not a taxable supply but an input taxed supply of residential premises.

In your case, there was an overpayment of GST to the extent your supplies were not taxable supplies and were treated as taxable supplies. You have not reimbursed the recipients for any amount corresponding to the GST overpaid.

The words 'need not' contained in section 105-65 indicate the Commissioner may choose to pay a refund in appropriate circumstances even though the conditions in paragraphs 105-65(1)(a), (b) and (c) are satisfied. To this limited extent the Commissioner has a discretion.

Further, paragraphs 116 and 117 of MT 2010/1 state:

116.The operation of section 105-65 to deny the requirement to pay refunds that would otherwise be payable is not discretionary.…The words of the provision say that where the section applies the Commissioner need not give you a refund of the amount or apply the amount under the relevant RBA provisions….

117. The commissioner considers that the words 'need not', in the context of section 105-65, do not prohibit the giving of a refund and accordingly the Commissioner has a discretion to pay a refund in appropriate circumstances….

This view is supported by the decision in Luxottica Retail Australia Pty Ltd v FC of T 2010 ATC 10-119 at 57 when the AAT referred to 'residual discretion'. The question then becomes whether, in these circumstances, the discretion to pay the refund to the applicant should be exercised.

When the Commissioner's Discretion can be exercised

Paragraph 128 of MT 2010/1 provides some guiding principles to consider when exercising the discretion. It states:

128. Section 105-65 does not specify what factors are relevant to the exercise of this discretion. In exercising the discretion, the Commissioner will have regard to the following guiding principles:

(a) The Commissioner must consider each case based on all the relevant facts and circumstances.

(b) The Commissioner needs to follow administrative law principles such as not fettering the discretion or taking into account irrelevant considerations.

(c) The Commissioner must have regard to the subject matter, scope and purpose of section 105-65. As explained in paragraph 127 of this Ruling, it clear from the scope and purpose that section 105-65 is designed to prevent windfall gains to suppliers and to maintain the inherent symmetry in the GST system and is based on the underlying design feature and presumption of the GST system that the cost of the GST is ultimately borne by the non- registered end consumer.

(d) The discretion should be exercised where it is fair and reasonable to do so and must not be exercised arbitrarily. The circumstances in which the Commissioner considers it may be fair and reasonable to exercise the discretion include, but are not limited to, the following:

(i) The overpayment of GST arises as a direct result of the actions of the Commissioner and the taxpayer has not had the opportunity to factor in the cost of the GST or otherwise pass on the GST, for instance through a gross up clause.  For instance, an entity had treated its supply as GST-free, the Commissioner subsequently treats the supply as taxable, the entity pays an amount for GST on the supply, but the Commissioner later reverses that decision. In such circumstances it would not be necessary for the supplier to refund the recipient of the supply whether the recipient is registered or unregistered.

(ii) The taxpayer can demonstrate that, for other reasons, they did not otherwise pass on the GST. As mentioned in Avon, 'it is for the taxpayer to establish a circumstance out of the ordinary, namely that the amount of the overpayment ... has not been passed on'.

(iii) The supplier is able to satisfy the Commissioner that an amount corresponding to the refund will be, or has been, passed on to the party that ultimately bore the cost of the overpaid GST.

In a business to business transaction it is generally not enough simply to show that the supplier refunded the immediate business recipient. A supplier must be able to prove that an unregistered end consumer is the one ultimately compensated.

Where the registered recipient is unable to claim input tax credits or is only allowed to partially claim input tax credits, then, before the Commissioner would pay a refund to the supplier, the supplier would have to refund the registered recipient and the registered recipient would have to show it either did not pass the foreseeable cost (that is denied input tax credits) to the next recipient or that they have also refunded that amount to the next recipient and the entity that ultimately has borne the cost is compensated.

(e) The discretion would generally not be exercised where it produces an unreasonable result, for example an asymmetrical revenue outcome. This could occur where, for example, a supplier reimburses a registered recipient for the overpaid GST but the Commissioner is unable to reclaim the overclaimed input tax credit from the recipient…

You contend that the overpayment of GST arises as a direct result of the Commissioner advising your representative that the supplies of residential developments such as these would be taxable.

The settlement of the newly constructed units commenced after this date, in XX, and the contracts provided the sales were subject to the margin scheme.

Information has been provided that supports that the price of the units did not change from XX when most contracts had been entered into (at which time you had not factored in GST) to XX when the sales were treated as taxable supplies.

The arrangement to develop these units commenced with purchasing the original blocks of land in XX and the lodging of the Development Application in XX. You have advised that GST was not included in the setting of the price of the units. This was on the basis that the supply of the newly constructed premises would be input taxed supplies. This is consistent with the outcome of the Gloxinia decision which was decided on 24 May 2010. Taking into account all the facts and circumstances of this particular case, the Commissioner is satisfied that you have borne the GST in the final price of the newly constructed units and it is appropriate to exercise his discretion to allow a refund of the overpaid GST amount.