Edited version of your written advice

Authorisation Number: 1012717470496

Ruling

Subject: Development leases and property development

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?

Answers

Yes.

Relevant facts and circumstances

You acquired a Lease over a block of land from the Government Authority.

The Lease contained the following relevant clauses:

Clause 3 The Lessee further covenants with the Commonwealth as follows:

Commencement of Development

(a) That the Lessee shall within twelve (12) 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 at a cost not less than the sum of $ in accordance with plans and specifications prepared by the Lessee and previously submitted to and approved in writing by the Authority.

Completion of Development

(b) That the Lessee shall within twenty-four (24) months from the date of 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 thereto.

Purpose

(c) To use the land for the purpose of multi-unit housing for not more than xx dwellings.

Further Lease

(c) Subject to the provisions of the Land (Planning and Environment) Act 1991, the Lessee shall be entitled to a further lease of the land for such further term and at such rent and subject to such conditions as may then be provided or permitted by Statute Ordinance or Regulation;

As a result of an accident involving one of the business owners, the development was delayed significantly and will be finalised in xxxx.

You were granted an extension of time in which to undertake the development by the Government Authority in xxxx and xxxx.

The following additional information was supplied by your representative:

• Breach of Lease Provisions - Letter from Government Authority.

• Application for extension of time to commence or complete building and development provisions Section xxxx.

• Extension to the Building and Development Provisions from the Government Authority.

• Notice of Decision issued in response to the Development Approval.

• Breach of Lease provisions from a Government Authority.

• Application to the Government Authority for extension of time to commence and/ or complete the building and development provisions of the Lease.

• Letter from the Government Authority regarding the extension of time requested.

• Certificate of Design Acceptance.

• Notice of Decision.

• Job Activity Summary outlining the costs incurred in respect of the development before 27 January 2011.

The following additional information was supplied:

• The application to vary restrictions was made by the Developer of the estate and not the ruling applicant. The variation impacted on the driveways and access.

• The accident occurred in xxxx. Construction works ceased, however site works were underway. That is, the site was fenced off and you had commenced digging footings etc.

• Prior to the lodgement of the Development Approval in xxxx, all temporary facilities were in place (fencing), site excavation works had commenced and all planning issues had been resolved.

• Prior to 27 January 2011, x deposits had been taken on units and x contract had been entered into.

• The original contracts entered into in respect of the units, were rescinded X months after the accident.

• Up until the point of cancellation of the contracts and ceasing construction, all site preparation works and back of office applications, including liaison with the developer, Government Authority and other regulatory authorities had been done. All this work was done in-house by you.

• You advise that the company was commercially committed to the arrangement as:

• Pursuant to the contract of sale dated in xxxx, the company paid $xx for the Lease. Stamp duty amounting to $xx was paid to the Revenue Office.

• Direct development costs of $xx were incurred prior to 27 January 2011. In addition, significant indirect costs had been incurred internally with respect to planning and preliminary development activities.

• You have advised that no input tax credits have been claimed with respect to acquisitions relating to the development

• You have provided the following timeline with respect to the development:

xxxx Land purchase contract entered into with the Government Authority.

xxxx Issued xx year Lease by the Government Authority

Commencement of development within 12 months

Completion of development within 24 months.

Purpose: to use the land for the purpose of multi-unit housing for not more than xx dwellings

The lease terms were:

Commencement of development by xxxx and completed by xxxx.

xxxx Clients accident occurred and construction works ceased. Site works were underway (site fenced off, commenced digging footings etc).

xxxx x deposits taken and x contract entered into prior to 27 January 2011

xxxx Lodged Development Application

xxxx Notice of decision

Government Authority approval for construction of xx residential units.

The development commenced xxxx and was completed by xxxx.

xxxx Strata leasehold plan registered and individual xx year strata lot leases granted.

In an e-mail your representative, provided the following supporting information:

1. A Development Application was not lodged previously.

2. You were committed to the process of development under the lease and in accordance with 'lease and development conditions' and 'building and siting requirements' as provided the land Developer. You have provided the relevant document pages outlining the design process to be followed with these Developments and the approvals required.

The following information was extracted from Page x of the Building and Siting requirements:

1. The building and siting requirements applied to detached housing within Stage x provide design assistance for building homes in the area. This document formed part of the contract of sale and forms part of the lease and development conditions.

The Approval process is also outlined on pages x and x. The design approval process is defined in three stages:

1. Area Design Approval Process Stage.

2. Government Authority Approval Stage.

3. Construction Stage.

The home builder is required to obtain approval from the Area Design Coordinator prior to applying for development approval from the Government Authority. Building Approval and a Commencement Certificate are required from the appointed certifier prior to commencing any building works.

Contract for sale (Includes Annexure A [Lease and Development Conditions] and Annexure B [Building and Siting Requirements])

The Contract for sale entered into by the Government Authority and you included the following relevant clauses:

Clause xx Lease and development Conditions

Clause xx The Buyer must comply with the Lease and Development Conditions

Clause xx Building and Siting Requirements

Clause xx The buyer acknowledges and agrees to comply with the Building and Siting Requirements attached to this Contract.

The Estate Manager issued the Area Stage x - Multi Unit Lease and Development Conditions document on xxxx. The purpose of this document was to set out the relevant lease conditions and development requirements affecting the blocks in the document which would be enforced by the Government.

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 40-65(1)

A New Tax System (Goods and Services Tax) Act 1999 Subsection 40-65(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 Subsection 40-75(2C)

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

Reasons for decision

In this ruling, please note:

• All legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) unless otherwise specified.

• 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 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 land from which the residential premises were created has previously been supplied to you when you received the grant of the xx 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 supplier of the earlier supply (the government body that granted the xx year 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, you). 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 Agency includes the Lease and the Contract for Sale. The Contact for Sale includes the Lease and Development Conditions and the Building and Siting Requirements annexed thereto 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.

In this case, subsection 40-75(2B) would apply to disregard the supply of the residential premises that occurs upon grant of the individual strata lot leases, except for the operation of the transitional provision item 12 of Schedule 4 to the Amending Act (item 12).

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

In this case, the item 12 exception for the wholesale supply will be satisfied as:

• The premises from which the residential premises were created were previously supplied to you by Government Authority 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 in excess of $X.

• The arrangement is considered to include the Lease and Development Conditions and the Building and Siting Requirements in the Contract of Sale and the new Lease. The registration of the units plan is the wholesale supply and is conditional on the terms of the new Lease being satisfied.

• You have further advised that no input tax credits have been claimed with respect to the acquisitions relevant to the development.

Therefore, item 12 applies so that the granting of the individual strata leases over the individual residential units is not disregarded for the purpose of applying paragraph 40-75(1)(a). Following the grant of the strata lot leases, the newly constructed residential units will cease to be new residential premises. The subsequent supplies by you of the residential units to home owners or investors 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 of 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). However, the transitional provision exception to subsection 40-75(2C) provided by item 13 of Schedule 4 to the Amending Act (item 13) is not satisfied.

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.