Edited version of your written advice

Authorisation Number: 1051182507401

Date of advice: 20 January 2017

Ruling

Subject: GST and supply of real property

Question 1

Are your supplies of the apartments, (the Apartments) taxable supplies of "new residential premises" pursuant to section 9-5?

Answer

Yes

Question 2

If you paid the purchaser of an apartment a refund equal to the GST that you remitted on the sale of the apartment, would you be entitled to an equivalent refund from the ATO of the GST that you remitted on the sale?

Answer

No

Relevant facts and circumstances

ABC Pty Ltd (ABC) is the bare trustee for the partnership (you).

You are registered for GST.

On DDMMYYYY you acquired a Crown lease for a property ("Original Crown Lease").

You acquired the Crown lease as a GST-free supply of a going concern from entity XXX.

The Original Crown Lease which XXX supplied to you was subject to a lease variation and an existing development approval ("DA"). The DA was approved in MMYYYY and the lease variation(s) were registered on DDMMYYYY. As set out in the Notice of Decision ("NOD"), the variations sought by XXX extended the permitted use under the Original Crown Lease to include residential purposes, amongst other amendments. XXX had not prepared any development plans for the property prior to sale.

Neither ABC, nor any of the tax law partners that ABC acts for, has (or has ever had) any interests in XXX. Conversely, XXX does not have (and has never had) any interest in either ABC (as a corporate entity) or in the partnership on behalf of which ABC acts. Further, there were no discussions between XXX and ABC with respect to undertaking a residential apartment development on the land prior to DDMMYY.

After acquiring the property, you sought development approval for a residential development in MMYYYY. The development was called the Development. The Development was to comprise X levels of above ground car parking, ground floor retail facilities and X levels of residential apartments comprising xxx units. Each apartment is a residential premises which includes a kitchen, laundry, bedrooms (between 1 to 3 depending on the unit) and bathrooms (1 or 2 depending on the unit).

On DDMMYYYY, your proposed development was approved - subject to approval for a variation in your current lease.

The approval was subject to a number of criteria including:

1 A two year time limit at which time it would expire and there were legislative requirements that were to be met prior to the registration of the instrument of variation.

2 Part XXX provides that the approval in relation to the proposed variation of the Crown lease does not take effect until the lessee has provided to the planning and land authority:

● a written consent from the lessee, or

● an agreement between the lessees of various blocks in respect of the removal of the requirements in the current Crown Lease of to maintain certain facilities.

3 Part XXX provides that

● That certain building works must not commence on the site until the Instrument of Variation for the approved lease variation is registered at the Office of Regulatory Services.

4 Part XXX provides that:

● That the lessee accepts the variation substantially in accordance with the draft Instrument of Variation at Attachment I and shall do all that is necessary to ensure that the Instrument of Variation giving effect to this approval is registered at the Office of Regulatory Services prior to the end of this approval.

5 Part XXX provides that:

● Prior to the registration of the Instrument of Variation, the lessee must, as is required under the relevant Act, pay any assessed Lease Variation Charge. Once advised of the lease variation charge, the charge should be paid not less than x months prior to the expiration of this approval. This will ensure that sufficient time remains to enable the Instrument of Variation to be registered at the Office of Regulatory Services prior to expiry of this approval.

6 Part 1XXX provides that:

● For approvals that involve a lease variation, there is no provision under the Planning and Development Act 2007 to extend the time frame for compliance with the lease variation conditions of the approval beyond 2 years after the date this approval takes effect. Refer to Appendix X for information about approvals that may be required for construction.

7 Part XXX, the reasons for Decision provide the following further information in regards the development process

The Lease was varied on DDMMYYYY and construction commenced. Construction was completed in MMYYYY.

On DDMMYYYY, the varied Crown Lease ABC acquired was surrendered and new Crown Leases were granted over the blocks. They comprised amongst other things a residential Crown Lease over the residential apartments ("Residential Crown Lease") and a commercial Crown Lease over the commercial parts of the development.

On DDMMYYYY, unit titling was sought for the Residential Crown lease and the Units Plan was registered on DDMMYYYY. In accordance with section 33 in the Units Title Act 2001 (ACT) the Residential Crown Lease ended upon registration of the Units Plan. ABC was then taken to hold a leasehold interest for each unit (i.e. each residential apartment) listed in the Units Plan. The Territory was taken to have granted a lease to ABC in respect of each unit once the Units Plan was registered.

When ABC 'sold' the apartments it transferred ownership of each leasehold interest in the relevant units to the purchaser

ABC is listed as the Vendor on the sale documentation for the sale of the units to third party purchasers. ABC acted as bare trustee for you in relation to each sale. You have remitted the GST on the apartment sales.

You have at all times claimed full input tax credits (GST credits) for GST incurred on acquisitions associated with the Development.

The contracts for each residential apartment included the standard printed clauses of the Contract for Sale published by the Relevant Society. You supplied a copy of the Off the Plan contract for sale for Unit XX dated DDMMYYYY.

You have stated that in respect of each Contract for Sale:

● The prices were marked as GST inclusive unless otherwise specified

● The GST boxes for each Contract for Sale were marked to indicate: "Buyer and Seller agree to apply margin scheme".

● Clause XX provides that prior to completion the seller will:

● comply with its obligations under the NOD ## and surrender the Crown Lease over THE blocks; and

● then attend to the registration of the units plan in respect of the residential buildings

● Clause XX provides that the price payable in accordance with this contract is inclusive of GST and at clause XX the buyer and seller agree to apply the margin scheme and that any GST payable under this contract is to be calculated under Division 75 of the GST Act.

You have accounted (or will account) for GST on the sale of all of the apartments that are in the Development. Some of the apartments remain unsold and are currently being marketed for sale. The margin scheme was (or will be) applied to all sales.

Contentions

You have contended that:40-75(2B) does not apply on the basis that there is no arrangement for the “wholesale supply” of the units which is conditional upon ABC completing specified building or renovation work as required by section 40-75(2B) and that 40-75 (2C) applies.

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 section 40-75

A New Tax System (Goods and Services Tax) Act 1999 paragraph (40-75)(1)(a)

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)

Reasons for decision

In this reasoning,

● unless otherwise stated, all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)

● all legislative terms of the GST Act marked with an asterisk are defined in section 195-1 of the GST Act

Question 1

Section 9-5 provides that you make a taxable supply if:

(a) you make the supply for consideration

(b) the supply is made in the course or furtherance of an enterprise that you carry on

(c) the supply is connected with the indirect tax zone (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.

For the supply of the units to be taxable supplies, all of the requirements in section
9-5 must be satisfied.

In this case, the residential apartments were sold for consideration as will any unsold units. The property is connected with the indirect tax zone as it is located in Australia. You are carrying on a property development enterprise and are registered for GST. Therefore, paragraphs 9-5(a), (b), (c) and (d) of the GST Act are satisfied. In addition the supply of the units will not be GST-free.

Input taxed

Subdivision 40-C provides that a supply of residential premises will be input taxed to the extent that they are not commercial residential premises or new residential premises. In your case the supply of the individual units will not be commercial residential premises therefore we will consider whether they are new residential premises.

The meaning of new residential premises

The term 'new residential premises' has the meaning given by section 40-75, which states at paragraph 40-75(1)(a) that residential premises are 'new residential premises' if they 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.

Consistent with the majority of the Full Federal Court's decision in Federal Commissioner of Taxation v. Gloxinia Investments Ltd [2010] FCAFC 46, the granting of a strata lot lease over residential premises is a supply of residential premises and, without more, the granting of a 99 year strata lot lease over newly constructed residential premises will mean that they are no longer new residential premises. This is because under paragraph 40-75(1)(a), the grant of the strata lot lease will mean that they are residential premises that have previously been the subject of a long-term lease.

However, section 40-75 contains provisions whereby certain supplies of residential premises are disregarded for the purposes of determining whether the premises have previously been sold as residential premises or have been the subject of a long term lease, for the purposes of paragraph 40-75(1)(a).

Subsection 40-75(2B)

Under subsection 40-75(2B) a supply (the wholesale supply) of newly constructed residential premises will be disregarded for the purposes of applying paragraph 40-75(1)(a) where the following requirements are met:

(a) the premises from which the residential premises were created had earlier been supplied to the recipient of the wholesale supply, or one or more of its associates; and

(b) 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; and

(c) 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).

You acquired the original Crown Lease, subject to an approved variation to allow the construction of residential premises, and development approval. You surrendered the varied Crown Lease and were granted a Residential Crown Lease and Commercial Crown Lease. Therefore the premises from which the residential premises were created had earlier been supplied to you (the recipient of the wholesale supply) - by the government body.

You have contended that the arrangements you entered into do not constitute an arrangement for the purposes of 40-75 2B.

ATO ID 2014/19 explains that the term 'an arrangement' is not limited to the Crown lease and we consider that the requirements of subsection 40-75(2B) are satisfied where the parties by their formal interaction have brought into existence or invoked a legal framework, which envisages that the making of the wholesale supply by the supplier of the earlier supply is dependent, contingent or consequential on specified building work being undertaken by the recipient of that supply.

We consider that the requirements of subsection 40-75(2B) (b) are satisfied because of the arrangements and approvals including the variation of the crown lease and the surrendering and reissuing of the leases. This is because the parties by their formal interaction have brought into existence or invoked a legal framework, which envisages that the making of the wholesale supply by the supplier of the earlier supply is dependent, contingent or consequential on specified building work being undertaken by the recipient of that supply.

The construction and sale of the individual residential apartments could not occur other than through this arrangement. We consider that your circumstances are similar to that described in ATO ID 2014/19 and therefore the requirements of subdivision 40-75(2B)( c) are met.

As all the requirements of subsection 40-75(2B) are met, subsection 40-75(2B) applies to disregard the supply of the residential premises that occurred upon grant of the individual strata lot leases.

With respect to the exception to subsection 40-75(2B) provided by item 12 of Schedule 4 to the Tax Laws Amendment (2011 Measures No. 9) Act 2012 (item 12), there is no evidence to show that you, or any of your associates, were commercially committed to this 'arrangement' prior to DDMMYY as you did not acquire the Crown Lease until after that date. Further the exception would not apply as you have claimed full input tax credits (GST credits) at all times for GST incurred on acquisitions associated with the Development.

As the transitional provision exception provided by item 12 is not satisfied, subsection 40-75(2B) applies to disregard the supply of the residential premises for the purpose of applying paragraph 40-75(1)(a). Therefore your supplies of the residential apartments to home owners and investors are taxable supplies.

Subsection 40-75(2C)

Parliament has not legislated for any hierarchy rule as between subsection 40-75(2B) and s 40-75(2C). Therefore for completeness we will consider 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 Units Plan is a "property sub-division plan" as defined in section 195-1 and the granting of the individual strata lot leases was therefore captured by subsection 40-75(2C).

As the Units Plan was not lodged until MMYY, 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 (item 13) is not satisfied. Accordingly, subsection 40-75(2C) would apply to disregard the supply of the residential premises that occurred upon grant of the individual strata lot leases.

Conclusion

As either subsection 40-75(2) or subsection 40-75(2C) applies to disregard the supply of the residential premises that occurred upon grant of the individual strata lot leases, your subsequent supplies of the residential apartments to home owners and investors were (will be) taxable supplies of new residential premises pursuant to section 9-5 of the GST Act.

Question 2

As you have correctly treated your supplies of the residential apartments as taxable supplies, there is no basis for the ATO to refund to you (or to anyone else) the GST that you remitted on your sales of the residential apartments.