ATO ID 2010/22: GST and land supplied by way of a long term lease on the condition that residential premises are constructed on the land
Date of decision: 18 November 2009
Business line: Indirect Tax

Issue
Is the entity, an Australian government agency, making a taxable supply of land under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) when it grants a long term lease which is subject to the condition that the lessee constructs residential premises on the land?

Decision
Yes, the Australian government agency is making a taxable supply of land under section 9-5 of the GST Act when it grants a long term lease which is subject to the condition that the lessee constructs residential premises on the land.

Facts
The entity is an Australian government agency which carries on an enterprise in relation to supplying land by way of long term lease. The lease is granted for a period of 99 years, subject to the condition that the lessee constructs a house on the land. The annual lease fee is calculated as a percentage of the unimproved value of the land and reviewed annually to increase in line with property values. However, the scheme allows lessees to make a single lump sum payout of the annual lease fee commitment at any time by applying to the relevant authority for a variation of the lease to reduce the annual lease fee payable to a nominal amount. The amount payable to vary the annual lease fee to a nominal amount is based on the unimproved market value of the land at the time of conversion. After the variation, the annual lease fee payable is five cents. The annual lease payments are not a factor in the calculation of the lump sum payout. Under the terms of the annual fee lease, the lessee is required to finance and construct a house on the land within a set period of time of the lease being granted. Annual fee lessees may also be eligible for other forms of home buyer assistance. All vacant land supplied by the entity under the annual fee lease is improved land. The entity is registered for goods and services tax (GST). The supply is made in the course of its enterprise and is connected with Australia.

Reasons for decision
Summary: Under section 9-5 of the GST Act, an entity makes a taxable supply if: However, a supply is not taxable to the extent that it is input taxed or GST-free. Subdivision 40-C of the GST Act deals with sales of residential premises and supplies of residential premises by way of long term lease. Section 195-1 of the GST Act defines a long term lease as a supply by way of lease, hire or licence (including a renewal or extension of a lease, hire or licence) for at least 50 years if: Under section 40-70 of the GST Act, a supply of residential premises (not being new residential premises) by way of long term lease is input taxed. The policy intent in relation to section 40-70 is set out in the Explanatory Memorandum to the A New Tax System (Goods and Services Tax) Bill 1998 which states: 5.166 The supply of a long term lease (that is, a lease of 50 years or more) is not a supply of residential rent. The supply of a long term lease is to be treated as a sale of residential premises and input taxed under Subdivision 40-C. Subsection 40-35(2) and section 40-70 . 5.167 The supply of real property as residential premises and the supply of residential premises by way of a long term lease is input taxed to the extent that the residential premises are not: • 'commercial residential premises' such as hotels, motels etc ('commercial residential premises' is discussed at 6.140); or • newly constructed residential premises. Subsection 40-65(2) and 40-70(2 ) The definition of residential premises in section 195-1 of the GST Act 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. For land to be residential premises, as defined, there must be a building on the land that has the physical characteristics of a residence. Vacant land, of itself, can never have sufficient physical attributes to characterise it as being able to be, or intended to be, occupied as a residence (see paragraph 25 of Goods and Services Tax Ruling GSTR 2000/20 and paragraph 26 of Goods and Services Tax Ruling GSTR 2003/3). It follows that, in the context of the GST Act, a supply of vacant land by way of a long term lease for consideration should be treated the same as a sale of the land as it is a supply of the maximum interest in the land that the Crown has alienated. Under the lease, the interest in the vacant land is supplied to the lessee by the entity when the lease is granted. The consideration for the grant of the lease may be annual lease payments or a combination of both annual lease payments and a single lump sum which has the effect of extinguishing the lessee's liability to future annual lease payments. The interest in the land held by the lessee is not affected by any change to the calculation or the timing of the payment of the consideration. As the interest in the land obtained by the lessee under the lease is the maximum interest the Crown has alienated, the subsequent construction of residential premises on the land by the lessee will not change the nature of the supply made by the entity to the lessee. The entity is registered for GST and the supply of the leasehold interest in the land in Australia is in the course of its enterprise. The entity's supply of the land is not GST-free under Division 38 of the GST Act as the land is improved land when the lease is granted. The entity's supply of the land is not input taxed under Division 40 of the GST Act. Therefore, the entity is making a taxable supply of land under section 9-5 of the GST Act when it grants a long term lease which is subject to the condition that the lessee constructs residential premises on the land.

Legislative references: A New Tax System (Goods and Services Tax) Act 1999 section 9-5 Subdivision 40-C section 40-65 section 40-70 section 195-1
Related public rulings and determinations: Goods and Services Tax Ruling GSTR 2000/20 | Goods and Services Tax Ruling GSTR 2003/3
Other references: Explanatory Memorandum to the A New Tax System (Goods and Services Tax) Bill 1998
Subject references: Goods and services Tax GST property & construction GST lease and real property GST residential premises GST supplies & acquisitions Taxable supply Input taxed supplies