ATO ID 2014/19: GST and the supply of newly constructed residential premises under an arrangement entered into prior to 27 January 2011
Date of decision: 27 May 2014
Business line: Interpretative Assistance, Indirect Tax

Issue
Do newly constructed residential units developed and built by an entity under an arrangement entered into with a government body, that the entity was 'commercially committed' to as at 27 January 2011, cease to be new residential premises upon the granting of new individual strata lot leases over each individual unit?

Decision
Yes, the newly constructed residential units will cease to be new residential premises for the purposes of paragraph 40-75(1)(a) of A New Tax System (Goods and Services Tax) Act 1999 (GST Act). [1] The granting of a new individual strata lot lease for each residential unit gives rise to a supply of residential premises. Subsection 40-75(2B) does not disregard this supply for the purposes of applying paragraph 40-75(1)(a), as the transitional exception [2] to subsection 40-75(2B) applies.

Facts
The entity is registered for GST and is carrying on a property development enterprise. In January 2010 the entity was issued a 99 year Crown lease (Crown lease) over a large block of land by the relevant government body. The terms of the Crown lease include a 'building and development' provision that required the entity to commence the approved development on the land within 12 months and to complete that development within 36 months of the date of the grant of the Crown lease. In March 2010 the entity lodged a development application with the government body to construct multiple residential units on the land. The government body approved the development application in April 2011. As at 27 January 2011 the entity had undertaken significant works directly related to the development, with acquisitions in excess of $200,000. In June 2012 the construction of the residential units was completed and the entity lodged a strata leasehold plan for registration with the government body. The strata leasehold plan was registered on 1 July 2012 and individual 99 year strata lot leases were granted to the entity with respect to each of the individual residential units comprising the development.

Reasons for decision
Summary: 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. | Detailed Reasoning - 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 further provisions which provide that 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). | Detailed Reasoning - Subsection 40-75(2B): Where the requirements of subsection 40-75(2B) are met, a supply (the wholesale supply) of newly constructed residential premises will be disregarded for the purposes of applying paragraph 40-75(1)(a), and a subsequent supply of those premises is a supply of new residential premises. 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 [3] from which the residential premises were created have previously been supplied to the entity when it 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 supplier of the earlier supply (the government body that granted the 99 year Crown lease) and the recipient of that earlier supply (the entity). 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, the entity). 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 the entity and the government body includes the 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 government body. 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 Tax Laws Amendment (2011 Measures No. 9) Act 2012 (item 12). Subject to certain conditions being met, item 12 provides that subsection 40-75(2B) does not apply to supplies of residential premises made on or after 27 January 2011 if, prior to 27 January 2011, the recipient of the supply was 'commercially committed' to an arrangement. In this case there was an earlier supply [4] of the premises through the Crown lease. The entity was commercially committed to the arrangement, having undertaken significant work and made acquisitions in excess of $200,000 before 27 January 2011. Therefore, item 12 applies so that the granting of the individual strata lot leases over the individual residential units is not disregarded for the purposes 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 the entity of the residential units to home owners or investors will be input taxed supplies. | Detailed Reasoning - 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). However, 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. [5] Accordingly, although both subsections 40-75(2B) and 40-75(2C) apply to this supply, the combined effect of subsection 40-75(2C) and item 13 do not prevail to prevent the exception provided by the transitional provision of item 12 from applying. This is because regard must be had to the overall intent and operation of all the transitional provisions relating to these legislative amendments, [6] which is to ensure that taxpayers that entered into arrangements prior to the legislative amendments relying on the law as stated in Gloxinia would not be disadvantaged. [7] Therefore, the subsequent supply by the entity of the residential units to home owners and investors will be input taxed supplies.

Legislative references: A New Tax System (Goods and Services Tax) Act 1999 section 40-75 paragraph 40-75(1)(a) subsection 40-75(2B) paragraph 40-75(2B)(a) paragraph 40-75(2B)(b) paragraph 40-75(2B)(c) subsection 40-75(2C)
Case references: Federal Commissioner of Taxation v. Gloxinia Investments Ltd [2010] FCAFC 46 2010 ATC 20-182 75 ATR 806
Related public rulings and determinations: GSTR 2003/3
Other references: Explanatory Memorandum to the Tax Laws Amendment (2011 Measures No. 9) Bill 2011
Subject references: goods and services tax GST lease and real property GST long term lease GST new residential premises GST residential premises GST sale of real property