Private ruling: Goods and services tax - The supply of residential premises under long term leases.
Published: April 2015

Ruling: Q1: Will your supplies of residential premises be input taxed supplies pursuant to section 40-65 of the A New Tax System (Goods and Services Tax) Act 1999 ? | A1: Yes | Q2: Will the Commissioner allow: (a) Entity A, not to not transfer the transactions in its account for the period mmyyyy to ddmmyyyy which relate to the tax law partnership Entity B and (b) the Entity B partnership to report its transactions from ddmmyyyy? | A2: A private ruling cannot be provided on this question.

Relevant facts and circumstances: Entity structure Entity A entered into a contract to acquire a property as a taxable supply. Entity A registered for GST and reported its development acquisitions and supplies. The property comprised two blocks. • Block X which contained commercial premises which it continued to operate and • Block Y which contained commercial premises which it continued to lease to commercial tenants to operate. Entity A acquired the property as bare trustee for the following entities: • Entity C • Entity D and • Entity E Initially blocks X and Y were acquired for a commercial non-residential property development however residential premises have now been developed on a portion of what was then block Y and commercial premises on the balance of the properties. Lease A 99 year lease was issued for blocks X and Y. Under Clause X (Purpose clause) of the Crown Lease with the Commonwealth of Australia (Cwlth) the permitted use of the land included residential use. Development Application (DA) 1 On ddmmyyyy development approval was sought to erect a building with under car parking and associated landscaping. The development was approved and $X was spent for this purpose. However this project was abandoned as it was not feasible to continue. DA 2 On ddmmyyyy a second development application was lodged to develop Block Y. It involved the construction of: • A new multi storey - unit residential building over three levels of parking • Associated Public Works and • Provision for café. Between ddmmyyyy and ddmmyyyy $X plus GST was expended on master plan architectural services, design and documentation for the purposes of building residential units on block Y. The Notice of Decision (NOD) from the government entity was approved subject to certain conditions: • Certain demolition works • Construction residential units with basement car parking and • Associated landscaping, paving, site facilities and other site works. Part 1 of the NOD sets out the conditions of approval. You supplied a copy of the NOD Construction commenced in ddmmyyyy and was completed on ddmmyyyy. The delay in construction was due to a downturn in the market and the time taken to get sufficient presales. The existing lease of blocks X and Y was surrendered and blocks A, B and C were created and a new lease was granted over these blocks. A copy of the draft lease for new block B which is a portion of the old block Y was supplied. The lease of Block B commenced on ddmmyyyy. Block B comprises X% of the original total land area of Blocks X and Y. Block B is the subject of this ruling and construction of the units is now complete and settlements of the units have begun. The Strata Plan was registered during mmyyyy and individual strata lot leases were granted with respect to the individual residential units. Settlements on the completed units began in mmyyyy.

Relevant legislative provisions: 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 | Section 195-1 A New Tax System (Goods and Services Tax) Act 1999

Reasons for decision: Summary: Under subsection 40-65, a sale of real property is input taxed but only to the extent the property is residential premises to be used predominately for residential accommodation (regardless of the term of occupation) however, the sale is not input taxed to the extent that the residential premises are: • commercial residential premises, or • 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. Therefore the supply of the units will be input taxed unless they are new residential premises. The term 'new residential premises' has the meaning given by section 40-75, which in part provides that : (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. In your case, the Strata Plan was registered during mmyyyy and individual strata lot leases were granted to you. When these units are subsequently supplied to end consumers they will be input taxed unless they are new residential premises pursuant to subsections 40-75(2B) and 40-75(2C) of the GST Act. | Detailed Reasoning - Subsections 40-75(2B) and 40-75(2C): The effect of subsections 40-75(2B) and 40-75(2C) is to disregard the wholesale supplies made to you from the government entity 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). For subsection 40-75(2B) to apply to disregard the supply of the residential premises that will be made by way of long term lease of the individual unit title leases, the requirements of paragraphs 40-75(2B)(a), (b) and (c) must be satisfied. ATO Interpretative Decision 2014/19 GST and the supply of newly constructed residential premises under an arrangement entered into prior to 27 January 2011 (ATO ID 2014/19) provides the ATO view in respect of 'this issue. In particular ATO ID 2014/19 considers the application of paragraphs 40-75(2B) (a), (b) and (c). | Detailed Reasoning - Paragraph 40-75(2B): For a supply to be disregarded under 40-75(2B) it must meet all the requirements of (a) to (c). Then if it meets these requirements it must not be exempted by item 12 of this section. 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 you satisfy paragraph 40-75(2B)(a) because the land from which the residential premises were created has previously been supplied to you. Secondly, paragraph 40-75(2B)(b) provides that there must have been an arrangement between the supplier of the earlier supply, or their associate, and the recipient of that earlier supply, or their associate. In your case, the lease of the land on which the units were constructed, allowed to use the land for certain purposes which included residential use. You requested development approval from the government entity to develop the residential units and you received approval to do so. Therefore we consider that there was an arrangement in place between you and the supplier which satisfies paragraph 40-75(b). The third requirement under paragraph 40-75(2B)(c) requires that under the arrangement, the wholesale supply of the residential premises to you is conditional on you undertaking specified building or renovation work. ATO ID 2014/19 states: 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. ATOID 2014/19 also recognises the intent of parties in entering into their development is for the construction and sale of individual residential premises and acknowledges 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. As such, the arrangement entered into between developers and government bodies also includes the lodging of the strata leasehold plan and granting of the individual strata lot leases. Under the arrangement between you, and the government entity it is considered the granting of the individual unit title leases over the residential apartments to you (the wholesale supply) is conditional on you undertaking specified building or renovation work. Therefore, paragraph 40-75 (2B)(c) is satisfied and subsection 40-75(2B) would apply to disregard the supply of the residential premises that occur upon grant of the individual strata lot leases, except for the operation of the transitional provisions in item 12 of Schedule 4 to the Amending Act (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. | Detailed Reasoning - Item 12 exception to section 40-75(2B): 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 the Amending Act. Where the wholesale supply of consequent leases occurs after 27 January 2011, in order to qualify for the exception, the following conditions must be satisfied: 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) Immediately before 27 January 2011, the recipient of the wholesale supply or one of more of its associates were commercially committed to an arrangement; and c) Under the arrangement, the wholesale supply was conditional on specified building or renovation work being undertaken by the recipient of the wholesale supply or by one or more of its associates; and d) No GST return (as amended) given to the Commissioner reports a net amount for a tax period that includes amounts equivalent to the input tax credits that the recipient of the wholesale supply would have been entitled to if its acquisitions relating to the next sale or long term lease of the residential premises were creditable acquisitions. Commercially committed is a defined term. To be commercially committed, in relation to an arrangement, means: a) to be a party to the arrangement, where the arrangement is legally binding; or b) to be the preferred tenderer (however described) in the final step in a bidding or tendering process relating to the arrangement; or c) to have directly made (with associates) acquisitions, having a total GST exclusive value of at least $200,000, in relation to the arrangement; or d) to have directly incurred (with associates) internal direct costs, of at least $200,000, in relation to the arrangement. | Detailed Reasoning - Application of the item 12 exception to section 40-75(2B): The wholesale supply of the unit title leases to you occurred after 27 January 2011, when you lodged your strata plan (property subdivision plan). The item 12 exception to the Amending Act is satisfied in relation to the wholesale supply as: • The premises from which the residential premises were created were previously supplied to you when you acquired the original 99 year Crown Lease. • You were commercially committed to the arrangement prior to 27 January 2011 as you had incurred direct costs in excess of $200,000 in relation to the arrangement. • The arrangement is considered to include the Development Approval setting out the specified works and the new Crown Lease. The registration of the units plan is the wholesale supply and that was conditional on the terms of the development approval and new Crown 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 Land 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) of the GST Act. Accordingly, the premises are not new residential premises. Any supplies of the residential premises by you 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). The transitional provision exception to subsection 40-75(2C) provided by item 13 of Schedule 4 to the Amending Act does not apply. However 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 located at Block B by way of assignment of a long term lease from you to third party purchasers will be input taxed supplies of residential premises. | Detailed Reasoning - Question 2: This question is not in respect of the application of a question of GST law. Therefore we are unable to provide a ruling on this question.