Private ruling: GST and sale of property
Published: August 2014

Ruling: Q1: Will your supplies of residential premises be input taxed supplies under section 40-65 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)? | A1: Yes

Relevant facts and circumstances: You are registered for GST. On ddmmyyyy you purchased land by way of long-term lease for $xx. The documentation included a draft Crown Lease for the Land. The Crown Lease was granted on ddmmyyyy, for a term of 99 years commencing on ddmmyyyy. The Crown Lease contains the following relevant clauses: • Purpose: To use the land for one or more purposes, including multi-unit housing, non-retail commercial use, restaurant and shop. • Commencement of development - 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 $xx in accordance with plans and specifications prepared by the Lessee, previously endorsed by the Agency and submitted to and approved in writing by the Authority; • Completion of development - That the Lessee shall within twenty four (24) months from the date of the 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; On ddmmyyyy, you submitted a development application (DA) to construct a mixed use development, which included apartments and a commercial / retail area. The relevant Authority subsequently issued a Notice of Decision (NoD) advising that the DA was approved subject to conditions. This ruling request relates only to the residential premises. Subsequent to the grant of the Crown Lease, you have undertaken a medium-density development on the Land. The development included commercial and residential premises. You conducted development activities on the Land from ddmmyyyy and claimed GST credits on the costs in accordance with Goods and Services Tax Ruling GSTR 2008/2 Goods and Services Tax - development lease arrangements with government agencies (GSTR 2008/2) GSTR 2008/2 was withdrawn on 11 May 2011, following the Full Federal Court decision in Federal Commissioner of Taxation v Gloxinia Investments Ltd [2010] FCAFC 46 ("the Gloxinia case"). You have amended the relevant GST returns to reflect that acquisitions in relation to the construction of the residential premises are no longer creditable. Further, you have repaid all of the input tax credits previously claimed in relation to the residential premises. Upon completion of the residential development, on ddmmyyyy an application was made to register a "Units Plan", (i.e. a strata plan). This registered Units Plan is known as Units Plan Number xxx. Upon registration of the Units Plan (Schedule of Unit Entitlements) on ddmmyyyy, the provisions of the Crown Lease (e.g. residential construction, start and completion dates, etc.) were carried over in Units Plan Number xxx and the individual unit titles were granted to you in respect of registered Units Plan Number xxx. Each unit title has an identical term to the earlier Crown Lease, which exceeds 50 years. You will sell the newly constructed residential premises which are the subject of individual unit titles in Units Plan Number xxx to third party purchasers. Documents provided: • Site specific development conditions • Contract for sale • Notice of decision • Application to register a units plan

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: Summary: In this ruling, • unless otherwise stated, all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (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 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. | Detailed Reasoning - 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: | Detailed Reasoning - 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). | Detailed Reasoning - The Full Federal Court's decision in Gloxinia: 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. | Detailed Reasoning - New subsections 40-75(2B) and 40-75(2C): However, following the Federal Court's decision in Gloxinia , section 40-75 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 1 from which the residential premises were created had previously been supplied to you when you 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. In this case, paragraph 40-75(2B)(b) is satisfied as there is an arrangement between the supplier of the earlier supply (the relevant Authority that granted the 99 year Crown 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 relevant Authority to you. The arrangement between you and the relevant Authority 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 relevant Authority. Whilst the new 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 Schedule 4 to Tax Laws Amendment (2011 Measures No. 9) Act 2012 . 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 exception to section 40-75(2B): The wholesale supply of the unit title leases by the relevant Authority to you occurred on ddmmyyyy. a) Earlier supply to you of the wholesale supply: The premises from which the residential premises were created was previously supplied to you by way of the grant of the Crown Lease on ddmmyyyy. b) Commercially committed to an arrangement You entered into a legally binding arrangement to construct xx dwellings on the Land. As at 27 January 2011, your costs directly related to the development exceeded $200,000. Therefore, you were commercially committed. c) Wholesale supply conditional on specified building or renovation work being undertaken by the recipient of the wholesale supply. Under the arrangement, you constructed a mixed use development, including xx dwellings, on the Land; The DA application which contained the proposal was approved on ddmmyyyy; The wholesale supply of the unit title leases could not occur without the completion of the development; Upon registration of the units plan, the relevant Authority made the wholesale supply of unit title leases to you. d) GST return details You have amended the relevant GST returns to reflect that acquisitions in relation to the construction of the residential premises are no longer creditable. Further, you have repaid all of the input tax credits previously claimed in relation to the residential premises. As you have satisfied all the preceding conditions to the exception to section 40-75(2B) of the GST Act, the premises are not new residential premises. Your supplies of the residential premises will therefore 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 Tax Laws Amendment (2011 Measures No. 9) Act 2012 does not apply, but 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, 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 by way of assignment of a long term lease from you to third party purchasers will be input taxed supplies of residential premises. 1 Note 1 of subsection 40-75(2B) provides that the premises referred to in paragraph 40-75(2B)(a) includes vacant land.