Private ruling: Goods and service tax (GST) and residential premises
Published: November 2013

Ruling: Q1: Was your supply of the Property an input taxed supply of residential premises? | A1: Yes. | Q2: If the answer to question 1 is yes, will the Commissioner of Taxation (Commissioner) exercise his discretion under section 105-65 of Schedule 1 to the Taxation Administration Act 1953 (TAA) to refund the GST you paid in relation to the sale of the Property? | A2: No, the Commissioner will not exercise his discretion under section 105-65 of Schedule 1 to the TAA to refund the GST you paid in relation to the sale of the Property.

Relevant facts and circumstances: You are registered for GST and conduct a business of housing construction. You entered into a Contract for Sale (Purchase Contract) to acquire the leasehold interest in the Property from the Government Agency under the margin scheme. You have provided a partial copy of the Purchase Contract (without Annexure Clauses). The construction of the home on the property was completed by you prior to the granting of the Crown Lease. The Crown Lease for the property was granted to you by the Government Agency. The home was not leased or occupied during your period of ownership. It was used as a display home. You acted in accordance with Goods and Services Tax Ruling GSTR 2008/2 Goods and services tax: development lease arrangements with government agencies (now withdrawn) and you treated the supply of the property as a taxable supply under the margin scheme. You entered into a Contract for Sale (Sale Contract). You have provided a copy. The contract of sale states that the price is GST inclusive and that you and the purchaser agree to apply the margin scheme to the supply. The property settled. The property sale was made under the margin scheme. The margin was calculated. You remitted GST to the Australian Taxation Office. The purchaser was not registered for GST. You are of the view that the supply of the Property under the sale contract was an input taxed supply and not a taxable supply of new residential premises. You state that the Commissioner should exercise his discretion to refund the overpaid GST. You have not refunded the overpaid GST to the purchaser. Your contentions You contend that the price of a residential property is determined by the market and you did not have any capacity to increase the price on account of the likely GST liability. You contend that the non-registered purchaser of a residential property is not concerned with the GST status of a property they are seeking to buy. You contend that the purchaser of a residential property will have regard to factors such as: · The location of the property and the neighbourhood. · The characteristics of the property. · The condition of the property. · The price of other properties available for sale. · The historical price of property sales in the same geographical area. You contend that the overpayment of GST was a direct result of the actions of the Commissioner as a consequence of you following the Commissioner's position as set out in GSTR 2008/2. The Commissioner's position was subsequently found to be incorrect in the Gloxinia case. You state that it was not possible for you to pass on the cost of the GST to the purchaser under the sale contract as the sale price for residential properties is determined solely by the market forces. You contend that the amount of GST is not an amount that can be passed onto the purchaser under the sale of residential premises, it is a cost incurred solely by the vendor. You contend that the cost of the GST was borne solely by you. You contend that to refund you the overpaid GST would not result in an asymmetrical revenue outcome given the purchaser was not entitled to claim an input tax credit on the acquisition of the property.

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 9-40, | A New Tax System (Goods and Services Tax) Act 1999 Subdivision 40-C, | 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 Section 195-1, | A New Tax System (Goods and Services Tax) Act 1999 Section 40-75, | A New Tax System (Goods and Services Tax) Act 1999 Subsection 40-75(2), | A New Tax System (Goods and Services Tax) Act 1999 Paragraph 40-75(1)(a) and | Taxation Administration Act 1953 Section 105-65 of Schedule 1.

Reasons for decision: Summary: In this ruling, please note: · All legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) unless stated otherwise. · All terms marked by *asterisk are a defined term in the GST Act unless stated otherwise. 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. In your case, the supply of the property was made for consideration, the supply was made in the course of your housing construction enterprise, the supply is connected with Australia as the property is located in Australia and you are registered for GST. As the supply was not GST-free, the only remaining issue to be determined is whether your supply was input taxed. Subdivision 40-C provides for input taxed supplies of residential premises. The provisions within subdivision 40-C have been amended since the supply of the property. Therefore, we must consider the provisions as they stood at the time of the supply. All references within subdivision 40-C are references to the GST Act taking into account amendments up to the time. Under subsection 40-65(1), a sale of residential premises to be used predominately for residential accommodation (regardless of the term of occupation) is input taxed. However, subsection 40-65(2) states that the supply 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 information submitted, the premises is residential premises, is not commercial residential premises, and was not used for residential accommodation before 2 December 1998. However, we must establish if the supply of the residential premises was a supply of new residential premises. | 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; … Further, subsection 40-75(2) provides, amongst other things, that the premises are not new residential premises if at least five years have passed from when the premises first become residential premises. If paragraph 40-75(1)(a) applies, subject to section 40-75(2), the supply will be new residential premises and therefore will be a taxable supply under section 9-5. In this case, at the time of the sale of the property from you to the recipients, five years had not passed from when the premises first became residential premises. However, it must be determined if the residential premises supplied to the purchaser had ever been the subject of a long-term lease. The term 'long-term lease' is defined in section 195-1, which states: long-term lease means 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: (a) at the time of the lease, hire or licence, or the renewal or extension of the lease, hire or licence, it was reasonable to expect that it would continue for at least 50 years; and (b) unless the supplier is an *Australian government agency - the terms of the lease, hire or licence, or the renewal or extension of the lease, hire or licence, as they apply to the *recipient are substantially the same as those under which the supplier held the premises. We must establish if there was a supply of residential premises by way of long term-lease from the the Government Agency to you with the granting of the Crown Lease. The Commissioner of Taxation issued Decision Impact Statement Commissioner of Taxation v Gloxinia Investments Ltd atf Gloxinia Unit Trust (DIS) on 21 April 2011. In relation to the sale of newly constructed residential premises, the DIS states: | Detailed Reasoning - Sale of newly constructed residential stratum unit: · The grant by a government agency, to a developer, of a long-term lease with respect to a newly constructed residential unit that is an individual lot in a strata leasehold plan will give effect to a supply of that residential unit to the developer. A subsequent sale of the residential unit, by way of assignment of the long-term leasehold interest, will be an input taxed supply of residential premises. In accordance with the decision, at the time of the subsequent sale, the residential unit will not be new residential premises because it will have previously been the subject of a long term lease. In your case, under the arrangement between you and the Government Agency consisting of the Purchase Contract and Deed, you were required to construct the display home before the Government Agency would grant the Crown Lease to you. As such, subsequent to you satisfying the conditions under the arrangement, the Government Agency granted the Crown Lease to you. This was the first supply of residential premises by way of long-term lease. Therefore, your subsequent supply of the residential premises by way of assignment of the long-term lease interest, from you to the purchaser, was an input taxed supply as the premises had previously been the subject of a long-term-lease. | Detailed Reasoning - Question 2: Under the general rules the Commissioner is required to give a refund or apply that amount in accordance with the running balance account provisions in Divisions 3 and 3A of Part IIB of the Taxation Administration Act 1953 (TAA). However, the requirement to give a refund of overpaid GST is subject to section 105-65 of Schedule 1 to the TAA which modifies the general rules so that the Commissioner need not give a refund or apply that amount if an entity overpaid its net amount or an amount of GST where the requirements of the section are satisfied. Subsection 105-65(1) of Schedule 1 to the TAA states: (1) The Commissioner need not give you a refund of an amount to which this section applies, or apply (under Division 3 or 3A of Part IIB) an amount to which this section applies, if: (a) you overpaid the amount, or the amount was not refunded to you, because a *supply was treated as a *taxable supply, or an *arrangement was treated as giving rise to a taxable supply to any extent; and (b) the supply is not a taxable supply, or the arrangement was treated as giving rise to a taxable supply, to that extent (for example, because it is *GST free); and (c) one of the following applies: (i) the Commissioner is not satisfied that you have reimbursed a corresponding amount to the recipient of the supply or (in the case of an arrangement treated as giving rise to a taxable supply) to an entity treated as the recipient; (ii) the recipient of the supply, or (in the case of an arrangement treated as giving rise to a taxable supply) the entity treated as the recipient, is *registered or *required to be registered. | Detailed Reasoning - Whether subsection 105-65(1) of Schedule 1 to the TAA applies to your circumstances: The restriction on refunds of overpaid GST under section 105-65 of Schedule 1 to the TAA will apply if all three of the following conditions are satisfied: · there was an overpayment of GST · a supply was treated as a taxable supply when it was not a taxable supply or was taxable to a lesser extent, and · either the recipient has not been reimbursed a corresponding amount of the overpaid GST and/or the recipient of the supply is registered or required to be registered for GST. Miscellaneous Tax Ruling MT 2010/1 Miscellaneous tax: restrictions on GST refunds under section 105-65 of Schedule 1 to the Taxation Administration Act 1953 (MT 2010/1) provides the view of the Commissioner on section 105-65 of Schedule 1 to the TAA. Paragraph 20 of MT 2010/1 explains the meaning of 'overpaid'. In the context of section 105-65 of Schedule 1 to the TAA, 'overpaid' means the amount that has been remitted must be in excess of what was legally payable on the particular supply in the relevant tax period prior to taking into account or applying section 105-65 of Schedule 1 to the TAA. You remitted GST on the sale of the Property under the margin scheme when the supply was in fact not a taxable supply but an input taxed supply of residential premises. It follows that you remitted more GST than was legally payable and that there has been an overpayment of GST. Paragraph 21 of MT 2010/1 explains the meaning of 'treated' as a taxable supply. For GST purposes it is up to the supplier to determine whether a supply is a taxable supply and act accordingly. You treated the supply of the residential display house as a taxable supply when you mischaracterised the supply of the residential display house as a taxable supply and remitted GST to the ATO when the supply was not a taxable supply. You have calculated the GST payable under the margin scheme and remitted the GST to the ATO You have advised that the purchasers/recipients are not registered for GST purposes and that they have not been reimbursed for any amount corresponding to the GST overpaid. As the three conditions are satisfied, section 105-65 of Schedule 1 to the TAA applies and the Commissioner has no obligation to pay a refund that would otherwise be payable under section 8AAZLF of the TAA. However, paragraph 27 of MT 2010/1 explains the circumstances in which the Commissioner may choose to pay a refund even though the conditions in paragraphs 105-65(1)(a), (b) and (c) of Schedule 1 to the TAA are satisfied. Further, paragraphs 116 and 117 of MT 2010/1 state: 116.The operation of section 105-65 to deny the requirement to pay refunds that would otherwise be payable is not discretionary.…The words of the provision say that where the section applies the Commissioner need not give you a refund of the amount or apply the amount under the relevant RBA provisions…. 117. The commissioner considers that the words 'need not', in the context of section 105-65, do not prohibit the giving of a refund and accordingly the Commissioner has a discretion to pay a refund in appropriate circumstances…. This view is supported by the decision in Luxottica Retail Australia Pty Ltd v FC of T 2010 ATC 10-119 at 57 when the AAT referred to 'residual discretion'. The question then becomes whether, in these circumstances, the discretion to pay the refund to the applicant should be exercised. Paragraph 128 of MT 2010/1 provides some guiding principles to consider when exercising the discretion. It states: 128. Section 105-65 does not specify what factors are relevant to the exercise of this discretion. In exercising the discretion, the Commissioner will have regard to the following guiding principles: (a) The Commissioner must consider each case based on all the relevant facts and circumstances. (b) The Commissioner needs to follow administrative law principles such as not fettering the discretion or taking into account irrelevant considerations. (c) The Commissioner must have regard to the subject matter, scope and purpose of section 105-65. As explained in paragraph 127 of this Ruling, it clear from the scope and purpose that section 105-65 is designed to prevent windfall gains to suppliers and to maintain the inherent symmetry in the GST system and is based on the underlying design feature and presumption of the GST system that the cost of the GST is ultimately borne by the non registered end consumer. (d) The discretion should be exercised where it is fair and reasonable to do so and must not be exercised arbitrarily. The circumstances in which the Commissioner considers it may be fair and reasonable to exercise the discretion include, but are not limited to, the following: (i) The overpayment of GST arises as a direct result of the actions of the Commissioner and the taxpayer has not had the opportunity to factor in the cost of the GST or otherwise pass on the GST, for instance through a gross up clause. For instance, an entity had treated its supply as GST-free, the Commissioner subsequently treats the supply as taxable, the entity pays an amount for GST on the supply, but the Commissioner later reverses that decision. In such circumstances it would not be necessary for the supplier to refund the recipient of the supply whether the recipient is registered or unregistered. (ii) The taxpayer can demonstrate that, for other reasons, they did not otherwise pass on the GST. As mentioned in Avon , 'it is for the taxpayer to establish a circumstance out of the ordinary, namely that the amount of the overpayment ... has not been passed on'. (iii) The supplier is able to satisfy the Commissioner that an amount corresponding to the refund will be, or has been, passed on to the party that ultimately bore the cost of the overpaid GST. In a business to business transaction it is generally not enough simply to show that the supplier refunded the immediate business recipient. A supplier must be able to prove that an unregistered end consumer is the one ultimately compensated. Where the registered recipient is unable to claim input tax credits or is only allowed to partially claim input tax credits, then, before the Commissioner would pay a refund to the supplier, the supplier would have to refund the registered recipient and the registered recipient would have to show it either did not pass the foreseeable cost (that is denied input tax credits) to the next recipient or that they have also refunded that amount to the next recipient and the entity that ultimately has borne the cost is compensated. (e) The discretion would generally not be exercised where it produces an unreasonable result, for example an asymmetrical revenue outcome. This could occur where, for example, a supplier reimburses a registered recipient for the overpaid GST but the Commissioner is unable to reclaim the overclaimed input tax credit from the recipient. Of relevance to your circumstances is the guiding principle that the Commissioner must have regard to the subject matter, scope and purpose of section 105-65 which is explained in paragraph 127 of MT 2010/1 as follows: …the provision is designed to prevent windfall gains to suppliers and to require the supplier to ensure that any refund ultimately compensates the person or entity who ultimately bore the cost. In relation to a refund of overpaid GST, the potential or otherwise for a windfall gain, the requirement to ensure the refund compensates the person or entity that ultimately bore the cost and the potential to disturb the symmetry envisaged by the GST system, are factors that must be taken into account in relation to the exercise of the discretion. The Explanatory Memorandum to the Tax Law Amendment (2008 Measures No 3) (which introduced the current version of section 105-65) adds further: 2.2 Without the restriction on refund requirement, there is a potential for windfall gain to arise to businesses that receive the refund of GST but have not borne the incidence of tax. It follows from the above that it is important when exercising the discretion to determine who has borne the burden of the GST. That is, whether a supplier has passed on the GST to the recipient. In answering this question, the Commissioner takes into consideration the factors outlined in paragraphs 9-12 of Avon Products Pty Ltd v Commissioner of Taxation (2006) HCA 29 (Avon). It is considered that the guidance provided by the Avon case about who bears the burden of the indirect tax impost applies equally in the GST context given the similarity in the sales tax and GST regimes in that respect. Those paragraphs are reproduced as follows: 9. That sales tax is expected to be passed on depends upon the circumstance that sales of goods occur within an economy geared to making profit. It is the profit-making motive of business which, in the nature of things, generally results in sales tax being passed on. This is because, leaving aside rare cases where sales tax is separately identified and superadded to the invoice price after sale, sales tax can only be passed on indirectly through the price mechanism. In a profit-making structure, businesses will set prices so as to ensure at least that all foreseeable costs are recovered, anything above this being conceptualised as a margin of profit. Because sales tax is levied upon the vendor prior to the ultimate sale by retail in the manner explained by Dixon J in Ellis & Clark[, it forms part of the cost structure of doing business. There is nothing extraordinary in the proposition that in the usual course of things sales tax will be passed on. 10. As has been explained, it is for the taxpayer to establish a circumstance out of the ordinary, namely that the amount of the overpayment of sales tax has not been passed on. Where the whole or part of the economic burden of sales tax may have been passed on indirectly through prices, the inquiry in this regard is likely to be complex. The complexity arises because prices may be set with reference to a wide range of factors (including considerations of cost of production, competitive advantage, operational cash flow and customer goodwill). However the starting point must be the seller's pricing policy and practice. 11. In this way, the question is to be approached with reference to the actual conduct of the seller in setting prices based upon its actual knowledge at the relevant time. That knowledge includes the belief that the component of sales tax which later proves to have been an overpayment is a real cost of doing business. Accordingly, it is unsurprising that a seller's intention, whether subjective or objectively ascertained, will generally be to pass the burden of the impost on to the purchaser. Since the onus of proof lies upon the taxpayer, it will be for it to establish that a price which is set so as to ensure that it recovers its cost does not include the economic burden of the sales tax. 12. Additionally, once it is appreciated that it is in the nature of sales tax to be passed on, there is nothing remarkable in the consequence that proof to the contrary will occur comparatively seldom. …. But, given what has been said above, realism requires a recognition that in the ordinary course sales tax will have been passed on. Paragraph 126 in MT 2010/1 sets out the framework for the exercise of the discretion and provides, that the presumption is that in an economy geared to making a profit, the supplier will pass on to the recipient all the costs incurred in the making of the supply, including GST. This means that the presumption is that the cost of any GST liability is a foreseeable cost that will be passed on as part of the cost recovery and pricing structure of the supplier in the usual course of doing business. It is for the supplier to prove that the GST has not been passed on. The case must be assessed on its merits to determine if the GST has been passed on to the recipient. In your case, the contract of sale states that the price for the supply of the Property is GST inclusive and that the buyer and seller agree to apply the margin scheme. You believed from the outset that the supply was taxable and therefore it is considered that you would have factored in the cost of the GST when setting the sale price for the Property. In other words, you passed the cost of the GST on to the recipient. The fact that the contract of sale specifically refers to GST (as being included in the price) and you and the purchaser agreed to apply the margin scheme to the sale. It is reasonable to conclude based on this alone that when you supplied the property, that GST is a component of the price paid. It is also reasonable to conclude that this would be your belief and the belief of the purchasers at the time the supply was made. In the absence of other evidence to the contrary, the Commissioner considers that the basis used to arrive at the price would have taken into account the fact that GST was normally payable. It is considered that GST has been included in the price charged to the purchaser and accordingly has been borne by the recipient (as intended by the GST regime). Further, the overpayment of GST did not arise as a direct result of the actions of the Commissioner. You treated the supply as taxable and set the price inclusive of GST. The Commissioner did not change the treatment of the supply from an input taxed supply to a taxable supply thereby not giving you the opportunity to factor in the cost of the GST. You have contended that the price of a residential property is determined by the market and you did not have any capacity to increase the price on account of the likely GST liability. The market price may have effect on your profit. However, when you have determined to make a supply for a certain price and where the price includes GST, you have a GST liability. Under the GST regime, the price (market price or not) is the consideration you receive to make the supply, you and the recipient understood that the supply is taxable and the price is GST inclusive. It is the prima facie fact that the GST has been passed on. You have contended that the non-registered purchaser of a residential property is not concerned with the GST status of a property they are seeking to buy. It is considered that the issue of passing on does not relate to whether the recipient has concern on the GST status of the supply. It is relevant that the supply is believed to be taxable, GST has been included in the price. To provide a refund to you would therefore result in a windfall gain contrary to the underlying purpose of section 105-65 of Schedule 1 to the TAA. Under paragraph 128 of MT 2010/1, the Commissioner must take this into account in relation to the exercise of the discretion. In conclusion, the Commissioner is satisfied that you have overpaid an amount because you treated a supply as a taxable supply when the supply was not a taxable supply. However, the Commissioner is not satisfied that you reimbursed a corresponding amount to the recipient of the supply and so need not give you a refund. Section 105-65 of Schedule 1 to the TAA contains a discretion which the Commissioner may exercise in certain limited circumstances to allow the refund. However, your circumstances do not warrant the exercise of the discretion. The Commissioner will not exercise his discretion under section 105-65 of Schedule 1 to the TAA to refund any incorrectly remitted GST by you for the supply of the Property.