Private ruling: GST and supply of residential premises by way of long term lease
Published: August 2012

Ruling: Q1: Are your supplies of the newly constructed residential premises correctly classified as input taxed supplies? | A1: Yes | Q2: Does the administrative treatment in the fact sheet 'Goods and services tax treatment of new residential premises' apply to your circumstances so that the you are not liable for any penalty or any GIC that may result from the revisions?. | A2: Yes | Q3: If the general interest charges are not remitted under the above fact sheet, will the general interest charges (GIC) be remitted in full in accordance with Law Administration Practice Statement PS LA 2008/3 and PS LA 2007/11 or alternatively remitted to the base rate? | A3: Not applicable

Relevant facts and circumstances: You are a building entity and are registered for goods and services (GST) Prior to 1 January 2011 a short term Holding Lease was granted to you by a Government authority. The land is to be used for the purpose of subdivision and constructing the works and building in accordance with the requirements of the deed. Under the lease and development deed, you agreed to undertake the design construction and completion of certain works at your own cost. The Deed provides for commencement of works, completion of works and list of works. After the completion of the works, subsequent leases were granted to you. The lease term is for a period in excess of 50 years. You commenced settling on contracts for sale of the subsequent leases to purchasers. Upon settlement of the contracts for sale, the subsequent leases were assigned from you to the purchasers. You have lodged amendments to all Business activity statements (BASs) in relation to this project to repay all input tax credits that have been claimed in relation to the supplies of residential premises that you make

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 Section 9-5 | Section 11-5 | Sections 40-65, | Section 40-75.

Reasons for decision: Summary: The new section 40-75(2B) of the GST Act does not apply to disregard the wholesale supply. The supply of the premises was previously subject to a long term lease and therefore section 40-70 of the GST Act applies to make the supply input taxed. | Detailed Reasoning - Detailed reasoning: The GST treatment of a supply of residential premises is considered under sections 40-65 and 40-70 of the A New Tax System (Goods and Services Tax) Act (GST Act) . Under those sections, the sale or long term lease of residential premises to be used predominantly for residential accommodation is input taxed to the extent that the premises are not commercial residential premises or new residential premises. The term 'new residential premises' is defined in subsection 40-75(1) of the GST Act. Of relevant to the case is paragraph 40-75(1)(a) which states: 40-75 Meaning of new residential premises When premises are new residential premises *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; or (b) …; or (c) … Paragraphs (b) and (c) have effect subject to paragraph (a). (2)… *asterisk denotes a defined term in the GST Act The relevant supply in this case is a supply (by way of long term lease) of new land and house package made after 27 January 2011. Whilst it is not disputed that the supply is a supply of residential premises as defined in the GST Act, the issue is whether the supply is a supply of new residential premises and therefore will not be treated as input taxed under sections 40-65 and 40-70 of the GST Act. Under paragraph 40-70(1)(a) of the GST Act, we need to consider whether or not the underlying supply in question (the house and land package) has been previously been subject to a long term lease. | Detailed Reasoning - Background of legislative changes: The GST treatment of development lease arrangement with government agencies (including the supply of residential premises by way of long term lease) was considered in GSTR 2008/2 effective as from the date of issue on 11 May 2008. Under this Ruling, it is considered that the government entity merely sells or leases land (not land and the attached development works) to the developer. Therefore, when the developer supplies the completed residential premises by way of sale or long-term lease, it is making supplies of new residential premises, as the premises 'have not previously been sold as residential premises and have not previously been the subject of a long-term lease'. It follows that the supply is a supply of new residential premises and paragraph 40-65(2)(b) of the GST Act applies to make the supply input taxed. However, in Commissioner of Taxation v Gloxinia Investments (Trustee) [2010] FCAFC 46 (Gloxinia case) the Federal Court held that when strata lot leases are granted to Gloxinia there is a grant or assignment or real property, which effects a supply, pursuant to section 9-10 of the GST Act, by way of long term lease of each of the home units that is the subject of a lot in the Strata Leasehold Plan. The home units when sold by Gloxinia will have previously been the subject of a long term lease and will no longer be new residential premises pursuant to paragraph 40-75(1)(a) of the GST Act and are input taxed supplies of residential premises. On 21 March 2012, the Tax Law Amendment (2011 Measures No 9) Act 2011 (TLAA) received Royal Assent. Of relevance to the case is the new subsections 40-75(2B) and (2C) that apply to supply of residential premises on or after 1 January 2011 (subject to certain exception contained in items 12 and 13 of Schedule 4 to the TLAA). The purposes of the subsection 40-75(2B) are to ensure that the intended outcome of the GST treatment of residential premises is achieved. That is new residential premises constructed under development lease arrangement are treated as taxable supplies rather than input taxed where the premises are sold by developers to home buyers or investors. It is the outcome even though there may have been an 'earlier wholesale supply' of the premises. Under subsection 40-75(2B) of the GST Act the earlier supply is disregarded for the purpose of determining whether residential premises are new residential premises if the residential premises are constructed pursuant to a particular arrangement. The purposes of the subsection 40-75(2C) are to ensure that the granting of individual strata lot leases over newly constructed residential premises upon a registration of a property subdivision plan is not, by itself sufficient to cause those premises ceasing to be new residential premises and to be input taxed when they are subsequently sold or supplied by way of long term lease. The relevant subsections are reproduced as follows: Disregard certain supplies of the premises (2A)… (2B) A supply (the wholesale supply ) of the *residential premises is disregarded as a sale or supply for the purposes of applying paragraph (1)(a) if: (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) an arrangement (including an agreement) was made by: (i) the supplier of the earlier supply, or one or more associates of the supplier; and (ii) the recipient of the earlier supply, or one or more associates of the recipient; and (c) under the arrangement, the wholesale supply was conditional on: (i) specified building or renovation work being undertaken by the recipient of the earlier supply, or by one or more associates of the recipient; or (ii) circumstances existing as specified in regulations made for the purposes of this subparagraph. Note 1: The premises referred to in paragraph (a) could be vacant land. Note 2: For subparagraph (c)(ii), circumstances may be specified by class (see subsection 13(3) of the Legislative Instruments Act 2003 ). Note 3: This subsection does not apply to a supply if certain commercial commitments were in place before 27 January 2011 (see item 12 of Schedule 4 to the Tax Laws Amendment (2011 Measures No. 9) Act 2012). (2C) A supply of the *residential premises is disregarded as a sale or supply for the purposes of applying paragraph (1)(a) if it is made because a *property subdivision plan relating to the premises was lodged for registration (however described) by the *recipient of the supply or the recipient's *associate. Note: This subsection does not apply to a supply if the plan was lodged for registration before 27 January 2011 (see item 13 of Schedule 4 to the Tax Laws Amendment (2011Measures No. 9) Act 2012 ). | Detailed Reasoning - Transitional provisions: However, some supplies of residential premises after 27 January 2011 will not be subject to the amendments if the conditions contained in items 12 and 13 of Schedule 4 to the TLAA are satisfied. Item 12 excludes certain 'wholesale supplies' of residential premises made on or after 27 January 2011, from the application of the new law [ss 40-75(2B)] subject to certain conditions being satisfied in relation to the whole sale supply. Item 13 excludes supplies of residential premises made on or after 27 January 2011 from application of the new law [ss 40-75(2C)] if the supply was made because of a 'property subdivision' was lodged for registration before 27 January 2011 by the developer or their associate. | Detailed Reasoning - The GST treatment of the supplies of residential premises by the Syndicate: You have provided that: · The supplies of newly constructed residential premises were made after 27 January 2011. · The residential premises have been constructed pursuant to a particular arrangement under an arrangement between you (a developer) and the land owner (a Government Authority) whereby the you became entitled to the long term lease hold title in the premises conditional on specified building work being undertaken by you. · The supplies were made by way of long term leases. As the supplies were made after 27 January 2011, the wholesale supply to you by the Government Authority is disregarded in determining whether the residential premises are new residential premises for the purpose of applying paragraph 40-70(1)(a) of the GST Act. The supplies are supplies of new residential premises subject to the exceptions under items 12 and 13 of Schedule 4 to the TLAA. Your supplies will not be subject to the new law if the condition under Item 12 or 13 of Schedule 4 to the TLAA are satisfied. That is, the whole sale supply will be excluded from the application of the new law and the supplies will be considered as have been previously subject to a long term lease. It then follows that paragraph 40-70(2)(b) applies and the supplies are input taxed supply of residential premises. | Detailed Reasoning - Exception - arrangements made before 1 January 2011 to develop premises: (1) Subsection 40-75(2B) of the GST Act does not apply to the wholesale supply of residential premises if: (a) the wholesale supply happens: (i) on or after 27 January 2011; or (ii) before 27 January 2011, and the next supply of the residential premises happens on or after 27 January 2011; and (b) subitem (2) is satisfied in relation to the wholesale supply. (2) This subitem is satisfied in relation to the wholesale supply if: (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 or 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 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. Note The premises referred to in paragraph (a) could be vacant land. | Detailed Reasoning - In your circumstances:: The wholesale supply to you by the Government Authority was made after 27 January 2011. You were commercially committed to an arrangement under which the wholesale supply was or is to be made, immediately before 27 January 2011 The land from which the residential premises were created had earlier been supplied to you under the Holding Lease. (b) Prior to 27 January 2011 you entered to the arrangement with the Government Authority. Under sub-item 12(3) of Schedule 4 to the TLAA the term 'commercially committed' in relation to an arrangement means 'to be a party to the arrangement where the arrangement is legally binding'. The Holding Lease and the Deed are legally binding arrangement that you have entered into immediate before 27 January 2011. The arrangement under the Holding Lease specified that the purpose is to use premises only for the purpose of subdivision and constructing the works and building on accordance with the requirements of the deed (c) The wholesale supply is conditional on specified building works being undertaken by you. (d)Any acquisitions relating to subsequent supply by way of long term lease of the residential premises by you have not been treated as being creditable acquisitions for which entitlements to an input tax credit arises. However, this condition is also satisfied where a GST return has subsequently been amended so that they do not include any input tax credit (or any part) mentioned above. You have treated the supplies made in 2011 as taxable. However, you have amended your relevant GST returns to reflect that the acquisitions are no longer creditable and have repaid all of the input tax credits previously claimed which relates to making of supplies that are input taxed. As all of the conditions in Item 13 of Schedule 4 to the TLAA are met, the wholesale supply is not disregarded (that is the new section 40-75(2B) does not apply). Therefore, you supplies of residential premises are considered to be input taxed supplies. | Summary: Pursuant to the fact sheet 'Goods and services tax treatment of new residential premises' you are not liable for any penalty and general interest charge (GIC) that may result from the revisions to correct the GST treatment of your supplies. | Detailed Reasoning - Detailed reasoning: Announcement of proposed retrospective law changes poses a dilemma for affected taxpayers about whether to follow the existing law or to anticipate proposed changes to the law. The ATO will provide practical guidance setting out the ATO's administrative approach to particular retrospective law change proposals. Following the Royal Assent on 21 March 2011 of the TLAA, the ATO has issued the fact sheet 'Goods and services tax treatment of new residential premises' which provides the ATO's position on penalty and interest on the amendment or revision of GST returns Under the heading 'Administrative treatment' the fact sheet states that: From 21 March 2012, the day of royal assent, each taxpayer will need to review their positions and do one of the following things: · revise their impacted activity statement lodged since 27 January 2011 (the date of effect of the amendments) if they do not anticipate the changes to the law correctly · revise their impacted activity statement lodged since 27 January 2011 (the date of effect of the amendments) if they lodged it in accordance with the law as it was before 21 March 2012 Taxpayers who revise their activity statements within 28 days of 21 March 2012 (that is, before 19 April 2012) will not be liable for any penalty or general interest charge (GIC) that may result from the revision. After this time, the normal ATO administrative treatment of penalties and GIC will apply. The Syndicate did not anticipate the changes to the law and treated the supply as taxable rather than input taxed (due to the application of Item 12 of Schedule 4 to the TLAA). However, the Syndicate revised all relevant activities statements by 19 April 2012 to repay all input tax credits that it has claimed in relation to acquisitions to make input taxed supplies of residential premises. Following the guidance in the fact sheet above, you are not liable for any penalty or any GIC that may result from the revisions. | Summary: Not applicable as the request has been considered in question 2 | Detailed Reasoning - Detailed reasoning: As you are not liable for penalty and GIC arising from the revisions under the administrative treatment in the fact sheet "Goods and services tax treatment of new residential premises, the request in this question does not need to be considered.

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