Private ruling: GST and the sale of newly constructed residential premises
Date of advice: 1 September 2015
Published: September 2015

Ruling: Q1: Will the sale of newly completed and strata titled apartments be taxable supplies of new residential premises? | A1: No

Relevant facts and circumstances: You acquired land on ddmmyyyy under a long term lease. You are registered for GST. Commercial premises were located on the land and you occupied a portion of the premises and sublet the balance to commercial tenants. You held the land under a 99 year lease and were permitted to use the land for the following purposes as set out in clause 3 To use the premise only for the purposes of: (i) Offices for approved non-profit association (ii) Offices and conference room for organisations not directly involved in trading insurance banking or business necessitating the sale of goods. On ddmmyyyy you lodged a Development Application (DA). The purpose of the DA was in part to vary the lease purpose clause to permit additional uses and delete clause 3 (b) gross floor area restrictions. Relevantly there was a request to modify the development possibilities to include residential apartments from the first floor and above. Conditional approval for the variation of the Crown lease was granted by the Government Authority on ddmmyyyy. Prior to late January 20XX you spent in excess of $200,000 on the project including payments to architects, engineers and payments for lease betterments. On ddmmyyyy the original title was cancelled and a computer certificate of title was issued. The term of this lease was XX years which was the balance of the original 99 year lease. The purpose clause was modified to include the approvals granted under the development approval process. In mmyyyy you engaged an entity to manage the development and sale of the apartments. When the project is completed you will surrender your lease and submit a strata application and 99 year leases will be issued for each of the apartments. The strata plans will be lodged and you will then sell these apartments to third party purchasers.

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 40-65 and | A New Tax System (Goods and Services Tax) Act 1999 Section 40-75

Reasons for decision: Summary: In this reasoning, unless otherwise stated, • all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) • all reference materials referred to are available on the Australian Taxation Office (ATO) website www.ato.gov.au • all legislative terms of the GST Act marked with an asterisk are defined in section 195-1 of the GST Act Section 9-5 provides that you make a taxable supply if: (a) You make the supply for consideration (b) the supply is made in the course or furtherance of an enterprise that you carry on (c) The supply is connected with the indirect tax zone (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 apartments 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 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 apartments 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). 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 of the GST Act 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 from which the residential premises were created has previously been supplied to you in mid 19YY and mid 20ZZ (under the new 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 your case the: • planning and feasibility work done and • the approvals to develop residential premises meet the requirement that an arrangement was in place between you and the supplier which satisfies paragraph 40-75(2B)(b). 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 you (the recipient of the earlier supply). 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 you and the Government Authority includes the development approval and the Crown lease, which sets 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 Authority. 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 apartments can only occur following the lodgement of a strata leasehold plan and the subsequent grant of the individual strata lot leases. Whilst the new section 40-75(2B) applies in relation to supplies of residential premises occurring on or after late January 20XX, there is an exception whereby certain arrangements which were entered into before late January 20XX will not be subject to section 40-75(2B). The exception is contained at item 12 of Schedule 4 to the Amending Act. | Detailed Reasoning - Application of the Item 12 exception to section 40-75(2B): Item 12 provides that 40-75 (2B) does not apply to a wholesale supply where the supply of the leases occurs after 27 January 2011 and sub item (2) of item 12 is satisfied. Sub item 2 is satisfied when: 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 late January 20XX, 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. Subject to you amending the GST returns where necessary, you have satisfied all the preceding conditions in sub item 12 (1) and sub item (2) of section 40-75(2B) and are considered to be commercially committed to the arrangement in that you expended more than $200,000 before late January 20XX. 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 apartments 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.