Private ruling: GST and long term strata lease and refund of GST
Published: May 2013

Ruling: Q1: Are the supplies of the residential premises in the development an input taxed supply under Subdivision 40-C of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)? | A1: Yes. However, only for supplies of real property where settlement is after 27 January 2011 and where you have first repaid the input tax credits claimed. | Q2: Will the Commissioner exercise his discretion under section 105-65 of the Taxation Administration Act (TAA) 1953 and refund the over remitted GST? | A2: No.

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. · You are a company registered for goods and services tax (GST). · You carry on a residential construction business consisting of a large proportion of contract housing and smaller portion of speculative housing. · You purchased land in 2007 from a Government Agency. You entered into a binding lease that required you to erect an approved development. · The arrangement under the lease specifies that within a certain time period from the Commencement Date or within such further time as may be approved in writing by the Government Agency, you must commence construction of an approved development on the Land as approved by the Government Agency at a cost of not less than a specified sum per dwelling; · The wholesale supply was conditional on specified building works being undertaken and completed by you because a number of clauses of the lease have specified the works required to be completed by you prior to the grant of the wholesale supply. · Other relevant terms of the Lease are as follows: COMMENCEMENT OF DEVELOPMENT 3(a) 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 laud at a cost not less than the sum of covenant dollars in accordance with plans and specifications prepared by the Lessee and previously submitted to and approved in writing by the Authority; COMPLETION OF DEVELOPMENT 3(b) 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; PURPOSE 3(c) To use the land for the purpose of multi-unit housing for dwellings; · A property subdivision was lodged for registration prior to January 2011. · You have developed the land through the construction of strata titled residential units. · Construction began on the development in the 2009/10 financial year. · You have claimed input tax credits (ITC) throughout construction and the GST liability was remitted upon settlement. · There were not any deeds or sub-agreements between you and the supplier. · You treated the sale of the residential properties as taxable supplies with GST calculated under the margin scheme. · You claimed input tax credits relating to the development and sale of the residential premises. · You have not repaid any of the claimed input tax credits to the Australian Taxation Office (ATO). · You have not revised your Activity Statements (AS) to reflect that you were making supplies that were input taxed.

Relevant legislative provisions: All references are to the A New Tax System (Goods and Services Tax) Act 1999 : Section 9-5 | Section 40-65 | Section 40-75 | Taxation Administration Act 1953 Divisions 3 and 3A of Part IIB | Sections 105-65 to the Schedule 1 | Your contentions | The circumstances and outcome of the issue as decided by the Full Federal Court in Commissioner of Taxation v Gloxinia Investments (Trustee) [2010] FCAFC 46 (Gloxinia case) are analogous to yours. Both entities acquired land under short-term lease, developed residential units, surrendered the short-term lease to the government agency in exchange for long term leases over the new premises, and then subsequently sold the long-term leases to third parties.

Reasons for decision: Summary: The supplies of the newly constructed residential premises in the development are taxable supplies with the exceptions of Units A, B and C which are eligible to be treated as input taxed supplies. Subsection 40-75(2B) allows you to treat the supplies as input taxed, but only where you first repay the input tax credits already claimed. Subsection 40-75(2C) does not apply to make the supply input taxed, as the property subdivision plan was lodged for registration before 27 January 2011. | 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 relevance to this case is paragraph 40-75(1)(a) which states: 40-75 Meaning of new residential premises | Detailed Reasoning - 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; 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 of a new land and house package by way of assigning a long term lease made subsequent to December 2010. Whilst it is accepted 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 that would 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 the underlying supply in question (the house and land package) has previously been subject to a long term lease. Goods and Services Ruling 2008/2 Goods and services tax: development lease arrangements with government agencies (GSTR 2008/2) (issued on 11 May 2008) provided the view of the Tax Office on the supply of newly constructed residential premises under a development lease. Under this Ruling, it was 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 followed 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 taxable. Following the decision in the Gloxinia case handed down by the Federal Court on 24 May 2010, the Assistant Treasurer announced, in a media release dated 27 January 2011, that the GST law would be amended to ensure that it achieves the intended policy outcome for the GST treatment of residential premises (that is, that GST is payable on the full value added to premises by developers). Following the Gloxinia case, the ATO issued a Decision Impact Statement (DIS) on 21 April 2011 providing the amended view of the Tax Office in relation to this decision. In the DIS the Commissioner considers, amongst other things, that: To the extent that the land comprises residential premises, the developer does not make a creditable acquisition in acquiring the land from the land owner. This is because the acquisitions relate to the developer's subsequent sales of the premises to home buyers and investors and, in accordance with the decision, those subsequent sales are input taxed supplies of residential premises. Therefore, following the Court decision in the Gloxinia case, the Tax Office confirmed that the correct decision was the input taxed treatment of the supplies. However, this confirmation was subject to the proposed amendments announced in the Assistant Treasurer's press release. The DIS advises that the press release indicates that, when enacted, the amendments will have some retrospective application. However, they will contain a transitional provision to ensure that taxpayers who have entered into arrangements on a basis consistent with the Court's findings in Gloxinia, prior to the date of the press release, are not disadvantaged. GSTR 2008/2 was later withdrawn (on 11 May 2011) as a result of the Court decision and the anticipated amendments to the legislation. On 21 March 2012, the Tax Law Amendment (2011 Measures No 9) Act 2011 (TLAA) received Royal Assent. Of relevance to this case are the new subsections 40-75(2B) and (2C) that apply to supply of residential premises on or after 27 January 2011 (subject to certain exceptions contained in items 12 and 13 of Schedule 4 to the TLAA). The purpose of subsection 40-75(2B) is to ensure that the intended GST treatment of residential premises is achieved. That is, that new residential premises constructed under development lease arrangements are treated as taxable supplies rather than input taxed where the premises are sold by developers to home buyers or investors. This is the intended 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 purpose of subsection 40-75(2C) is 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 to cease to be new residential premises (and to therefore be input taxed) when they are subsequently sold or supplied by way of long term lease. Under transitional provisions 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 wholesale supply. Item 13 excludes supplies of residential premises made on or after 27 January 2011 from the application of the new law (ss 40-75(2C)) if the supply was made because a 'property subdivision' was lodged for registration before 27 January 2011 by the developer or their associate. The term 'property subdivision plan' is defined in section 195-1 of the GST Act to mean: property subdivision plan means a plan: (a) for the division of *real property; and (b) that is registered (however described) under an *Australian law. Note: Examples are strata title plans and plans to subdivide land In your circumstances: · You purchased the land from Government Agency in 2007. · You lodged an Application for property subdivision registration in December 2010 · The arrangement under the lease specifies that within twelve (12) months from the Commencement Date or within such further time as may be approved in writing by the Government Agency you must commence construction of an approved development on the Land as approved by the Government Agency at a specified cost per dwelling; · The wholesale supply was conditional on specified building works being undertaken and completed by you because a number of clauses of the lease have specified the works required to be completed by you prior to the grant of the wholesale supply. · Other relevant terms of the Lease are as follows: | Detailed Reasoning - COMMENCEMENT OF DEVELOPMENT: 3(a) 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 laud at a cost not less than the sum of covenant dollars in accordance with plans and specifications prepared by the Lessee and. previously submitted to and approved in writing by the Authority; | Detailed Reasoning - COMPLETION OF DEVELOPMENT: 3(b) 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; PURPOSE 3(c) To use the land for the purpose of multi-unit housing for dwellings; | Detailed Reasoning - Units 7, 10 and 12: On the facts provided Unit A, Unit B and Unit C settled on or after 27 January 2011. Therefore the supply of these units occurred after 27 January 2011. | Detailed Reasoning - 40-75(2B): This section broadly provides that a previous supply (the wholesale supply) of residential premises (including vacant land) is disregarded as a supply for the purposes of paragraph 40-75(1)(a) if the premises/land from which the residential premises are created had earlier been supplied (to the recipient of the wholesale supply) subject to an arrangement whereby specified building or renovation work is to be undertaken (by the recipient). In those circumstances, as the wholesale supply would be disregarded, the premises when supplied (again) are still new residential premises and are therefore not input taxed. Supplies of such premises are taxable supplies. However, subsection 40-75(2B) does not apply to a supply if certain commercial commitments were in place before 27 January 2011. The requirements for this exemption are considered in detail in item 12 of Schedule 4 to the TLAA 2012 (item 12). Under item 12, subsection 40-75(2B) does not apply if a) the wholesale supply happens on or after 27 January 2011; or b) the wholesale supply happens before 27 January 2011 and the next supply of the residential premises happens on or after 27 January 2011 and certain other requirements (as detailed below) are met. We consider that scenario (ii) applies in your circumstances because the wholesale supply (by way of long term lease) to you occurred in 2007. Your supplies of the newly constructed residences happen after 27 January 2011. Where the following requirements are met subsection 40-75(2B) does not apply: 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 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. In your circumstances the following facts apply: a) the land on which you constructed the units was supplied to you earlier under a long term lease, b) in 2007 you entered into a binding Lease that remained in force immediately before 27 January 2011 (and thereafter), c) as part of the conditions of the Lease that you entered into the 'wholesale supply' was conditional on specified building or renovation work being commenced by a certain date and completed by a certain date in accordance with specified clauses of the lease, and d) currently your GST returns as already reported include input tax credits that you would have been entitled to if your acquisitions relating to your on-supply of the premises were creditable acquisitions. You have advised that you have claimed all ITCs up to and including the date of this private ruling request. As your returns have not yet been amended all the requirements for the exception to apply are not satisfied. Therefore based on the current facts subsection 40-75(2B) does apply. This means that the wholesale supply to you is disregarded. Therefore as the supply is disregarded your on-supply of the premises is treated as if it has not previously been the subject of a long-term lease, and therefore the residential premises are new residential premises (section 40-75(1)(a)). The result is that based on the current facts presented the supply of the (new) residential premises is not input taxed. That is, the supply is taxable. However, you have advised that in the event that the ruling determines that your supplies are input taxed supplies, you will review and amend any prior GST returns that have been lodged in relation to the development of the land (for Units A, B and C) to ensure that all acquisitions (apportioned for Units A, B and C only) are treated as not being creditable acquisitions. We note that in that factual scenario, once you have amended your GST returns to repay any input tax credits claimed relating to those supplies, all of the requirements of item 12 (as detailed above) will have been met. It is then (and only then) that subsection 40-75(2B) will not apply under the transitional provisions, with the result being that we acknowledge that the residential premises have been previously subject to a long-term lease and are therefore not new residential premises under section 40-75(1)(a). As they are not new residential premises a supply of the residential premises by way of long-term lease will be an input taxed supply. Should you wish to utilise the latter treatment (as input taxed) in your next BAS, as you have indicated, it is essential that you first repay the input tax credits that you have already claimed. The normal way to correct these mistakes is to revise the previous activity statement(s), but in some cases you can correct it on a later activity statement. Please refer to our publication 'Correcting GST Mistakes' on our website (ato.gov.au). Please note that under this section you have the choice to classify your supplies as input taxed supplies where you meet all the conditions as outlined above. | Detailed Reasoning - 40-75(2C): This section provides that a supply of residential premises is disregarded as a sale or supply (such that the premises will still be new residential premises) 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. However, 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 (2011 Measures No.9 Act 2012). Under the exception in Item 13 of Schedule 4 to the TLAA, the supplies of residential premises by way of long term lease made after 27 January 2011 are not subject to the application of the amendment [section 40-75(2C)]. That is, subsection 40-75(2C) does not apply. | Detailed Reasoning - Units D to L: The exceptions under section 40-75 of the GST Act (items 12 and 13 of Schedule 4 to the TLAA) only apply to the supply of residential premises made after 27 January 2011. On the facts provided Units D to L all settled prior to 27 January 2011. As these supplies occurred before 27 January 2011 the normal rules apply to the sale of these properties. Goods and Services Ruling GSTR 2008/2 (issued on 11 May 2008 and in place until 11 May 2011) provided the view of the Tax Office on the supply of newly constructed residential premises under a development lease. Under this Ruling, it was 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 followed 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 taxable. | Detailed Reasoning - 40-75(2C): This section provides that a supply of residential premises is disregarded as a sale or supply (such that the premises will still be new residential premises) 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. However, 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 (2011 Measures No.9 Act 2012). Under the exception in Item 13 of Schedule 4 to the TLAA, the supplies of residential premises by way of long term lease made after 27 January 2011 are not subject to the application of the amendment [section 40-75(2C)]. That is, subsection 40-75(2C) does not apply. | Summary: Where you repay the input tax credits, and therefore the supplies become input taxed supplies, the result is that you will have overpaid GST on those supplies (as they were treated as taxable rather than input taxed at the time of the supply). However, where you do, the Commissioner will not exercise his discretion to refund the overpaid GST on those supplies. | Detailed Reasoning - Detailed reasoning: Where you have made an input taxed supply, but have remitted GST in connection with this supply, you will have therefore remitted an amount in excess of what was legally payable on the supply. That is, you will have overpaid an amount of GST. Before any refund of the overpaid amount can be claimed, the impact of section 105-65 of Schedule 1 to the TAA (section 105-65) must be considered. Section 105-65 of the TAA places a restriction on refunds that arise from the overpayment of GST in certain circumstances. Section 105-65 of the TAA applies and the Commissioner need not give you a refund if you overpaid an amount because a supply was treated as a taxable supply when the supply was not a taxable supply and one of the following applies: either the recipients have not been reimbursed an amount corresponding to the overpaid GST, or the recipient of the supply was registered or required to be registered. You have treated the supplies as taxable as you have remitted an amount as GST to the Commissioner on those supplies in the calculation of your net amount. You have advised that you have remitted a GST amount being 1/11 th of the GST margin. As you have not reimbursed a GST amount to the unregistered purchasers, section 105-65 of the TAA applies such that the Commissioner need not give you a refund of the overpaid GST amount. Paragraph 85 of Miscellaneous Taxation Ruling MT 2010/1 confirms that section 105-65 applies where supplies are treated as taxable under the margin scheme but are actually GST-free or input taxed. As discussed above your supplies would be input taxed should you repay the input tax credits, and therefore as you have treated your supply as taxable under the margin scheme section 105-65 applies. | Detailed Reasoning - Exercise of the discretion available under section 105-65: Section 105-65 of the TAA applies such that the Commissioner need not give a refund of the overpaid amount, but has discretion to do so in appropriate circumstances. This discretion is explained, and guidance as to its use is given, in MT 2010/1. In deciding whether to exercise the discretion the Commissioner must consider each case based on all the relevant facts and circumstances. The Commissioner must also have regard to the subject matter, scope and purpose of section 105-65 of the TAA. In particular, section 105-65 of the TAA is designed to prevent windfall gains to suppliers and is based on the presumption of the GST system that the cost of the GST is ultimately borne by unregistered end consumers. We acknowledge that MT 2010/1 provides that it may be appropriate for the Commissioner to exercise the discretion to allow a refund where an 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 (see paragraph (d)(i) of MT 2010/1). We are aware that there has been uncertainty surrounding the correct GST treatment in this type of scenario. However, the prevailing ATO view has been that supplies of newly constructed residential premises should be treated as taxable. This was the view in GSTR 2008/3, and is the view that is given effect in the amended legislation (subject to the transitional provisions that are intended to prevent disadvantage in relevant circumstances). In the current circumstances you have acted conservatively in treating the supplies as taxable supplies. In this case GST has been included in the price and accordingly has been passed on to the purchasers. That is, it has been borne by them (as intended by the GST regime). Based on the factors above, we consider that refunding the GST paid to you would result in a windfall gain to you at the expense of your purchasers. The Commissioner would therefore not exercise the discretion to allow you to claim a refund of overpaid GST in a situation where you were to repay input tax credits already claimed.