Private ruling: GST and supply of residential property
Published: January 2012

Ruling: Q1: Will your supplies of residential premises by way of assignment of a long term lease from you to third party purchases be input taxed supplies? | A1: Yes.

Relevant facts and circumstances: On ddmmyyyy, you entered into an option agreement to execute a Contract for Sale to acquire land and a business situated on the Land. You acquired the property as a GST-free going concern. Settlement in relation to the above transaction was completed on ddmmyyyy. The settlement statement specified that the value ascribed to the business was $xxx. Accordingly the value ascribed to the Land was $yyy. On ddmmyyyy, a Development Application was lodged for the demolition of the existing building and construction of residential premises on the Land. The Development Application ("the DA") was approved prior to 27 January 2011. In addition to approving the residential development, the DA approved a variation in the Purpose clause of the Crown Lease to permit 'residential use' on the Land. The DA Notice of Decision ("NOD") approved the proposal, subject to conditions. One of the conditions noted was that the existing Crown Lease over the Land be surrendered and a new Crown Lease be granted substantially in accordance with the sample Crown Lease shown at Attachment 1 to the DA. The Crown Lease was surrendered and a new Crown Lease was granted to you on ddmmyyyy. The new Crown Lease term was approximately 47 years. The new Crown Lease contained the following relevant clauses: Clause xxxx - Purpose: To use the land for the purpose of one or more of the following uses: multi unit housing limited to a maximum of xx dwellings; Clause xxxy - Interpretation: In this lease unless the contrary intention appears: multi unit housing means the use of the land for more than one dwelling and includes but is not limited to dual occupancy housing and triple occupancy housing. At all times prior a specified the tax period, you acted in accordance with Goods and Services Tax Ruling GSTR 2008/2: development lease arrangements with government agencies (now withdrawn). Accordingly, prior to that tax period, you claimed all input tax credits on acquisitions made in relation to the development. In the event that the supplies are correctly classified as input taxed supplies, you will review and amend any GST returns that have been lodged in relation to the development of the Land to ensure that all acquisitions are treated as not being creditable acquisitions. After completion of the development (which occurred after 27 January 2011), you made an application to register a units plan (i.e. strata title plan). Prior to registration of the units plan, you were required to surrender the then existing Crown Lease and accept a new Crown Lease dated after 27 January 2011. This new Crown Lease expires 99 years from the date of the lease. The relevant Authority required that the surrender and re grant of the Crown Lease occur prior to registration of the units plan such that the underlying Crown Leases upon registration of the units plan would have a 99 year term. Upon registration of the units plan, the provisions of the Crown Lease (purpose clause, term etc.) were carried over to the Units Plan. Accordingly, the unit title leases that were granted to you in respect of the registered units plan have a term of 99 years.

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 40-70(1) | A New Tax System (Goods and Services Tax) Act 1999 subsection 40-70(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 section 195-1

Reasons for decision: Summary: Under subsection 40-70(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), a supply of residential premises by way of long term lease is input taxed. However subsection 40-70(2) provides that the supply is not input taxed to the extent that the residential premises are: · commercial residential premises; or · 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 of the GST Act 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. Subsection 40-75(1) of the GST Act provides that 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) have been created through substantial renovations of a building; or (c) have been built, or contain a building that has been built, to replace demolished premises on the same land. Based on the submitted information, the premises to be supplied by way of lease are residential premises and 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. If any of the provisions in subsection 40-75 (1) of the GST Act apply, the supply will, (subject to subsection 40-75 (2) of the GST Act) be new residential premises and will therefore be a taxable supply under section 9-5 of the GST Act. The question to be determined is whether the residential premises that are supplied to the purchasers have ever been the subject of a long-term lease. The definition of long-term lease in section 195-1 of the GST Act refers to 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: · 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 · 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. You were granted a Crown Lease subsequent to the approval of the DA for the purpose of construction of a residential development on the Land. After completion of the development, you made an application, after 27 January 2011, to register a units plan (i.e. strata title plan). Upon registration of the units plan, the provisions of the Crown Lease (purpose clause, term etc.) were carried over to the Units Plan. The unit title leases granted to you in respect of the registered units plan have a term of 99 years. The Federal Court decision Commissioner of Taxation v Gloxinia Investments (Trustee) [2010] FCAFC 46 (Gloxinia) handed down on 24 May 2010, held that a developer's sales of newly constructed residential premises, constructed under a particular arrangement with a land owner (sometimes referred to as a 'development lease' arrangement) are input taxed supplies of residential premises. On the facts provided the arrangement between you and the relevant Authority is similar to the development lease arrangement that was the subject of the Gloxinia decision. Therefore your subsequent supply of residential premises would be input taxed as they have previously been subject to a long term lease. However, on 21 March 2012, Tax Laws Amendment (2011 Measures No.9) Bill 2012 ("the Bill") received Royal Assent. The Bill contains amendments to Division 40 of the GST Act that aim to overcome the issues identified in Gloxinia. In particular, a new section (section 40-75(2B)) has been inserted into the GST Act to disregard a 'wholesale supply' (such as the supply made by ACTPLA to you in granting the consequent leases) of residential premises as a supply for the purposes of section 40-75(1)(a). 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. | Detailed Reasoning - Application of the exception to section 40-75(2B): The wholesale supply of the unit title leases to you occurred after 27 January 2011. a) Earlier supply to you of the wholesale supply: The premises from which the residential premises was created was previously supplied to you. b) Commercially committed to an arrangement The arrangement in this matter is the demolition of an existing building and construction of residential premises on the Land. You have directly made (with associates) acquisitions, having a total GST exclusive value of at least $200,000, in relation to the arrangement: · You have incurred direct costs in relation to initial acquisition of the Crown Lease. · You have incurred additional direct costs in relation to the arrangement. c) Wholesale supply conditional on specified building or renovation work being undertaken by the recipient of the wholesale supply. Under the arrangement, you demolished an existing building and constructed residential premises on the Land (refer to DA application); The DA application which contained the proposal was approved on a specified date; The wholesale supply of the unit title leases could not occur without the completion of the development; Upon registration of the units plan (which occurred after 27 January 2011), the relevant Authority made the wholesale supply of unit title leases to you. d) GST return details You advised that in the event that the supplies are correctly classified as input taxed supplies, you will review and amend any prior GST returns that have been lodged in relation to the development of the Land to ensure that all acquisitions are treated as not being creditable acquisitions. Subject to you amending the GST returns relating to the preliminary costs, you will satisfy this requirement of the exception to section 40-75(2B) of the GST Act. 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. Any supplies of the premises by you will be input taxed supplies of residential premises. | Detailed Reasoning - Further issues for you to consider: You acquired the property as a GST free going concern. Division 135 requires you to make an increasing adjustment to take into account the proportion of supplies that you will make which are neither taxable supplies nor GST-free supplies.

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