Private ruling: GST and the supply of residential premises
Date of advice: 13 July 2015
Published: July 2015

Ruling: Q1: Will your supplies of residential premises to third party purchasers, be taxable supplies pursuant to section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)? | A1: No

Relevant facts and circumstances: You registered for GST as a partnership from ddmmyyyy. You entered a Contract for Sale to acquire land (the Land). The Land was acquired as a taxable supply and the margin scheme was not applied. Land contract The land contract defines: • Crown Lease to mean a lease from the Seller to the Buyer in the form of the draft Crown lease included in the Leases Schedule. • Holding lease to mean a lease from the Seller to the Buyer in the form of the draft holding lease included in the Leases Schedule. The Contract for Sale provides that • The Seller must grant to the Buyer and the Buyer must accept from the Seller the Holding Lease which will be in the form included in the Contract for Sale. • The Buyer may make application to the Seller for the grant of a Crown Lease/s in accordance with the relevant provisions of the Holding Lease. The form of the draft Crown Lease was included on the Contract for Sale. Holding Lease After the purchase of the Land you were issued a holding lease (the Holding Lease) over the land. Draft Crown Lease The Draft Crown Lease provides for the premises to be used for a range of purposes including residential use. Agreement to develop the land A number of documents were provided in relation to the feasibility of using the land for different purpose including residential. Some of these documents predated January 2011. You sought and received approval to construct buildings in X stages on the land including residential premises. Each of the residential units will have x bedrooms and x bathrooms and a full kitchen. The residential premises that are constructed will not be commercial residential premises as defined in the GST Act. It was proposed that upon completion of each of the stages the development, a units plan will be registered (i.e. strata title plan). Upon registration of the units plan, the provisions of the Crown Lease (purpose clause, term etc.) will be carried over in Form 4 of the Units Plan. Accordingly the unit title leases that will be granted to the taxpayer in respect of registered units plan have a term of more than 50 years. Stage X has been completed. As part of the completion of stage X the Holding Lease was surrendered in regards to a portion of the land. The purpose clause provides that: The Lessee covenants not to use the premises for any purpose other than for one or more of the following purposes: (i) Residential and (ii) Serviced apartment

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 Section 40-65 | A New Tax System (Goods and Services Tax) Act 1999 Section 40-75 and | A New Tax System (Goods and Services Tax) Act 1999 Section 195

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 40 of the GST Act provides that you are liable for GST on any taxable supply that you make. | Detailed Reasoning - Input taxed: Supplies of real property can be taxable, input taxed or GST free depending on the circumstances of the supply. In your case we do not consider that there are any relevant GST free provisions and therefore where your supplies are not input taxed they will be taxable supplies as they meet the positive requirements of section 9-5. Under subsection 40-65, a sale of real property is input taxed but only to the extent the property is residential premises to be used predominately for residential accommodation (regardless of the term of occupation) however, the sale 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 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 units 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. Therefore the supply of the units will be input taxed unless they are new residential premises. The term 'new residential premises' has the meaning given by section 40-75, which in part provides that: (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; 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. In your case, the strata plan will be registered and individual strata lot leases will be granted to you. When these units are subsequently supplied to end consumers they will be input taxed unless they are new residential premises pursuant to subsections 40-75(2B) or 40-75(2C) of the GST Act. | Detailed Reasoning - Subsections 40-75(2B) and 40-75(2C): The effect of subsections 40-75(2B) and 40-75(2C) is to disregard the wholesale supplies of the strata titled premises made to you from the Commonwealth 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). For subsection 40-75(2B) to apply to disregard the supply of the residential premises that will be made by way of long term lease of the individual unit title leases, the requirements of paragraphs 40-75(2B)(a), (b) and (c) must be satisfied. ATO Interpretative Decision 2014/19 GST and the supply of newly constructed residential premises under an arrangement entered into prior to 27 January 2011 (ATO ID 2014/19) provides the ATO view in respect of this issue. In particular ATO ID 2014/19 considers the application of paragraphs 40-75(2B) (a), (b) and (c). | Detailed Reasoning - Paragraph 40-75(2B): For a supply to be disregarded under 40-75(2B) it must meet all the requirements of (a) to (c). Then if it meets these requirements it must not be exempted by item 12 of that section. 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 you satisfy paragraph 40-75(2B)(a) because the land from which the residential premises were created has previously been supplied to you prior to January 2011(under the holding lease Secondly, paragraph 40-75(2B)(b) provides that there must have been an arrangement 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 documents between 23 April 20AA and November 20BB • the acquisition of the lease of the land on which the units were constructed, • the lodgement of the MPIS and • the approvals to develop residential premises meets the requirement that an arrangement was in place between you and the supplier which satisfies paragraph 40-75(2B)(b). The third requirement under paragraph 40-75(2B)(c) requires that under the arrangement, the wholesale supply of the residential premises to you is conditional on you undertaking specified building or renovation work. ATO ID 2014/19 states: The arrangement between the entity and the government body includes the development approval and the Crown Lease, which set 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 body. ATOID 2014/19 also recognises the intent of parties in entering into their development is for the construction and sale of individual residential premises and acknowledges the sale of the individual residential units can only occur following the lodgement of a strata leasehold plan and the subsequent grant of the individual strata lot leases. As such, the arrangement entered into between developers and government bodies also includes the lodging of the strata leasehold plan and granting of the individual strata lot leases. Under the arrangement, it is considered the granting of the individual unit title leases over the residential apartments to you (the wholesale supply) is conditional on you undertaking specified building or renovation work. Therefore, paragraph 40-75 (2B)(c) is satisfied and subsection 40-75(2B) would apply to disregard the supply of the residential premises that occur upon grant of the individual strata lot leases, except for the operation of the transitional provisions in item 12 of Schedule 4 to the Amending Act (item 12). | Detailed Reasoning - Item 12 exception to section 40-75(2B): 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 the Amending Act. 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. 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, you have satisfied all the preceding conditions to the exception to section 40-75(2B) of the GST Act. 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 units 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.