Private ruling: GST and the application of Division 135
Published: September 2013

Ruling: Q1: Do you have an increasing adjustment under Division 135 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) in relation to your supplies of residential units at the property? | A1: No

Relevant facts and circumstances: You are registered for GST. On ddmmyyyy, you acquired a leasehold interest in land from Entity P as a GST-free going concern. The property was acquired by way of a put and call option arrangement which was entered earlier, with settlement occurring on ddmmyyyy. You continued to lease the commercial premises until ddmmyyyy, which was when the building was demolished. During the put and call option period, you submitted an expression of interest for the provision of a new purpose built commercial office on the land for Entity Q. Subsequent to the sale of the going concern to you, the tenants vacated the premises and you continued the process of negotiating with Entity Q, culminating in a response to Entity Qs request for proposal. Around the same time, you submitted a Development Application to the relevant authority for construction of a mixed use development consisting of residential units and commercial areas. Entity Q subsequently advised that they were suspending the request for proposal indefinitely. Subsequently, you commenced exploring residential development opportunities. On ddmmyyyy, the relevant authority advised that it had approved your proposal for a mixed use development, subject to conditions. One of the conditions was that the (then) existing Crown lease was to be surrendered and a new Crown lease would be issued commencing on the date of surrender of the (then) existing leases and terminating on ddmmyyyy or on such further date as may be approved by the Authority. Additionally, the new crown lease could not be registered until the relevant change of use charge was paid. The new Crown lease was to be substantially in accordance with the form of lease appearing at Attachment 1 of the Notice of Decision. The new Crown Lease, issued on ddmmyyyy, contains an amended Purpose clause which allows residential use to a maximum of xx dwellings. It provides that the lessee is to hold the lease for a term exceeding 50 years. Various clauses provide: Commencement of development: That the lessee shall within xx amount of time 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 land in accordance with plans and specifications prepared by the lessee and previously submitted to and approved in writing by the Authority; Completion of development That the lessee shall within xx amount of 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 to such development Purpose - to use the land for one or more of the following uses: · non retail commercial use · residential use · restaurant · shop You subsequently entered into a Development Deed with a third party for the construction of the premises in accordance with the DA. Upon completion of the development, an application will be made to register a `units plan', (ie a strata plan). Upon registration of the units plan, the provisions of the Crown lease will be carried over in the units plan and the unit title leases will be granted to the taxpayer in respect of the registered unit plans having a term exceeding 50 years. Settlements are expected to commence in or about mmyyyy. On ddmmyyyy, the Commissioner issued a private ruling (authorisation number xxxx) which stated that your supplies of the residential units to purchasers will be taxable supplies.

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 40-75 | A New Tax System (Goods and Services Tax) Act 1999 Section 135-5 | A New Tax System (Goods and Services Tax) Act 1999 Section 135-10

Reasons for decision: Summary: In this ruling, · unless otherwise stated, all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) · all reference materials, published by the Australian Taxation Office (ATO), that are referred to are available on the ATO website www.ato.gov.au Division 135 provides that the recipient of a supply of a going concern has an increasing adjustment to take into account the proportion (if any) of supplies that will be made in running the concern and that will not be taxable supplies or GST-free supplies. Later adjustments are needed if this proportion changes over time. Subsection 135-5(1) of the GST Act states: You have an increasing adjustment if: (a) you are the *recipient of a *supply of a going concern, or a supply that is *GST-free under section 38-480; and (b) you intend that some or all of the supplies made through the *enterprise to which the supply relates will be supplies that are neither *taxable supplies nor *GST-free supplies. * Terms with an asterisk are defined in the GST Act. | Detailed Reasoning - Purchase of the property: You acquired a leasehold interest in the property from Entity P as a GST-free going concern. During the put and call option period, you submitted an expression of interest for the provision of a new purpose built commercial office on the land for Entity Q. From the facts provided, at the time of your acquisition, you continued to lease the property as commercial premises until mmyyyy. It is therefore considered that you did not acquire the premises with the intention of making supplies that would not be taxable supplies or GST-free supplies. Therefore, at the time of acquiring the property, you did not have an increasing adjustment under subsection 135-5. | Detailed Reasoning - Subsequent use of the property: Section 135-10 provides for later adjustments for supplies of going concerns. Under section 135-10: (1) If you are the *recipient of a *supply of a going concern, or a supply that is *GST-free under section 38-480, Division 129 (which is about changes in the extent of creditable purpose) applies to that acquisition, in relation to: (a) the proportion of all the supplies made through the *enterprise that you intend will be supplies that are neither *taxable supplies nor *GST-free supplies; and (b) the proportion of all the supplies made through the *enterprise that are supplies that are neither taxable supplies nor GST-free supplies; In the same way as that Division applies: (c) in relation to the extent to which you made an acquisition for a *creditable purpose; and (d) in relation to the extent to which a thing acquired is *applied for a creditable purpose. In about mmyyyy, Entity Q advised that they were suspending the request for proposal indefinitely. You then commenced exploring residential development opportunities, and received approval by Authority, by way of a Notice of Decision (NOD), for the use of the land to be for residential use. You subsequently changed your use of the land from commercial office development to residential development. Under section 9-5 you make a taxable supply if: (a) you make a supply for *consideration; and (b) the supply is made in the course or furtherance of an *enterprise that you *carry on; and (c) the supply is *connected with 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 units 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. A private ruling (authorisation number xxxxxxxxxxxxxx) has issued to you on a specified date, in respect to your supplies of residential premises at the property, by way of assignment of a long term lease from you to third party purchasers. We have concluded in that private ruling that your supplies of residential premises at the property, by way of assignment of a long term lease from you to third party purchasers will be taxable supplies of new residential premises. Accordingly, your supplies of the residential units to purchasers are not supplies that are neither taxable supplies nor GST-free supplies. As such there is no change in the proportion of the ended supplies and actual supplies made through the enterprise that are neither taxable nor GST-free supplies. You therefore do not have an increasing adjustment under section 135-10.