Private ruling: Assi gnment of long-term leases over residential premises
Date of advice: 29 June 2018
Published: September 2018

Ruling: Q1: Will supplies by way of the assignment of long-term leases over residential apartments in the developed premises by you to third party purchasers be input taxed under section 40-70 of the GST Act? | A1: Yes


Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 , section 40-70 | A New Tax System (Goods and Services Tax) Act 1999, section 40-75 | A New Tax System (Goods and Services Tax) Act 1999, subsection 40-75(2B) | A New Tax System (Goods and Services Tax) Act 1999, subsection 195(1) | Income Tax Assessment Act 1936, section 318

Reasons for decision: Summary: Unless otherwise stated, all legislative references are to the GST Act. Subsection 40-70(1) provides the following in relation to the GST treatment of a supply of a long term lease: | Detailed Reasoning - 40-70 Supplies of residential premises by way of long-term lease: (1) A supply is input taxed if: (a) the supply is of *real property but only to the extent that the property is *residential premises to be used predominantly for residential accommodation (regardless of the term of occupation); and (b) the supply is by way of *long term lease. (2) However, the supply 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. For the purposes of paragraph 40-70(1)(a), “new residential premises” is defined in section 40-75 as follows: | 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; … (2AA) Despite subsection (1), the *residential premises are not new residential premises if: (a) they are created from residential premises that became the subject of a *property subdivision plan; and (b) the residential premises referred to in paragraph (a) were not new residential premises immediately before they became the subject of that plan. … Disregard certain supplies of the premises (2A) … (2B) A supply (the wholesale supply) of the *residential premises is disregarded as a sale or supply for the purposes of applying paragraph (1)(a) if: (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) an arrangement (including an agreement) was made by: (i) the supplier of the earlier supply, or one or more associates of the supplier; and (ii) the recipient of the earlier supply, or one or more associates of the recipient; and (c) under the arrangement, the wholesale supply was conditional on: (i) specified building or renovation work being undertaken by the recipient of the earlier supply, or by one or more associates of the recipient; or (ii) circumstances existing as specified in regulations made for the purposes of this subparagraph. Note 1: The premises referred to in paragraph (a) could be vacant land. Note 2: For subparagraph (c)(ii), circumstances may be specified by class (see subsection 13(3) of the Legislation Act 2003 ). Note 3: This subsection does not apply to a supply if certain commercial commitments were in place before 27 January 2011 (see item 12 of Schedule 4 to the Tax Laws Amendment (2011 Measures No. 9) Act 2012 ). Applying the above to your situation, subsection 40-75(2B) is of particular relevance. That subsection was inserted by the Tax Laws Amendment (2011 Measures No. 9) Act 2012 (Amending Act). The subsection is subject to certain transitional provisions, which are discussed below. Broadly, the subsection provides that when a wholesale supply of residential premises is made in respect of premises which have previously been supplied to the recipient of the wholesale supply (or an associate), and where the wholesale supply was conditional upon specified building works by the recipient of the wholesale supply (or an associate), the wholesale supply is disregarded for the purposes of determining whether they are “new” for the purposes of paragraph 40-75(1)(a). That is, the making of the wholesale supply does not result in the premises having “previously been the subject of a long-term lease”. The effect of transitional provisions in the Amending Act is that the wholesale supply will continue to result in the input taxed treatment of subsequent supplies to end purchasers if subsection 40-75(2B) does not apply. Relevantly, item 12 of the Amending Act sets out the following transitional provision: | Detailed Reasoning - 12 Exception – arrangements made before 27 January 2011 to develop premises: (1) Subsection 40-75(2B) of the A New Tax System (Goods and Services Tax) Act 1999 (as inserted by this Schedule) does not apply to a supply (the wholesale supply) of residential premises if: (a) the wholesale supply happens: (i) on or after 27 January 2011; or (ii) before 27 January 2011, and the next supply of the residential premises happens on or after 27 January 2011; and (b) subitem (2) is satisfied in relation to the supply. (2) This subitem is satisfied in relation to the wholesale supply if: (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 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 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. Note: The premises referred to in paragraph (a) could be vacant land. (3) In this item: arrangement includes an agreement. commercially committed : 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. | Detailed Reasoning - Associates: The term ‘associate’ is defined in subsection 195(1) by cross reference to section 318 of the Income Tax Assessment Act 1936 (ITAA 1936). Subsection 318(3) of the ITAA 1936 provides that the trustee of a trust is connected to another entity that benefits under a trust. A person is taken to be an entity that benefits under a trust if the entity benefits, or is capable (whether by the exercise of a power of appointment or otherwise) of benefiting under the trust, either directly or through any interposed entities (paragraph 318(6)(a)). As the entity is a potential beneficiary, it is an associate of yours. | Detailed Reasoning - New Residential Premises: You will construct premises that have not previously been sold or the subject of a long term lease. Consequently, the premises will be “new residential premises” for the purposes of sections 40-70 and 40-75 of the GST Act. It is therefore necessary to ascertain whether they will cease to be “new residential premises” once the Wholesale Leases are issued. | Detailed Reasoning - Arrangement: Subsection 40-75(2B) applies to your situation because: 1. The premises from which the unit titled residential premises will be created will have been earlier supplied to you or one or more of your associates via the wholesale supply (the Wholesale Leases). A number of earlier supplies will have taken place, specifically: ● an earlier supply occurred when an associate of yours acquired the Crown Lease in 200X; ● an earlier supply occurred by way of issuing the deconcessionalised Crown Lease in 201X; ● the premises were to be supplied to you in or about mid 201X, which will also qualify as an earlier supply. ● These earlier supplies were made under an “arrangement” whereby the following specified building works would be carried out: ● The deconcessionalised Crown Lease was requested and obtained for the specific purpose of carrying out the proposed development. ● The supply to you will be made on the basis that you will carry out the proposed development as agreed. | Detailed Reasoning - Item 12: In your case, the requirements of Item 12 are satisfied because the wholesale supply will occur after 27 January 2011. Subitem 12(2) is also satisfied for the following reasons: ● the premises from which the residential premises will be created have been earlier supplied to an associate of the recipient of the Wholesale Leases. The premises will also be supplied to you prior to the completion of the development. Therefore, Subitem 12(2)(a) is satisfied. ● Immediately before 27 January 2011, your associate was commercially committed to the development, as they had expended more than $200,000. This meets the definition of “commercially committed” in Subitem 12(3)(c). As such, Subitem 12(2)(b) is satisfied. ● Under the “arrangement” the Wholesale Leases are conditional on specified building work being undertaken by you. It is implicit that the Wholesale Leases will not be issued until those works are undertaken. ● you have advised that, for the purposes of this ruling, no GST return (as amended) given to the Commissioner will report a net amount for a tax period that includes amounts equivalent to the input tax credits that you would have been entitled to if your acquisitions relating to the next long term lease of the residential premises were creditable acquisitions. | Detailed Reasoning - Conclusion: As Item 12 applies to your situation, subsection 40-75(2B) has no application. The Wholesale Leases, when issued, will be long-term leases for the purposes of paragraph 40-75(1)(a), and will preclude the sales of the developed premises to end purchasers from being taxable under subsection 40-70(2).