Private ruling: GST and supply of residential premises
Published: March 2013

Ruling: Q1: Will your supplies of residential premises in Australia be input taxed supplies? | A1: Yes

Relevant facts and circumstances: On ddmmyyyy, a Crown Lease was issued to Entity A over land situated in Australia (the Land"). The term of the Crown Lease exceeded 50 years. Later, a Put and Call Option agreement was entered into by you and Entity A. The Call Option allowed you the option to acquire the Crown Lease over the Land for the price as stipulated in the Contract for Sale which was annexed to the Put and Call Option, being $xx,xxx. The Put Option allowed Entity A the option to require you to acquire the Crown Lease over the Land for the price as stipulated in the Contract for Sale which was annexed to the Put and Call Option, being $xx,xxx. You subsequently exercised the Call Option and entered into a Contract for Sale to acquire the Crown Lease over the Land from Entity A for $xx,xxx. The Crown Lease over the Land contained the following relevant clauses: · Clause 1 - Interpretation: · Clause A(a) - Commencement of development: o That the lessee shall within x 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 including buildings and other works within the lease at a cost not less than the sum of $x in accordance with plans and specifications prepared by the lessee and previously submitted to and approved in writing by the Authority; · Clause B(b) - Completion of development: o That the lessee shall within y 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 including buildingsand other works within the lease in accordance with the said plans and specifications and in accordance with every law and regulation applicable thereto. · Clause E(e) - Purpose: To use the premises only for the purpose of: (-) - residential use; Accordingly, subsequent to you acquiring the Crown Lease over the Land, you were legally bound to complete the development in accordance with clause B(b) of the Crown Lease. On ddmmyyyy, you lodged Development Application ("the DA") with the Authority for (amongst other things) construction of mixed use development, including xx residential apartments. The Authority issued a Notice of Decision (NOD") in relation to the DA. The NOD advised that the Authority had approved the proposal, subject to conditions. One of the conditions was that "the building and development provisions of the Crown Lease" over the Land be extended to permit the construction of the development. That is, you were required to have the construction commencement and completion dates extended. Subsequent to approval of the DA, further minor amendments were made to the DA approval such that the final development contains additional residential apartments. In brief, the development (as approved in the DA) is a mixed use development, which comprises: residential apartments; and commercial space. This private ruling relates only to supplies of the residential premises by you. On ddmmyyyy, you lodged Development Application (the subsequent DA") with ACTPLA, varying the provisions of the Crown Lease over the Land to change the proportions of permitted uses. The Authority issued a Notice of Decision ("NOD") in relation to the subsequent DA. The NOD advised that ACTPLA had approved the proposal, subject to conditions. One of the conditions was that "the building and development provisions of the Crown Lease" over the Land be extended to permit the construction of the development. That is, you were required to have the construction commencement and completion dates extended. At all times up to and including the date of this private ruling request, you acted in accordance with the principles outlined in Goods and Services Tax Ruling GSTR 2008/2 - development lease arrangements with government agencies (now withdrawn) and section 40-75 of A New Tax System (Goods and Services Tax) Act 1999 (without application of the transitional provisions contained in item 12 of Schedule 4 of Tax Laws Amendment (2011 Measures No.9) Bill 2012). Accordingly you have claimed all input tax credits on acquisitions made in relation to the development to date. In the event that your future supplies of the residential premises are 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. Upon completion of the development an application was made 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 in the Units Plan. Accordingly, the unit title leases that were granted to you in respect of registered units plan have a term exceeding 50 years. With the DA not approved until ddmmyyyy (prior to which time the development had not commenced) and with the units plan not being registered until later, you were in breach of the conditions of the Crown Lease. You advised that the breach of the conditions of the Crown Lease arose due to you being in negotiations with the Government in relation to the terms of the Crown Lease and the clauses contained therein. Subsequently, the Government approved an extension of time for the commencement and completion of the development as follows: Clause 3(a) - Commencement of Development -ddmmyyyy; Clause 3(b) - Completion of Development -ddmmyyyx. Accordingly, whilst you were previously in breach of the commence and complete conditions contained in the Crown Lease, subsequent to receipt of the approval for the extension of the periods within which the development must be commenced and completed, you are no longer in breach of the Crown Lease. The supplies of residential premises (upon assignment of the unit title leases to purchasers) commenced in mmyyyy.

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. 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. 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. 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 within Australia subsequent to the approval of the DA for the purpose of construction of a mixed use development on the Land, which includes xx dwellings. After completion of the development, you made an application, 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 in the Units Plan. The unit title leases granted to you in respect of the registered units plan have a term exceeding 50 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 as they had previously been subject to a long term lease. On the facts provided the arrangement between you and 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 also 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. Commercially committed is a defined term. To be commercially committed, in relation to an arrangement, means: · to be a party to the arrangement, where the arrangement is legally binding; or · to be the preferred tenderer (however described) in the final step in a bidding or tendering process relating to the arrangement; or · to have directly made (with associates) acquisitions, having a total GST exclusive value of at least $200,000, in relation to the arrangement; or · to have directly incurred (with associates) internal direct costs, of at least $200,000, in relation to the arrangement. | Detailed Reasoning - Application of the exception to section 40-75(2B): The wholesale supply of the unit title leases by the Authority 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 You entered into a legally binding arrangement to construct xx dwellings on the Land. Therefore, you were commercially committed. c) Wholesale supply conditional on specified building or renovation work being undertaken by the recipient of the wholesale supply. Under the arrangement, you constructed a mixed used development, including xx dwellings, on the Land; The wholesale supply of the unit title leases could not occur without the completion of the development; Upon registration of the units plan, the 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, you will satisfy this requirement of the exception to section 40-75(2B) of the GST Act. 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, the premises are not new residential premises. Any supplies of the residential premises by you will be input taxed supplies.