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28 Sep 11
Increased GST under development lease arrangements for residential premises

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Background

The draft legislation follows from: 
  • the Assistant Treasurer’s media release (Media Release) dated 27 January 2011 of proposed GST amendments, and a related Treasury consultation paper
  • the earlier Full Federal Court decision in Commissioner of Taxation v Gloxinia Investments (Trustee) [2010] FCAFC 46 (Gloxinia), and the resulting Australian Taxation Office (ATO) Decision Impact Statement issued on 21 April 2011 which involved the withdrawal of GSTR 2008/2 relating to 'development lease’ arrangements with government agencies, and
  • statements in the 2011/2012 Federal Budget on 10 May 2011 re-confirming the changes announced in the Media Release.

Wholesale supplies

The proposed amendments under the draft legislation are primarily directed at ensuring that a ‘wholesale supply’ of premises (including land only) between a landowner and the developer - in ‘Gloxinia type’ development lease circumstances - does not cause a later supply by the developer of the fully developed lots of residential premises to cease to be ‘new residential premises’.  This result would arise where the earlier wholesale supply is regarded as the first supply of the developed lots, as new residential premises.

The ATO concern is that less GST is paid where: 
  • the earlier wholesale supply to the developer is treated as the (first) sale of new residential premises, as opposed to
  • the later sales of the developed lots by the developer being (the first) taxable supplies of new residential premises.
The proposed amendments would cause the wholesale supply to be ignored in determining whether the later supplies by the developer of the fully developed lots are new residential premises.   Once the wholesale supply is ignored, the later supplies of the developed lots  become a ‘first’ supply of the newly developed premises and those supplies would then be taxable supplies of new residential premises.
 
Importantly, in our view, it is unclear from the proposed amendments – because the proposed amendments seem to be deliberately limited to avoid prescribing these matters – how the wholesale supply itself will be treated.
 
It is not clear whether the wholesale supply will still itself be treated as a taxable supply of new residential premises, consistent with the decision in Gloxinia, for the whole value of the land and completed building works at the time of transfer to the developer.  This treatment seems the result from the combined effect of the current draft legislation and the decision in Gloxinia (the effect of which is not directly overturned by the proposed amendments) - but the approach adopted by the ATO in (the now withdrawn) GSTR 2008/2 had been to treat this supply between the landowner and the developer as only a supply of the land (without the value of the developed buildings).
 
If the intention is that GST applies to the full value of the supply (land and buildings) at the time of transfer to a developer, this treatment would create the unusual situation of successive taxable supplies of new residential premises.  It would particularly mean that more GST is collected in circumstances where the developer uses the premises for input taxed residential rental purposes for a period of time.
 
Input tax credits may still be claimable against a later taxable supply, if the developer later does sell a developed lot as new residential premises (within the five year rule for residential premises used for input taxed rental), but also subject to any choices to use the margin scheme.
 
McCullough Robertson will be making submissions on the draft legislation and, in particular, seeking clarification of this intended treatment of the wholesale supply. 

Other amendments

The other proposed amendments under the draft legislation involve clarification that:
  • the reconfiguration of titles by lodgement of a ‘property subdivision plan’ does not either create new residential premises (where the subdivided premises were not previously new residential premises) nor prevent later supplies of the subdivided lots from being new residential premises (on the basis that the creation of the subdivision lots was not an earlier sale or supply of new residential premises), and
  • premises do not permanently become new residential premises because they are created by substantial renovations or replacement of demolished premises, which is a technical interpretation possible under the existing wording of the GST law.

Transitional rules

Importantly, there are some limited and complex transitional provisions relating to the proposed amendments to the treatment of wholesale supplies.
Very broadly, from the draft legislation, the new rules will apply – so that later sales of the developed lots of residential premises by the developer from 27 January 2011 will be treated as new residential premises – unless
  • the earlier wholesale supply was made in circumstances where there was an ‘eligible arrangement’ in place before 27 January 2011, whereby the wholesale supply was conditional on the developer performing the building and development work on the land, and
  • the developer has not claimed input tax credits as if its later supply of the developed lots of residential premises were taxable supplies (i.e. in effect, the developer has not already treated the supply of the developed lots as taxable supplies). The claiming of such input tax credits would indicate an acceptance by the developer of the treatment previously advocated by the ATO and now proposed to be confirmed by the proposed amendments – and the transitional treatment is not extended to allow that treatment to be reversed. 

Action needed by developers

Because the draft legislation is likely to be implemented largely in its current form, developers should review all development lease arrangements to identify where developed lots of residential premises may have been sold after 27 January 2011, or may indeed still be on hand to be sold.
Those developed lots will likely require treatment as taxable supplies, unless the requirements of the transitional provisions can be proven to be satisfied.
The overall disadvantage of treating those later supplies of the developed lots as being taxable supplies is that higher overall GST is likely to apply.
There may be a particular issue and increased GST cost (depending on the clarification to be sought of the treatment of the wholesale supply under the amended law) where a developer has used the developed lots for residential rental purposes and does not qualify for the transitional treatment.
 
Focus covers legal and technical issues in a general way.  It is not designed to express opinions on specific cases.  Focus is intended for information purposes only and should not be regarded as legal advice. Further advice should be obtained before taking action on any issue dealt with in this publication.

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