By Stephanie Barnes and Claire Falkner
On 23 September 2011, the Government released exposure draft legislation designed to ensure that all supplies of newly developed residential properties by a developer are subject to GST.
Residential property developers using development lease or similar arrangements need to:
- determine which of their existing developments fall within the new regime. Broadly, legally enforceable development lease arrangements in place before 27 January 2011 are protected, subject to further requirements;
- understand the GST treatment which applies under the new rules (aspects of which are still uncertain); and
- decide on the most tax efficient structures for the future in light of the new rules, including whether the margin scheme should be applied to their development properties.
Subsidiary amendments affecting circumstances when a supply of residential premises will be taxable are also proposed.
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The general rule is that sales of residential premises are input taxed, so that no GST is charged on the sale. One exception to this treatment is sales of “new residential premises”, which are taxable supplies. The term “new residential premises”, as defined in the legislation, includes residential premises which have not previously been sold as residential premises or been the subject of a long-term lease. The rationale behind this exception is that the value added to property by developers should be subject to GST.
The current proposals stem from the Full Federal Court's decision in FCT v Gloxinia Investments (Trustee)  FCAFC 46. In that case, it was found that a developer’s sales of newly-constructed residential apartments were input taxed, and not taxable supplies.
Prior to that decision, the GST treatment of certain types of development arrangements had been addressed by the Australian Taxation Office (ATO) in GST ruling GSTR 2008/2 (now withdrawn). The facts of Gloxinia fell within the scheme of that ruling. The general pattern of the developments dealt with involves 3 supplies of the same property, as follows:
- a government agency initially grants a development lease to allow the developer to enter the land and to carry out the development. This first supply is described in the following as the development supply. The developer undertakes the development on its own account and at its own risk;
- the government agency transfers or grants freehold or long-term leasehold title to the land to the developer only when the development is completed. This second supply is described in the following, and in the draft legislation, as the wholesale supply;
- the developer pays the government agency an amount that reflects the price for the land sold or supplied as a long-term lease but not the development works; and
- the developer sells the completed development or strata titled units in the development to a third party or parties. This third supply is described in the following as the retail supply.
The ATO view set out in GSTR 2008/2 was that the overall transaction should be characterised as one under which the government entity sells or leases to the developer merely land, not land and the attached development works. It followed that when the developer made the retail supplies, it was making the first supply of those premises as residential premises. The retail supplies were therefore taxable supplies of new residential premises.
In Gloxinia, following development of the apartments and subdivision of the property by registration of a strata leasehold plan, an existing lease from the land owner (a municipal council) to the developer was replaced with a long-term lease over each strata-titled apartment. The strata lot leases would then be assigned by the developer to individual buyers (ie, the retail supply). Contrary to the ATO view, the Court held it could not ignore the legal effect of the strata lot leases. They were long-term leases of the apartments to the developer, and the subsequent retail supplies therefore were not supplies of “new residential premises”.
The Gloxinia decision also brought into question the ATO view that the process of subdividing or strata titling a property does not, by itself, result in new residential premises becoming non-new residential premises, or vice versa.
As a result of the decision in Gloxinia, on 27 January 2011 the Assistant Treasurer announced that the GST rules would be amended to ensure they achieved the intended policy outcome for the GST treatment of residential premises. The Government’s concern with the Gloxinia decision was that GST would only be charged in respect of the wholesale supply, the consideration for which generally includes the value of the land but not the value of the residential development, but not the retail supply. The result of that would be that a lower amount of GST would be payable. A consultation document describing the proposals was published.
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Proposed statutory amendments
The proposed amendments contained in the exposure draft legislation broadly provide as follows.
The wholesale supply amendment
In determining whether the retail supply of premises is a taxable first supply of residential premises, you disregard the wholesale supply if there has been both:
- a development supply; and
- an arrangement under which the wholesale supply was conditional on specified building or renovation work being undertaken by the recipient.
The subdivision amendments
- Subdivision of non-new residential premises (whether by way of strata titling or some other form of subdivision) does not itself result in the subdivided premises being new residential premises.
- A supply of new residential premises made because a subdivision plan was lodged (whether strata titling or some other form of subdivision) does not result in those premises being non-new residential premises on a subsequent supply.
Residential premises can become new residential premises as a result of substantial renovations, or because they have been built to replace demolished premises. It is to be clarified that such new residential premises will cease to be new residential premises once they are sold or supplied by way of long term lease as residential premises.
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Treatment of the wholesale supply
The legislative amendments do not address the GST treatment of the wholesale supply itself. Following Gloxinia, the wholesale supply can be expected to be a taxable supply of new residential premises. It is not clear whether this indicates a return to the approach taken by the ATO before 3 October 2007, from which date the analysis set out in GSTR 2008/2 was applied. That previous approach was that:
- the developer made a taxable supply of development works to the government agency which made a corresponding creditable acquisition; and
- the wholesale supply was a taxable supply of new residential premises, for which the consideration included the value of the development works.
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Date of effect and transitional provisions
The consultation document suggested that the subdivision amendments would have effect from 1 July 2000, and the wholesale supply amendment would have effect from 3 October 2007, but this has not been carried through to the draft legislation.
Under the draft legislation, the subdivision amendments and the wholesale supply amendment are to have effect for supplies made on or after 27 January 2011 (the date of the Assistant Treasurer's announcement of the proposed changes), subject to transitional provisions.
Importantly, the wholesale supply amendment will not apply to determine GST treatment of a retail supply in circumstances where:
- the arrangement for the wholesale supply to be made (see above for a description of the arrangement) was in place and legally enforceable before 27 January 2011; and
- no GST return has been lodged including input tax credits as if acquisitions relating to the retail supply were creditable acquisitions.
The amendment relating to subdivision of new residential premises will not apply where the relevant subdivision plan was lodged for registration before 27 January 2011 by the recipient (or an associate) of the subsequent supply.
The clarificatory amendment is to have effect for supplies made on or after the day the Bill receives Royal Assent.
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