The Government has released a consultation paper aimed at clarifying the GST treatment of supplies of new residential premises. The paper is partly a response to the Commissioner’s failed appeal in Commissioner of Taxation v Gloxinia Investments [2010] FCAFC 46, where the Full Federal Court held that developers supplying residential premises to the public were not subject to GST where the residential premises were previously subject to a development lease arrangement.  The Government is seeking to ensure that such supplies are subject to GST.

In summary the proposed changes will give effect to the following:

• Supplies of newly constructed residential premises will be subject to GST even if the property had previously been the subject of a sale or long term lease as result of a development lease arrangement.
• The granting of individual strata lot leases over newly constructed residential premises will not cause the premises to loose its ‘new’ character.
• In a similar vein, the subdivision or registration of a strata plan over existing residential premises will not, on its own, create new residential premises.

The proposals form another piece in the increasingly complex GST puzzle faced by developers of residential property.

Background

A supply of residential premises is generally an input taxed supply, and hence not subject to GST. As a result, ‘Mum and Dad’ property owners need not pay GST on their homes, or their investment properties. However a supply of new residential premises is not input taxed and will be subject to GST. The rationale behind this is to ensure that GST is levied on the value added to real property by developers. The Government is concerned that the Court’s decision in Gloxinia could potentially prevent this from occurring which would be  contrary to the original policy intent behind the GST Act.

‘New residential premises’ is defined in section 40-75 of the A New Tax System (Goods and Services Tax) Act 1999 (Cth) (the “GST Act”) to include residential premises which have not previously been sold as residential premises or been the subject of a long-term lease. This definition has created a number of issues for developers subject to a development lease arrangement.

A development lease arrangement involves the supply of land by way of sale or grant of a long term lease to the developer. However, prior to this, the developer enters into a short term development lease, the terms of which require the developer to undertake the development in accordance with a development plan. Once the development has taken place, the development lease is surrendered and the land will be supplied to the developer by way of sale of the freehold interest or grant of a long term lease. Developers then sell the residential premises to the public. The Commissioner’s view, outlined in GSTR 2008/2 ‘Goods and Services tax: development lease arrangements with government agencies’, is that when developers sell residential premises to the public (which has been subject to a development lease arrangement), this is a sale of ‘new residential premises’ and hence is subject to GST.

This view was challenged by the Full Federal Court in Commissioner of Taxation v Gloxinia Investments (“Gloxinia”). The Court held that the subsequent sale of residential premises to the public by the developer is an input taxed supply. The Court was of the view that the residential premises were no longer “new” as they had been subject to a previous sale of freehold interest or grant of a long term lease.

Proposed amendments

The consultation paper proposes the following three amendments to the definition of ‘new’ residential premises:

• A supply of premises by way of a sale or long term lease is disregarded for the purposes of determining whether a supply is new residential premises where that supply is preceded by a development lease arrangement as described above.  
• A grant of an individual strata lot over newly constructed residential premises upon registration of a strata plan will not prevent future supplies of the premises from being new residential premises.
• The subdivision or strata titling of existing residential premises which has previously been sold or subject to a long term lease will not, on its own, result in new residential premises.
  

As an alternative to these amendments, the Government has suggested re-writing the definition of new residential premises into a principles based test which would essentially only look at whether the residential premises has been previously sold or subject to a long term lease to the end user. An ‘end user’ would be a person who uses the premises for personal use or for renting the premises as residential premises.

Practical implications

Regardless of which amendments are finally adopted, the proposals will provide support for the Commissioner’s view in GSTR 2008/2 which provides that developers are subject to GST on sales of newly constructed residential premises which have been subject to a development lease arrangement.

Although the proposals will be retrospective, various transitional provisions will apply to ensure that developers who had relied upon Gloxinia and not charged GST on the sale of such residential premises will not be disadvantaged.

Viewed as a whole, the amendments seem to signal a shift towards the Commissioner’s preferred approach of looking at the substance of a transaction rather than its legal form. They aim to apply GST to supplies of what in substance are new residential premises, while ensuring other supplies of residential premises are not subject to GST.

Taxpayers who may be affected by these changes are encouraged to lodge submissions. Moore Stephens would be happy to assist in the preparation of submissions. All submissions are due to Treasury by 25 February 2011.

Authors: Andrew Cromb and Abi Chellapen.