Simply, the draft Ruling interprets 'supply' as including an attempt to supply. It is an extension of the meaning of the word that exceeds any realistic interpretation. You can't make a supply without actually supplying something - just offering to do so is insufficient.

If you want to collect Goods and Services Tax (GST) on property sales, you'll withdraw this ruling because most of the industry will be doing their utmost to make sure you don't, or at least the more honest ones will be making sure that they defer their liability far longer than you have ever contemplated.

The term relevant to the interpretation of Division 129 is 'apply'. The meaning of 'apply' is given in section 129-55. While the meaning of 'apply' includes supplying a thing, the meaning is much broader and given that it is an inclusive definition, this also includes its ordinary meaning. The Ruling does not interpret 'supply' as intending to supply something but rather takes the view that for the purpose of Division 129 'apply' includes holding a thing for the purpose of sale.

It is also noted that an objective assessment of all the facts and circumstances is necessary to establish that an entity is in fact holding premises for the purpose of sale. The concept is to be distinguished from the holding of an investment asset for sale at some undetermined time in the future.

However, the Commissioner considers that the view set out in the Ruling is the preferred interpretation of Division 129 in the context of new residential premises constructed for sale but subsequently used to make input taxed supplies by way of lease, as it recognises the dual application of the premises to both creditable and non-creditable purposes.

At paragraph 6, it is stated that an entity that has calculated Division 129 adjustments in relation to a particular acquisition based on the Commissioner's previous view in the Issues Register will be protected in respect to what it has done up to the date of issue of the final Ruling. In addition, if an entity has relied on the Commissioner's previous view in the Issues Register to make Division 129 adjustments, prior to the date of issue of the final Ruling, the entity can continue to calculate subsequent Division 129 adjustments relating to that particular acquisition on the basis of the Commissioner's previous view.

We query whether this approach is consistent with principles of proper taxation as taxpayers that have complied with the Commissioner's previous view will have more than likely overpaid GST pursuant to Division 129 adjustments in the circumstances canvassed by the draft Ruling. Moreover, according to the draft Ruling, the fact they can (and may in fact) continue on the same basis, notwithstanding the Commissioner's change in view would probably have more to do with the Commissioner's view of the application of the 5 year rule in subsection 40-75(2). We would like that transitional implication to also be covered in the Draft Ruling. At present, paragraphs 106-112 deal with that interaction but nowhere does the Commissioner assure those taxpayers that have relied on the previous views with respect to Division 129 and that have effectively made Division 129 adjustments as to what their GST position will be with respect to subsection 40-75(2).

We query whether the more likely transitional arrangement to be adopted by taxpayers is that they would seek to revise prior adjustments in order to rely on the Commissioner's revised view of the GST Act, and whether in these circumstances and having regard to the history and contentious nature of the issue, it is appropriate for the Commissioner to downplay and discourage that scenario. Refer paragraph 7 which states:

[i]f an entity revises prior adjustments relevant to an acquisition, based upon the views in this draft Ruling, the entity will also be required to calculate all adjustments arising in relation that acquisition on that same basis.

The transitional issue on the interaction between Division 129 and subsection 40-75(2) has been considered in the final Ruling. Consistent with the approach to the previous view on Division 129, if under the previous view the entity was considered to have applied the premises solely to making input taxed supplies by way of lease, this period will also contribute to a 5 year continuous period for the purposes of subsection 40-75(2).

The Commissioner is not seeking to downplay or discourage an entity from revising previous Business Activity Statements (BAS). The option has been given so that taxpayers that have made all increasing and decreasing adjustments under the previous view (or are expected to make relevant decreasing adjustments in the next adjustment period and do not wish to revise previous BAS) are not required to revise their previous BAS. However, it is considered that an entity must make all increasing and decreasing adjustments in relation to an acquisition consistently under either the previous view or under the revised view set out in the Ruling.

Footnote 43 in the Ruling has been added to paragraph 50 to clarify that the principles discussed in the Ruling apply equally in these circumstances.

Examples have been added to the Ruling to address these circumstances - see paragraphs 108 to 120 of the Ruling.

There is an assumption throughout the draft Ruling that the rental of new residential premises is an input taxed supply in all circumstances under the terms of section 40-35. See, for example, paragraphs 10, 23, 29, 32 and 40 of the draft Ruling. This is because of the repeated references to the sale of new residential premises being a taxable supply but the rental of new residential premises being an input taxed supply, without any reference to the terms of section 40-35(2) and the possibility that residential premises may be used for other purposes including office accommodation.

It will be remembered that section 40-35 states that '[a] supply of premises which is by way of lease ... is input taxed if: (a) the supply is of residential premises...' Significantly, subsection 40-35(2) relevantly qualifies the above, as follows: '[h]owever, the supply is input taxed only to the extent that the premises are to be used predominantly for residential accommodation (regardless of the term of occupation);' We consider that it is important that the Commissioner recognises in the draft Ruling that, besides being residential premises, the premises must also be predominantly used for residential accommodation to be input taxed supplies of residential premises. It is not appropriate, for example, in paragraph 23 of the draft Ruling to state that 'a supply of residential premises by way of lease, hire or license is input taxed if the requirements of section 40-35 are satisfied' without specifically referring to the requirements of subsection 40-35(2). We suggest that paragraph 23 needs to be expanded to explain the usage test, as discussed in the Toyama case, paragraphs 82, 95 and 96 and, more recently, in the South Steyne Hotel case, paragraphs 48-49.

We suggest that an example which would be helpful in this draft Ruling is the lease by a building company of new residential premises as a display home or display apartment to the developer of the new residential premises for the purpose of promoting sales of other new homes and apartments in the same complex. We consider that such premises are not used predominantly for residential accommodation and in no circumstances involve the making of input taxed supplies.

Furthermore, the Tax Office's view on the decision in Toyama Pty Ltd v. Landmark Building Developments Pty Ltd [2006] NSWSC 83; (2006) 2006 ATC 4160; (2006) 62 ATR 73 (Toyama) in relation to the phrase 'to be used predominantly for residential accommodation' is set out in the Decision Impact Statement (DIS 4541/02) related to that case.

It is the Tax Office's view that an objective approach is required to the interpretation of the phrase 'to be used predominantly for residential accommodation' and that this is to be based on the physical characteristics of the premises (see paragraphs 19 and 20 of GSTR 2000/20).

It is not considered that this Ruling is the appropriate publication for further explanation of this issue. GSTR 2000/20 and the DIS 4541/02 relating to the Toyama case provide some further explanation.

We query the relevance of new residential premises that are being held for the purpose of the sale or exchange involved as part of an entity's enterprise. The reference to 'exchange' is repeated in paragraphs 47, 48 and 51 of the draft Ruling without any apparent explanation. The Commissioner is asked to explain this in the draft Ruling.

It is considered that the application of the principles in the Ruling to this example is sufficiently covered by the guidance in the Ruling on the types of facts and circumstances that may be relevant. The Ruling notes that any one factor may not be sufficient on its own. See paragraphs 44 to 47 of the Ruling.

Dee Veloper apparently signs 6 month lease agreements with tenants which allow for early termination in the event of a sale. The example also suggests that Dee Veloper has notified the tenants of their intention to sell when entering into the leases. This example would not arise in practise because to do so would ordinarily be contrary to Dee Veloper's commercial interests. We recommend that the draft Ruling be amended to contain a more commercially realistic example.

The guidance provided by the Commissioner as to how to identify acquisitions that are subject to a change in creditable purpose and how to determine the extent to which an acquisition is applied for a creditable purpose is fairly elementary. In this regard, it is considered that additional work needs to be done with respect to identifying a wider sample of acquisitions in constructing new residential premises, particularly acquisitions of services and explain the relevant principles as to whether they are subject to a change in creditable purpose (for example are services of architects and surveyors subject to a change in creditable purpose?).

It is queried whether all acquisitions are capable of adjustments under Division 129. In this regard, paragraph 63 of the draft Ruling states that it provides guidance on 'identifying the types of different acquisitions that may be subject to adjustments under Division 129 (paragraphs 69 to 74 of this draft Ruling)'. In paragraph 70, it is stated that '[m]any relevant acquisitions will relate to the construction of particular premises' and later, '[i]f the constructed premises are applied differently to the intended or former application ... a Division 129 adjustment can arise in relation to this type of acquisition'. In respect of acquisitions of services, it is said that the services of an electrician, plumber, bricklayer or an entire construction contract can arise in relation to construction and be subject to Division 129 adjustments. In paragraph 71, it is further stated that acquisitions of services related to the sale of the premises such as real estate agent and marketing services acquired in relation to selling the premises are directly related to the sale.

It is suggested that there are several other acquisitions that may be said to directly relate to the sale of the new residential premises, for example, the services of surveyors and architects and seek the Commissioner's expansion of the list of relevant acquisitions, in particular, acquisitions of services that either relate to the sale of the new residential premises or the leasing of the premises for residential accommodation.

Apportionment methodology based on effective life of a building .

Another possible fair and reasonable method of apportionment would be to look at the estimated or effective lifespan of the premises rather than the estimated revenue from the premises. This is already a recognised concept for income tax purposes in the context of depreciating assets and would be relatively simple to apply. In these circumstances, the extent to which new residential premises are applied for a non-creditable purpose would be:

Period of time the premises is leased / Estimated effective life of the premises

Therefore, under this apportionment method, if the estimated effective life of the asset is 40 years, and the property is leased for a period of 1 year before it is sold, the developer will be required to make an increasing adjustment equal to 1/40th of the input tax credits claimed on construction acquisitions. If the property is leased for a period of 2 years before it is sold, the developer will be required to make increasing adjustments over two adjustment periods equalling 2/40th of the input tax credits claimed on construction acquisitions.

Division 129 requires an entity to look back over the relevant period and apportion the application of the premises during that period between creditable and non-creditable purposes. Contrary to this, an apportionment method based on the effective life of the premises contemplates the entire life span of the premises rather than the actual use of the premises by the entity in the relevant period. Furthermore, residential premises include the land on which the relevant building is constructed. Land is generally an appreciating asset, and the effective life of the relevant building is considered too remote and arbitrary to reasonably reflect the application of the residential premises, comprising both the land and buildings, during the relevant period.

The Commissioner would reject this method notwithstanding that the estimated effective life may be based upon the statutory rates provided for the purpose of calculating capital works deductions under Division 43 of the Income Tax Assessment Act 1997.

The problems currently confronting developers may be illustrated by reference to a simple example. Consider the scenario where a developer could sell a residential apartment for say $550,000 in February 2009, but the property is expected to sell for say $770,000 in August 2010 based on the prevailing market prices before the current downturn. To meet their holding costs, the developer leases the property for the next 18 months. The end result is that while the developer may have derived some rental income, their purpose (objectively considered) has been to maximise the sale price of the apartment upon which GST is levied. The outcome is that the developer remits GST of $70,000 instead of $50,000 (ignoring the margin scheme for present purposes).In the example set out the Commissioner may well take the view that it is appropriate to compare the income from the letting of the premises with the income from the ultimate sale of the premises and deny input tax credits according to the formula in paragraph 77 of the Draft Ruling. However, this approach ignores the fact that the letting activity is a means to an end - it is the means by which the developer is able to realise a much greater sale price for the property upon which GST is being remitted. The Commissioner should consider including in the draft Ruling a formula which compares the expected sale price of the property prior to the letting activity with the sale price of the property after the letting activity. It is counterintuitive to deny input tax credits (other than in respect of those costs which relate to the letting activity alone) when the purpose or objective of that letting activity is to generate a greater sale price upon which GST must be remitted. In other words, it is appropriate to have a formula which takes into account the fact that the effluxion of time arising during the period of letting has been productive in generating additional GST liabilities on sale.

The change in value of residential premises over time will be driven by many factors that are not related to the use of the premises to make supplies by way of lease. Therefore, changes in the estimated sale price of the premises do not provide an appropriate reflection of the use of the premises over the relevant period.

Also, at a broader level this methodology of considering the depreciation of a building while it is being used for making input taxed supplies is similar to the effective life methodology. Therefore, for similar reasons to those set out above in relation to the effective life methodology it is not considered that this methodology provides a fair and reasonable basis of apportionment.

In the retirement village industry it is quite common for developers to enter into loan / lease arrangements with residents as a means of securing a sale of the residual freehold interest in the property. The business model of the developers undertaking these activities is not to lease the property per se. Rather, the leasing of the property to residents is being undertaken to secure an income stream for an operator which enhances the value of the property upon sale. In many cases, the developer will not even have the expertise to operate the retirement village.

The particular problems (not addressed) by the draft Ruling are:

•

The reasonable methods of apportionment set out in the draft Ruling do not deal with the situation where the leasing activity is simply a means to an end. That is, the developer's ability to sell the premises and the price payable for the premises upon sale is dependent upon the entry into lease agreements with the residents.

•

The residents do not typically pay 'rent' for the premises. Instead, they may pay recurrent charges, and make an ingoing contribution (which is refundable upon termination, together with a share of any capital gain). The suggested apportionment methods in the draft Ruling do not readily apply to this industry.

However, it is acknowledged that the specific facts of each case, particularly in the retirement village sector, need to be considered in applying the Ruling. In particular, different considerations may need to be taken into account in determining a fair and reasonable basis of apportionment. While an output based indirect method may still be appropriate, different things may need to be taken into account in the numerator and denominator of the formula. The issues peculiar to the supplies made in the retirement village sector are outside the scope of this Ruling. Guidance on specific circumstances can be sought by writing to the Tax Office for a private ruling.

As noted above, even though leasing activities may be thought of as a means to an end, it is considered necessary to recognise the fact that during the relevant period the entity has applied the premises to two purposes - one creditable and one non-creditable. Division 129 is concerned with identifying the difference between actual application of a thing and intended application of a thing. It is considered that the use of the premises to make input taxed supplies should be recognised as an application of the premises.

Questioned whether a de minimis rule could be applied in relation to adjustments. Provided an example of new residential premises being sold for $3 million but it had been rented for a short period bringing in $2,000 rent. The example results in essentially a 99.94% creditable purpose.

As most of the examples are over a number of adjustment periods, what is the consequence of a change in the value of the 'Consideration for the taxable supply of the premises' (that is, the sale price of the property) if the value increases, for example from the $500,000 initial value to a revised $550,000, then 12 months later $600,000 as this will influence the final percentage?

Example 19 in the Ruling has also been amended to provide an example of the effect of a change in the estimated sales consideration on the apportionment methodology.

We seek clarification of the calculations in some of the examples in the draft Ruling.

In Example 8, a time-based apportionment is applied to ascertain the extent of creditable purpose for the period until the first adjustment period, where the application changed from solely for sale to solely for lease. However, in Example 7 where there was also a change in application no time-based apportionment was applied. It is submitted that for consistency the actual application in Example 7 should be 95.02% (that is 6/21 x 100 + 15/21 x 93.02).

In addition, Example 9 only partially applies the time-based apportionment. While we do not accept the need for the further time based apportionment method, if it must be included, it is submitted that the actual application in Example 9 should be 68.44% (that is 6/21 x 100 + 9/21 x 93.02 + 6/21 x 0).

In relation to the comment on Example 7 of the draft Ruling, it is the Tax Office view that also using a time based apportionment in such a scenario effectively results in a double counting of the creditable application. This is because the fact that the premises were only leased for part of the period is already reflected in the amount of rent the entity receives.

In relation to the comment on Example 9 of the draft Ruling, the same reasoning as in relation to Example 7 applies to explain why the time based apportionment is applied in the way that it is.

Having made a clear change in creditable purpose, would John in Example 8 need to make subsequent adjustments over the ensuing periods until the apportionment % of input credits initially claimed reaches/approaches a value of 0.00%, and at that point would the subsequent sale of the property incur a GST liability?

Footnote 51 in the Ruling has been added at the end of Example 12 in the Ruling to identify these issues.

The example should be expanded or extended to cover the full issues when the developer chooses to live in the premises. For example, what is the Commissioner's view of the implications for later adjustment periods? Have such premises left the GST net, such that all credits claimed are clawed back in the next adjustment period? Further, is any subsequent sale of the property outside of the course or furtherance of an enterprise or is it subject to the five year rule.

However, specifically, each case will depend on its facts. If an entity is continuing to hold the premises for the purpose of sale, there will continue to be a dual concurrent application of the premises and further adjustments in later adjustment periods will be required. If the entity commences applying the premises only to a private or domestic purpose, the entity will have to continue making adjustments in relevant adjustment periods based on a fair and reasonable method of apportionment.

Guidance on the issue of 'course or furtherance of' an enterprise is provided in the context of in specie distributions from a trust in Goods and Services Tax Determination GSTD 2009/1 Goods and services tax: is a supply by way of an in specie distribution of an asset that is applied in an enterprise carried on by a discretionary trust to a beneficiary of the trust made 'in the course or furtherance of' the trust's enterprise? The issue is also discussed in the context of partnerships in paragraphs 85B to 85G of Goods and Services Tax Ruling GSTR 2003/13 Goods and services tax: general law partnerships.

Paragraphs 106 to 112 of the draft Ruling.

GST as a tax on final private consumption - Division 129 should be applied as a timing provision until the 5 years has passed
GST is intended to be a tax on final private consumption. The interpretation and application of difficult GST issues needs to reflect that underlying purpose. The input taxing of residential rent and sales of existing residential property reflects a treatment of them as consumption with a denial or clawback of credits for the supplier being a means of taxing the consumption.

The application of Division 129 to residential property developments needs to particularly ensure that the tax is restricted to final private consumption and not to business entities or transactions. It needs to be remembered that, for most residential property developers, Division 129 is essentially a timing provision rather than substantially determining the underlying liability. Most residential property that enters the realm of operation of Division 129 will be sold within five years. Thus in most cases, the bulk of the GST paid on acquisitions by the developer will be ultimately creditable, either up front or by way of reversal of most of the Division 129 increasing adjustments. It is only for a minority of developments where the property remains leased and unsold after five years that Division 129 should act as the trigger for the final GST liability.

It is submitted that Division 129 should be applied as a simple timing provision until the five year period has passed. Its application should not be overly complicated. Once the five year mark has passed, Division 129 and the five year rule should be applied on a consistent basis, that is:

•

Input tax credits on acquisitions should be denied; and

•

The sale of the residential property should be input taxed (see below).

Whilst we do not consider the words 'used' and 'applied' to be the same, we recognise that various interpretations to align them, (or not align them), will lead to impractical outcomes.

For example:

1.

premises being taxed as new premises when only a minor percentage of input tax credits were allowable (eg where there was a single, but active, marketing attempt for a very short period, or a single opportunity to sell), or

2.

premises being taxed as new premises where credits were almost fully claimed, but division 129 does not claw them back because the 5 years for division 40 is reached after division 129 ceases to apply, or

3.

There are also matters such as which 5 year period is relevant and how do you calculate the period, (for example, first, any, last or cumulative?) One outcome is that 50 year old premises may be taxed as new because there is an attempt to sell the premises some time in that 50 year period.

These issues are not simply resolved through the Commissioner's view and need considerable work.

It is considered that more consultation is needed, and potentially legislative amendments are necessary to clarify the interaction of provisions. Otherwise, there are likely to be extraordinarily counter-policy outcomes and considerable uncertainty.

•

If premises are rented for over 5 years and until the relevant adjustment periods have ended and the premises have been held for the purpose of sale for the entire period and the premises are then sold, the sale will be a taxable supply of new residential premises but the entity would have been entitled to retain a large percentage of credits.

•

If premises are rented for over 5 years and until the relevant adjustment periods have ended and the premises have only been used for making input taxed supplies for the entire period and the premises are then sold, the sale will be an input taxed supply of residential premises but the entity would have been required to make increasing adjustments for the majority of credits.

In the first example referred to, if the premises started being held for sale before the end of 5 years of use for making input taxed supplies by way of lease, then this may result in the requirements of the 5 year rule not being met. However, depending on whether relevant adjustment periods still apply the entity may be entitled to a decreasing adjustment entitling the entity to some of the relevant input tax credits.

The second example is considered to be consistent with the policy of allowing most of the credits where a taxable supply of new residential premises by way of sale is made.

In the third example, any continuous 5 year period of use only for making input taxed supplies by way of lease would mean that there was an input taxed supply of residential premises when they are sold.

With respect, there is no 'strong similarity' between the meanings of those terms and, furthermore, the Commissioner's approach contradicts the underlying policy of the provisions.

To arrive at the outcome suggested in the alternative view of a 100% increasing adjustment it would be necessary at the relevant adjustment period to classify the entire past actual application of the thing as relating to making the input taxed sale of residential premises despite the fact that at the time of previous adjustment periods the entity would have been holding the premises for a creditable purpose of selling new residential premises. It is difficult to see that the nature of past application of a thing could change based on a future event. This seems contrary to the approach in Division 129 which is to compare the actual application of a thing with the intended use of the thing when it was acquired.

Secondly, another difficulty with the proposed alternative view is that the 5 year continuous period of rental is likely to be reached outside the final adjustment period for many of the acquisitions. This will arise because many acquisitions could have only two or five adjustment periods and may be made some time before the premises actually commence being rented. Therefore, in many cases the increasing adjustment which the alternative view suggests will not be made.

Time should be a relevant factor in evidencing whether premises are being held for the purpose of sale.

Example 11 could note that being able to objectively evidence holding for sale for a period of 6 years is unlikely and an exception rather than what would ordinarily happen, however the example is intended to demonstrate the principle.

A taxpayer's five year 'continuous' period may not be completed until more than 10 years after the taxpayer had initially leased the premises. During that period, the taxpayer would not have been entitled to claim all input tax credits and will have paid some of its input tax credits on construction back (pursuant to the Tax Office's revised view on the application of Division 129) and yet the taxpayer is still liable for the full GST on the sale of the property.

In the event that the residential premises are subsequently sold, after all Division 129 adjustment periods have passed, and the premises are still considered to be new residential premises, the taxpayer will still be making a taxable supply and liable to GST on the full price (or margin). However, in that scenario, the taxpayer will not be entitled to a decreasing adjustment as no adjustment periods will be available for the taxpayer. As such, the taxpayer will be liable to remit the full GST on the supply of the premises, but effectively will not be entitled to reclaim the relevant proportion of input tax credits for the GST on its construction.

This potential double taxation cannot, we submit, be the better approach to the interaction of Division 129 and subsection 40-75(2).

The better approach to the interpretation of subsection 40-75(2) is for the five year period to be determined on a cumulative basis after the premises have become new residential premises. We submit that this approach:

•

reflects the words of the legislation;

•

does not result in the taxpayer incurring 'double taxation'; and

•

reflects the policy intent of subsection 40-75(2).

We do not consider that the ATO's revised view with respect to the application of Division 129 leads to the result that the premises have been used to make supplies other than input taxed supplies in the period. In our view, it does not follow that the active marketing of premises for sale is a relevant 'use' for the purposes of the five year rule in subsection 40-75(2).

The wording of the section
The current ATO view is that the requirement within subsection 40-75(2) is satisfied where, for a continuous period of 5 years, the only supplies of the residential premises are by way of lease. This view is based on the Commissioner's emphasis of the phrase 'the period' in connoting a single, continuous period.

With respect, we submit this very narrow, restrictive approach is not justified by reference to 'the period'. We note that subsection 40-75(2) does not state that the 5 year period needs to be for a continuous period. We would consider that had the Parliament meant for the relevant period to be a 'continuous period' such language could have easily been inserted into the legislation.

By inserting additional words into the interpretation of the legislation, the Commissioner risks interpreting the legislation in a way unintended when it was originally enacted.

Furthermore, overemphasis on the word 'the' in these circumstances appears to be taking the literal 'textual approach' that the Courts have rejected - as was illustrated in the judiciary's approach to the word 'would' in HP Mercantile and the identity of property argument in Sterling Guardian.

Only 'used' for 'making input taxed supplies'
We submit that the view regarding 'use' fails to consider the relevant phrase holistically. The phrase is 'used for making supplies' relevant to the period. Therefore, comparing 'use' with other purposes or activities (such as marketing) which don't result in 'making supplies' in the period is inappropriate.

What is necessary is to consider what other supplies in the period the relevant premises have been 'used for making' (that is taxable or GST-free supplies). On this analysis, the marketing of the premises for sale is not a relevant 'use for making' a taxable supply in the period unless the taxable supply is made in the period. If a taxable sale is not made in the period, the premises were not used for making anything other than input taxed leasing supplies in the period.

This interpretation ensures that taking the apportionment approach for the application of Division 129 does not result in the consequence that the five year period never commences. On the contrary, the ATO view results in the five year rule never commencing due to any 'use' in marketing the premises from time to time. In our view, this approach does not accord with the policy of these provisions. On the ATO view, if a vendor of residential property attempts to sell the property as each residential tenancy agreement expires, say every 6 to 12 months it markets the premises for sale and leaves them vacant, there would never be a continuous period of 5 years, even if the premises were twenty years old. We do not think that that is the intended result of the legislation.

Policy
We submit that the better approach is that 'the period' within subsection 40-75(2) be a cumulative period of five years from the time the residential premises are considered to be new.

The treatment of 'the period' in this way means that the taxpayer should, almost invariably, be entitled to some input tax credit recovery under Division 129 to the extent that the taxpayer uses the residential premises to make a taxable supply by selling within that period. This interpretation accords with the policy in the Revised Explanatory Memorandum (paragraph 1.16). This interpretation would also accord with the entitlement to an input tax credit found in section 11-20 of the GST Act. That is, if the use was known upfront, that would result in partial input tax credits for an entity intending to construct new residential premises, lease them for a period and then sell them within five years.

On the other hand, if the premises are sold after the 5 year period had concluded, the taxpayer would be making an input taxed supply of residential premises. The taxpayer would be making an input taxed supply of residential premises. The taxpayer would have to repay all input tax credits on any acquisitions related to the original construction of the premises, but the taxpayer would not be required to remit any GST on the supply of the premises.

We submit that this approach would be in line with the policy intention of ensuring that GST is not embedded in sales of residential premises which have initially been used to make an input taxed supply but are ultimately used to make a taxable supply. Such an approach would also be in accordance with section 11-15, which allows a taxpayer an input tax credit 'to the extent that the acquisition' does not relate to making input taxed supplies.

The Commissioner does not intend to revise the views stated in GSTR 2003/3.

In calculating the final adjustments for the quarter following the sale you have addressed the input credits, but not the GST due as a result of the sale of the property. Can you clarify if David can apply the final apportioned % of 87.11% of the amount of GST due as a result of the sale or if David will incur the full 10% GST on the sale?

For example:

Incurring the full GST component: Liability = GST * Sale Price = 10% * $500,000 = $50,000

OR

an apportioned amount: Liability = GST * Sale Price * Adjustment = 10% * $500,000 * 87.11% = $43,555

However, it may be necessary to consider whether any further adjustments under Division 129 are required following the sale of the premises.

1.

On the sale of the unit for $500,000 is the GST payable 1/11 of $500,000 or is it 1/11 of $500,000 +/- other adjustments?

2.

If there are adjustments, what are they?

3.

Depending on the answers to 1 and 2 above, would it be appropriate to comment in the draft Ruling?

Given that no specific adjustments in relation to the supply consideration arise on the facts it is not considered necessary to add any further explanation to the Ruling.