House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Deputy Prime Minister and Treasurer, the Hon Wayne Swan MP)

Chapter 6 - GST treatment of new residential premises

Outline of chapter

6.1 Schedule 4 to this Bill amends the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) to ensure that sales or long-term leases of new residential premises by a registered entity are taxable supplies and that sales or long-term leases of residential premises (other than new residential premises) are input taxed supplies.

6.2 These amendments will also ensure that:

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first, the supply, by way of assignment of a long-term leasehold interest, of newly constructed residential premises is a taxable supply of new residential premises; and

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second, the reconfiguration of the title with respect to existing residential premises (other than new residential premises), of itself, will not result in the subsequent supply of those residential premises being a taxable supply of new residential premises.

6.3 These proposed amendments also clarify that premises that become new residential premises because of substantial renovations or because they have been built to replace demolished premises, cease to be new residential premises once they are subsequently sold or supplied by way of long-term lease as residential premises.

6.4 Except for item 2 in this Schedule (see paragraph 6.3), the provisions take effect from 27 January 2011 (the date of the Government's announcement). Item 2 of this Schedule (referred to in paragraph 6.3) applies in relation to supplies of residential premises on or after the day this Schedule commences.

6.5 All legislative references in this chapter are to the GST Act unless otherwise stated.

Context of amendments

6.6 Under section 40-65, the sale of residential premises to be used predominantly for residential accommodation is input taxed to the extent that the premises are not commercial residential premises or new residential premises.

6.7 Section 40-70 provides that a supply by way of long-term lease of residential premises to be used predominantly for residential accommodation is also input taxed to the extent that the premises are not commercial residential premises or new residential premises.

6.8 Section 40-75 provides the meaning of 'new residential premises'. Under this section, 'new residential premises' are residential premises:

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that have not previously been sold as residential premises, or have not previously been the subject of a long-term lease; or

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that have been created by 'substantial' renovations of a building; or

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that have been built to replace demolished premises on the same land, or which contain a building that has been built for that purpose.

6.9 The Full Federal Court decision in 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. This outcome is contrary to the policy intent to tax the sale of newly constructed residential premises by GST registered entities who are selling the premises as part of their enterprise activities.

6.10 The Federal Court's decision in Gloxinia also highlights that the current law may not achieve the stated policy intent with respect to the goods and services tax (GST) treatment of residential premises in other circumstances. In those parts of Australia where land tenure is held by way of long-term lease, such as in the Australian Capital Territory (ACT), the process of building, 'strata titling' and selling what would otherwise be new residential premises subject to GST may result in those sales being treated as input taxed and not subject to GST.

6.11 Although not specifically addressed by the Federal Court in Gloxinia , the reasons for the Court's decision may also be considered to raise doubt as to whether the current law achieves the desired policy intent where there is an alteration to property title arrangements for existing residential premises (other than new residential premises) held by way of freehold title. For example, the decision may be considered to suggest that the subdivision of an existing block of flats into strata title units, or the excising of a vacant lot from land comprising existing residential premises, may result in the premises becoming new residential premises and their subsequent supply being subject to GST rather than being input taxed.

6.12 These outcomes are contrary to the general policy intent in relation to the taxation of property under the GST Act.

6.13 The Government has therefore decided to amend the GST law with effect from 27 January 2011 (the date of the Government's announcement) to ensure that it achieves the intended policy outcome for the GST treatment of residential premises. The amendments made by this Schedule, except for item 2, apply in relation to supplies on or after 27 January 2011, subject to certain exceptions contained in items 12 and 13.

6.14 Retrospective amendment of the GST law is considered appropriate as it will provide certainty to taxpayers with respect to the GST treatment of supplies of affected premises. It is also considered that retrospective amendment of the GST law will limit any future potential competitive advantage that may otherwise arise for those taxpayers that construct new residential premises under relevant arrangements and which, under the current law, may result in reduced GST liabilities.

6.15 These amendments confirm the interpretative approach applied by the Australian Taxation Office (ATO) and followed by taxpayers prior to the decision in relation to the GST treatment of newly constructed residential premises that are subdivided or strata-titled prior to their sale or supply by long term lease.

6.16 Similarly, these amendments confirm and remove any doubt with respect to the interpretative approach applied by the ATO and followed by taxpayers prior to the decision with respect to changes to the configuration of property title relating to existing residential premises (other than new residential premises). That is, the amendments confirm and remove any doubt that the subdivision or strata titling of residential premises (other than new residential premises) does not result in the creation of new residential premises.

6.17 A transitional provision applies to ensure that taxpayers, who have entered into specified arrangements, on the basis of the current law as held to apply by the Federal Court in Gloxinia , will not be disadvantaged.

Summary of new law

6.18 This Schedule amends subsection 40-75(1) to remove any doubt that premises that become new residential premises because of substantial renovations or because they have been built to replace demolished premises, cease to be new residential premises once they are sold or supplied by way of long-term lease as residential premises.

6.19 Schedule 4 inserts new subsection 40-75(2AA) into the GST Act to clarify and remove any doubt that the subdivision of existing residential premises that are not new residential premises, by itself, does not result in the subdivided premises being new residential premises.

6.20 This Schedule inserts new subsection 40-75(2B) into the GST Act to provide that a 'wholesale supply' of residential premises is disregarded in certain circumstances for the purposes of determining whether a subsequent supply of the premises is a supply of new residential premises.

6.21 This Schedule also inserts new subsection 40-75(2C) into the GST Act to provide that any supply of residential premises by a government body as a result of the lodgment of a property subdivision plan, for example, the grant of strata-lot leases in relation to residential premises, is disregarded for the purposes of determining whether a subsequent supply of the premises is a supply of new residential premises.

Comparison of key features of new law and current law

Detailed explanation of new law

6.22 These amendments add words and notes to subsection 40-75(1) to clarify that premises that become new residential premises because of substantial renovations or because they have been built to replace demolished premises, cease to be new residential premises once they are sold or supplied by way of long-term lease as residential premises. [Schedule 4, item 2, subsection 40-75(1)]

6.23 These amendments also provide that residential premises are not new residential premises if they are created from residential premises that became the subject of a 'property subdivision plan' and the residential premises were not new residential premises immediately before they became the subject of that plan [Schedule 4, item 5, subsection 40-75(2AA)] . The term property subdivision plan has been defined to mean a plan for the division of real property that is registered (however described) under an Australian law. The note to the definition explains that strata title plans and plans to subdivide land are examples of a 'property subdivision plan'. [Schedule 4, item 10, definition of 'property subdivision plan' in section 195-1]

6.24 The intention of new subsection 40-75(2AA) is to clarify that the subdivision of existing residential premises that are not new residential premises does not, by itself, result in the subdivided premises being new residential premises. Subsection 40-75(2AA) will not prevent premises from being treated as new residential premises for the purposes of paragraph 40-75(1)(b) or (c) should they subsequently be substantially renovated or demolished and replaced. The premises referred to in paragraph (2AA)(a) include associated land as well as buildings.

6.25 These amendments also provide that a 'wholesale supply' of residential premises is disregarded in certain circumstances for the purposes of determining whether a subsequent supply of residential premises is a supply of new residential premises. [Schedule 4, item 8, subsection 40-75(2B)]

6.26 The intention of new subsection 40-75(2B) is to ensure that certain sales of newly constructed residential premises by a developer to home buyers and investors will be taxable supplies of new residential premises even though there may have been an earlier 'wholesale supply' of the premises. The earlier supply is disregarded for the purposes of determining whether or not residential premises are new residential premises if the residential premises have been constructed pursuant to a particular arrangement (including an agreement). The particular arrangement being an arrangement between a developer or builder and a land holder, whereby the developer or builder (or an associate of the developer or builder) becomes entitled to the freehold or long-term leasehold title in the premises conditional on specified building or renovation work being undertaken by the developer or builder.

6.27 These amendments are intended to ensure that GST is payable on the full value added to premises by developers and builders.

6.28 The earlier 'wholesale supply' is also a supply of new residential premises. The consideration for the 'wholesale supply' of the residential premises includes the GST-inclusive market value of the specified building or renovation work undertaken on the land by the developer or builder prior to the transfer of the premises to the developer or builder. This is consistent with the Federal Court's approach in Gloxinia where it was held that the Council supplied the completed residential premises to the developer, and not just vacant land, when the title to each of the individual residential apartments was granted to the developer upon their completion of the development and construction of the residential premises.

6.29 These amendments also provide for a regulation-making power to allow for future arrangements which may result in similar unintended policy outcomes to be included in and addressed by new subsection 40-75(2B) [Schedule 4, item 8, subparagraph 40-75(2B)(c)(ii)] . Any proposed regulations would be subject to public consultation in accordance with the Government's tax design policies.

6.30 These amendments further provide that the supply of premises by a government body as a direct result of the lodgment of a property subdivision plan, for example, the grant of strata-lot leases in relation to residential premises, is disregarded for the purposes of determining whether a supply of premises is a supply of new residential premises. [Schedule 4, item 8, subsection 40-75(2C)]

6.31 New subsection 40-75(2C) is intended to deal with the issue of strata titling of a long-term leasehold interest in newly constructed residential premises (which is particularly relevant in those States and Territories where land tenure is held by way of long-term leasehold, for example, the ACT). Specifically the new subsection is intended to ensure that the granting of individual strata lot leases over newly constructed residential premises upon registration of a property subdivision plan is not, by itself, sufficient to cause those premises to cease to be new residential premises and to be input taxed when they are subsequently sold or supplied by way of long-term lease. The supply that this new subsection captures is limited to the supply that a government body makes, for example, the grant of strata lot leases, as a direct result of the lodgment of a strata plan by an entity.

6.32 As noted in paragraph 6.26, the consideration for a 'wholesale supply' of residential premises under an arrangement of a kind described in new subsection 40-75(2B) includes the GST inclusive market value of the development and building works undertaken on the land by the developer or builder prior to the 'wholesale supply' being made. The developer also makes a supply of those development and building works to the land owner. The attribution rules and tax invoice requirements in Division 29 apply in relation to these respective supplies.

Example 6.18

On 1 February 2011, Government X enters into a deed with DeveloperCo for the development and sale of improved land that Government X held at 1 July 2000. The deed between Government X and DeveloperCo provides for the grant of a development lease for a period of three years. DeveloperCo is required to undertake certain development works on the land, including the construction of residential apartments, subject to the terms of the development lease. The deed between Government X and DeveloperCo provides that upon completion of the development works, Government X will transfer freehold title to the land including the development works to DeveloperCo in return for payment of $22 million.

The GST-inclusive market value of the works undertaken on the land by the developer is $220 million.

The value of the land as at 1 July 2000 was $11 million.

On 1 February 2014, the development works are completed and, in accordance with the terms of the deed, Government X transfers freehold title to the premises to DeveloperCo in return for a monetary payment of $22 million from DeveloperCo to Government X.

GST outcomes under the new law - margin scheme is applied

(i) The supply of development services by DeveloperCo and the acquisition of those development services by Government X.

In undertaking the development works on the land, under the terms of the deed and the development lease, DeveloperCo makes a taxable supply of those development works to Government X.

The consideration for the development works undertaken by DeveloperCo is the GST-inclusive market value of the freehold interest in the development transferred to DeveloperCo less the $22 million payment that DeveloperCo made in return for that transfer. In this case, it is accepted this amount is equivalent to the GST inclusive market value of the development works undertaken by the developer, that is, $220 million.

On the basis set out above, DeveloperCo's GST liability for its supply of the development works to Government X would be:

$220 / 11 = $20m.


Government X is entitled to an input tax credit for its acquisition of the development works from DeveloperCo, equivalent to the GST payable on the supply of the development works by DeveloperCo, that is, $20 million.

DeveloperCo is entitled to input tax credits on the taxable supplies it acquires to undertake the development works.

(ii) The wholesale supply of the premises to DeveloperCo on 1 February 2014.

The transfer of the freehold title to the premises to DeveloperCo on 1 February 2014 is a wholesale supply to which proposed subsection 40-75(2B) will apply.

This wholesale supply of the premises is a taxable supply.

The consideration for the wholesale supply of the premises is the $22 million paid by the developer plus the GST-inclusive market value ($220 million) of the development works that the developer undertook on the land under the terms of the deed and the development lease.

Therefore the total consideration for Government X's wholesale supply of the premises is $242 million.

Government X's GST liability on its wholesale supply of the premises under the margin scheme is:

$242m - $11m / 11 = $21m.


(iii) The developer's acquisition of the completed development and subsequent sale of residential premises to home buyers and investors.

The developer will not be entitled to an input tax credit for its acquisition of the completed development from Government X because it was supplied to the developer under the margin scheme (section 75-20).

The developer's sale of the residential apartments constructed under the development lease arrangement will be taxable supplies of new residential premises.

The developer will be liable for GST on its supplies of the residential apartments to home buyers and investors.

Where the margin scheme is applied, the GST liability applicable to the sale of each individual apartment will be equal to:

(the sale price of the apartment - the applicable proportion of the $242m consideration that the developer provided for the entire development) / 11.


GST outcomes under the new law - the margin scheme is not applied

The GST outcomes will be the same if the margin scheme is not applied, except that:

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Government X's GST liability on its wholesale supply of the completed premises to DeveloperCo will be calculated on the entire consideration received:

$242m / 11 = $22m


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DeveloperCo will be entitled to an input tax credit of $22 million for its acquisition of the completed premises from Government X.

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DeveloperCo's GST liability on the sale of individual residential apartments to home buyers and investors will be calculated as 1/11 of the entire sale price for each apartment.

Application and transitional provisions

6.33 The amendments made by this Schedule (other than item 2) apply in relation to supplies of residential premises on or after 27 January 2011. Retrospective application of the amendments is considered necessary for the reasons outlined in paragraphs 6.14 to 6.16. However, some sales of residential premises after 27 January 2011 will not be subject to these amendments if the conditions contained in items 12 and 13 are satisfied. [Schedule 4, subitems 11(1) and (2)]

6.34 The amendment made by item 2 applies in relation to supplies of residential premises on or after the day after this Schedule commences. [Schedule 4, subitem 11(3)]

6.35 The first exception to the other amendments (that is, other than those made by item 2) excludes certain 'wholesale supplies' of residential premises made on after or before 27 January 2011, from the application of the new law, subject to certain conditions being satisfied in relation to the 'wholesale supply'. [Schedule 4, item 12, subitem 12(1)]

6.36 The first condition that needs to be satisfied is that the premises from which the residential premises were created had earlier been supplied to the recipient of the wholesale supply or the recipient's associate. [Schedule 4, item 12, paragraph 12(2)(a)]

6.37 The second condition is that the recipient of the wholesale supply, or the recipient's associate, was 'commercially committed' to an arrangement, under which the 'wholesale supply' was or is to be made, immediately before 27 January 2011. [Schedule 4 , item 12 , paragraph 12(2)(b)]

6.38 The third condition is that the wholesale supply was conditional on specified building or renovation work being undertaken by the recipient of the earlier supply or their associate. [Schedule 4, item 12, paragraph 12(2)(c)]

6.39 The fourth condition is that any acquisitions relating to a subsequent sale or supply by way of long-term lease of the residential premises by the recipient of the 'wholesale supply', have not been treated as being creditable acquisitions for which an input tax credit entitlement arises. This condition is also satisfied where a GST return has subsequently been amended so that the net amount reported by the recipient of the wholesale supply for any tax period does not include an amount equivalent to the input tax credits, or any part of 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. [Schedule 4, item 12, paragraph 12(2)(d)]

6.40 The term 'arrangement' in subitem (2) includes, but is not limited to, an agreement. [Schedule 4, subitem 12(3)]

6.41 The term commercially committed , in relation to an arrangement, means:

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to be a party to the arrangement, where the arrangement is legally binding;

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to be the preferred tenderer (however described) in the final step in a bidding or tendering process relating to the arrangement;

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to have directly made (with associates) acquisitions, having a total GST exclusive value of at least $200,000, in relation to the arrangement; or

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to have directly incurred (with associates) internal direct costs, of at least $200,000, in relation to the arrangement.

[Schedule 4, subitem 12(3)]

6.42 A second exception relating to the other amendments excludes supplies of residential premises made on or after 27 January 2011 from the application of the new law, if the supply was made because a 'property subdivision plan' was lodged for registration before 27 January 2011 by the recipient of the supply or the recipient's associate. [Schedule 4, item 13]

Consequential amendments

6.43 The words 'When premises are new residential premises' are inserted as a heading before subsection 40-75(1). [Schedule 4, item 1, subsection 40-75(1)]

6.44 Subsection 40-75(2) is amended by omitting the words 'premises are not new residential premises' and substituting with the words 'residential premises are not 'new residential premises'. [Schedule 4, item 3, subsection 40-75(2)]

6.45 Paragraph 40-75(2)(a) is amended by omitting the words '*residential premises' and substituting with the words 'residential premises'. [Schedule 4, item 4, paragraph 40-75(2)(a)]

6.46 The words 'Disregard certain supplies of the premises' are inserted as a heading before subsection 40-75(2A). [Schedule 4, item 6, subsection 40-75(2A)]

6.47 Subsection 40-75(2A) is amended by omitting the words 'premises is disregarded as a sale' and substituting with the words 'residential premises is disregarded as a sale or supply'. [Schedule 4, item 7, subsection 40-75(2A)]

6.48 Two notes are included in the legislation to direct users of the legislation to the existence of the transitional provisions. [Schedule 4, item 8, subsection 40-75(2B) (note 3) and subsection 40-75(2C) (note)]

6.49 The words 'New residential premises include associated land' are inserted as a heading before subsection 40-75(3). [Schedule 4, item 9, subsection 40-75(3)]