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of development arrangements had been addressed by the Australian Taxation Office (ATO) in GST ruling GSTR 2008/2 (now withdrawn).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.