On 23 September, the Assistant Treasurer released exposure draft legislation seeking to revise the definition of the term “new residential premises” as it applies in section 40-75 of the GST law.
In essence, the amendments propose to put more rules into section 40-75 to deal with the specific manner in which new interests in land are created.
As my Russian driver – Boris – once asked me “when will they learn that the more rules you make the more ways there are of driving around them.”
The exposure draft Bill and explanatory material can be downloaded from the Treasury consultation website.
The closing date for submissions is Friday, 21 October 201.
The proposal to change the GST law was announced in the May 2011-12 budget in response to the Federal court decision in Commissioner of Taxation v Gloxinia Investments (Trustee) [2010] FCAFC 46.
While the decision in that case dealt with a “development lease” arrangement, the Government perceives that the decision may apply to circumstances where the form of legal ownership over land is converted to another form (e.g., a freehold interest is converted to strata titles).
The critical matter is whether the sale of the “later” interest is the supply of residential premises that have “previously been sold as residential premises and have not previously been the subject of a long-term lease”.
Dowsett J, in his dissenting judgment in Gloxinia described the apparent intention of the legislation as follows:
Thus it seems that the original intention was that the definition distinguish between newly constructed premises and other remises. However the primary mechanism used to give effect to this intention has been to distinguish between premises which have been previously sold or subject to a long term lease and premises which have not been so sold or leased.
The exposure draft proposes to insert more threads in the already tangled web of “new
residential premises” defying Dowsett J’s observations in Gloxinia about addressing the original policy intention.
The proposed amendments to the GST law are complex and focus on the mechanism by which a supplier might acquire an initial interest in real property and subsequently sell that interest.
Rather than address this curiosity referred to by Dowsett J, the ED proposes to address the existing policy in two respects:
- Describe arrangements where “new” interests are created out of existing interests and ensure that the “new” interests are not regarded as “new residential premises” – this is the subdivision and strata titling example; and
- Create a concept of a “wholesale” supply which is “disregarded if the residential premises have been constructed pursuant to 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.”
The EM states that “the amendments are intended to ensure that GST is payable on the full value added to premises by developers and builders.”
This fails to recognise that there may be significant value added by a “retailer” of newly constructed buildings that, under the policy that only seeks to tax the value added by developers and builders”, will escape tax.
As with many aspects of the GST law, there seems to be a reluctance to re-express the tax base in terms of household consumption expenditure. The ongoing focus on the “supplier” and the “supply” rather than the tax base of household consumption expenditure seems to frustrate policy decisions.
At the outset, it might have been more productive to examine why the second sale of premises in the course of an enterprise should not be subject to GST. The difficulty in this area is the curious policy decision to exclude from the GST tax base the value added by business to residential premises in the course of their enterprise.