2.2 Renovations and second hand materials
For source of ATO view, refer to:
- the general principles in GSTR 2000/8 Goods and services tax: special credit for sales tax paid on stock
- the general principles in GSTR 2006/4 Goods and services tax: determining the extent of creditable purpose for claiming input tax credits and for making adjustments for changes in extent of creditable purpose
- paragraphs 58 to 83 of GSTR 2003/3 Goods and services tax: when is a sale of real property a sale of new residential premises?
- paragraphs 20 to 22 of GSTR 2005/3 Goods and services tax: arrangements of the kind described in Taxpayer Alert TA 2004/9 - exploitation of the second-hand goods provisions to obtain input tax credits.
A builder, registered for GST, buys a house to renovate and sell as part of an enterprise of selling renovated houses. The house is renovated with second hand materials bought by the builder from someone who is not required to be registered for GST.
(a) Is the sale of the renovated house a taxable supply?
(b) Is the builder entitled to an input tax credit for the purchase of the house?
(c) Is the builder entitled to an input tax credit for the purchase of the second hand materials?
(a) Sale of renovated house
Whether the sale of the renovated house is a taxable supply depends on whether the house was renovated to such an extent that it became 'new residential premises'. If the renovated house is new residential premises, its sale by the builder will be a taxable supply. If the renovated house is not new residential premises, its sale will be an input taxed supply under section 40-65 of the GST Act.
(For more information about when a sale of residential property is a supply of new residential premises, see GSTR 2003/3.)
(b) Input tax credit for purchase of house
The builder would be entitled to an input tax credit under Division 11 of the GST Act for the purchase of the house if it had been a taxable supply (but not under the margin scheme - see section 75-20 of the GST Act) to the builder; and the builder later sells the renovated house as a taxable supply. An input tax credit would not be available if the sale of the renovated house is an input taxed supply (paragraph 11-15(2)(a) of the GST Act).
(c) Input tax credit for second hand building materials
As the second hand building materials were acquired from an entity that was not registered for GST, no GST would have been payable on the supply of those materials to the builder. Therefore, no input tax credits are available for the purchase of the second hand materials.
Subdivision 66-A of the GST Act, which allows an input tax credit for acquisitions of second hand goods, does not apply. This is because for Subdivision 66-A to apply, the second hand goods must be acquired for the purposes of sale or exchange (but not manufacture) in the ordinary course of a business (section 66-5(1)). This requirement is not met as the purchase of the second hand building materials were not acquired for the purposes of sale or exchange as goods. The materials, when incorporated into the renovated house, become part of the house which is real property. They no longer retain the character of goods.