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Edited version of your written advice

Authorisation Number: 1051236790069

Date of advice: 14 August 2017

Ruling

Subject: GST and sale of real property

Question

Will the sale of your property located at the specified address (the Property) be an input taxed supply of residential premises under section 40-65 of the GST Act?

Answer

Yes, your sale of the Property will be an input taxed supply of residential premises under section 40-65 of the GST Act, and GST is not payable on the supply.

Relevant facts and circumstances

The Trustee for the X Trust (you) is registered for GST from 1 July 2000.

In mm/yyyy, you acquired a property located at the specified address (the Property) with an existing apartment block on the land. The purchase of the Property was a related party transaction and you believe there was no contract.

The land size of the Property is x square meters (sqm) comprising an apartment building of land area y sqm and z sqm at the rear of the building that is used for parking n number of cars.

Since the purchase of the Property you have not carried out any substantial renovation on the building. The building consists of a specified number of apartment units. The apartments within the building are not separately strata titled. Each apartment is fit for use as a residence. All of the apartments are separately inhabitable and not dependant on each other to be inhabitable. There is no common laundry, common areas or any other shared facilities. The only shared areas within the building are hallways, stairwells, lift areas and the like.

There is no commercial or office space, reception desk or lounge/bar in the building. You do not hold out the apartment units to the public as offering accommodation in, or offer any services consistent with, a hotel, motel, hostel or boarding house.

You lease the entire building to another entity since your acquisition of the Property. GST is included in the rent by you to this other entity. At this stage further information on the lease contract or a copy of the lease contract is not readily available to be provided for this ruling request.

The other entity uses the apartments as part of a serviced apartments business.

In prior years you have obtained a Development Approval (DA) for the Property. You did not act on or use this DA. The DA is still in place and will be at the time of sale.

You are proposing to sell the Property and have received an offer from an unrelated third party to purchase the entire building. The current lease will cease at the time of the sale.

You wish to ensure you apply the correct GST treatment to the sale of the Property.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 paragraph 40-35(1)(a)

A New Tax System (Goods and Services Tax) Act 1999 paragraph 40-65(2)(a)

A New Tax System (Goods and Services Tax) Act 1999 paragraph 40-65(2)(b)

A New Tax System (Goods and Services Tax) Act 1999 section 40-35

A New Tax System (Goods and Services Tax) Act 1999 section 40-65.

A New Tax System (Goods and Services Tax) Act 1999 section 195-1

A New Tax System (Goods and Services Tax) Act 1999 subdivision 40-B

A New Tax System (Goods and Services Tax) Act 1999 subdivision 40-C

A New Tax System (Goods and Services Tax) Act 1999 subsection 40-65(1)

A New Tax System (Goods and Services Tax) Act 1999 subsection 40-65(2)

A New Tax System (Goods and Services Tax) Act 1999 subsection 40-75(1)

A New Tax System (Goods and Services Tax) Act 1999 subsection 40-75(2)

Reasons for decision

Detailed reasoning

Subsection 40-65(1) Act provides:

      A sale of * real property is input taxed, but only to the extent that the property is *residential premises to be used predominantly for residential accommodation (regardless of the term of occupation).

The term 'residential premises’ means land or a building that:

    (a) is occupied as a residence or for residential accommodation, or

    (b) is intended to be occupied, and is capable of being occupied, as a residence or for residential accommodation

    (regardless of the term of the occupation or intended occupation) and includes a floating home.

Goods and Services Tax Ruling GSTR 2012/5, Goods and services tax: residential premises sets out the Commissioner’s view on how Subdivision 40-B and 40-C apply to supplies of residential premises, and includes the following:

    9. The requirement in sections 40-35, 40-65 and 40-70 that premises be 'residential premises to be used predominantly for residential accommodation (regardless of the term of occupation)’ is to be interpreted as a single test that looks to the physical characteristics of the property to determine the premises’ suitability and capability for residential accommodation.

    10. The requirement for residential premises to be used predominantly for residential accommodation does not require an examination of the subjective intention of, or use by, any particular person. Premises that display physical characteristics evidencing their suitability and capability to provide residential accommodation are residential premises ….

    14. 'Residential premises’ are not limited to premises suited to extended or permanent occupation. Residential premises provide 'living accommodation’, which does not require any degree of permanence. It includes lodging, sleeping or overnight accommodation.

    15. To satisfy the definition of residential premises, premises must provide shelter and basic living facilities. Premises that do not have the physical characteristics to provide these are not residential premises to be used predominantly for residential accommodation.

In this case, you will be selling the Property with the apartment block on the land. There are a specified number of residential apartment units within the building, with each unit inhabitable as a residence.

We consider your premises provide shelter and basic living facilities. The premises have the physical characteristics that make them suitable for and capable of being occupied as residential accommodation. This means the premises satisfy the condition specified in subsection 40-65(1) as 'residential premises to be used predominantly for residential accommodation (regardless of the term of occupation)’

Accordingly, your sale of the Property will be input taxed, provided the exceptions in subsection 40-65(2) do not apply.

Subsection 40-65(2) states:

    However, the sale is not input taxed to the extent that the * residential premises are:

    (a) * commercial residential premises; or

    (b) * new residential premises other than those used for residential accommodation (regardless of the term of occupation) before 2 December 1998.

The GST definition of 'commercial residential premises’ includes a hotel, motel, inn, hostel or boarding house or anything similar to those premises.

Goods and Services Tax Ruling GSTR 2012/6, Goods and services tax: commercial residential premises (GSTR 2012/6) provides the ATO view on the meaning of the terms hotel, motel, inn, hostel or boarding house. The following paragraphs from GSTR 2012/6 are relevant to your circumstances:

      86. Premises may be characterised under paragraphs (a) or (f) of the definition of commercial residential premises when they are not operating. Premises that are not being operated at the time of supply may be classified by their overall physical character, considered with other objective characteristics.

197. A single supply by sale or lease of premises consisting of rooms, apartments, cottages or villas as well as commercial infrastructure, regardless of whether they are separately titled, is a supply of commercial residential premises under paragraph (a) or (f) of the definition.

    196. In addition to living accommodation areas, premises that are commercial residential premises include commercial infrastructure to support the commercial operation of the premises. This infrastructure may include (but is not limited to) reception areas, dining and bar areas, meeting/function areas, kitchens, laundry facilities, storage areas and car parks. This infrastructure is used to provide services to occupants. Premises described in paragraph (a) and similar premises under paragraph (f) of the definition contain some or all of these areas to some degree.

In some cases there may be an overlap in that some premises which fit within the definition of residential premises also fit within the definition of commercial residential premises. However, as explained in paragraph 196 of GSTR 2012/6, premises that are commercial residential premises would include commercial infrastructure (emphasis added) to support the commercial operation of the premises, in addition to living accommodation areas.

Your apartment units consist of residential premises for residential accommodation as determined earlier in this ruling. There is no commercial or office space, reception desk or lounge/bar in the building. You do not hold your premises out to the public as offering accommodation in, or offering any services consistent with, a hotel, motel, hostel or boarding house. There is no common laundry, common areas or any other shared facilities within the building. The only shared areas within the building are hallways, stairwells, lift areas and the like.

Accordingly, we consider that, by itself, your block of apartment units do not have any commercial infrastructure that would support the commercial operation of the premises, and therefore, cannot be classified as commercial residential premises for GST purposes. This means the exception in paragraph 40-65(2)(a) to you making an input taxed supply of residential premises has no application.

Furthermore, we need to consider whether the 'new residential premises’ exception in paragraph 40-65(2)(b) applies.

Subsection 40-75(1) provides the meaning of 'new residential premises’, and generally includes:

      ● residential premises that have not previously been sold as residential premises (other than commercial residential premises) and have not previously been the subject of a long-term lease,

      ● residential premises that have been created through substantial renovations of a building, or

      ● residential premises that have been built, or contain a building that has been built, to replace demolished premises on the same land.

However, under paragraph 40-75(2)(c), the premises are not new residential premises if, for the period of at least 5 years from becoming new residential premises, the premises have only been used for making supplies by way of lease, hire or licence that are input taxed under paragraph 40-35(1)(a).

More information on new residential premises is available in Goods and Services Tax Ruling GSTR 2003/3, Goods and services tax: when is a sale of real property a sale of new residential premises?

In your case:

    ● You acquired the Property in yyyy with an existing apartment block on the land.

    ● You did not carry out any substantial renovation on the apartment block.

    ● Since acquisition, you have leased the entire building to another entity. This means you have leased the apartment block for more than a specified number of years.

    ● In leasing the apartment block, you included GST in the rent.

    ● You are now proposing to sell the Property. The current lease will cease at the time of the sale.

Based on these facts, your premises are not new residential premises.

In summary, we have determined the Property:

    ● is residential premises under subsection 40-65(1),

    ● is not commercial residential premises under paragraph 40-65(2)(a), and

    ● is not new residential premises under paragraph 40-65(2)(b).

1Please note that under section 40-35 a supply of residential premises by way of lease is input taxed and accordingly not subject to GST.

Accordingly, your sale of the Property satisfies the requirements of subsection 40-65(1) to be an input taxed supply of residential premises and GST is not payable on the supply.

Further issues for you to consider:

The Commissioner’s view as set out in ATO ID 2004/303 Goods and Services Tax, GST and supply of residential premises together with assignment of development consent is that upon the sale of residential premises, where the development consent is automatically transferred to the purchaser as a natural consequence, the entity’s assignment of the development consent does not result in anything being transferred to the purchaser that would not result naturally from the transfer of the land itself. This is regardless of the formal assignment in the sale contract. Accordingly, the entity is not supplying the purchaser with anything more than the residential premises.

The provisions of section 9-5 are:

You make a taxable supply if:

    (a) you make the supply for * consideration; and

    (b) the supply is made in the course or furtherance of an * enterprise that you * carry on; and

(c) the supply is * connected with the indirect tax zone; and

(d) you are * registered, or * required to be registered.

    However, the supply is not a * taxable supply to the extent that it is * GST-free or * input taxed.

In your case, we have determined earlier that you are making an input taxed supply when you sell the Property. Where the sale is made under a sale contract that includes the DA, the supply will be considered a single supply of residential premises that is input taxed.

However, where a formal assignment of the development consent effects a transfer of something more than that resulting naturally from the transfer of the land itself, the additional assignment may be a separately identifiable supply, which may be a taxable supply where all of the requirements of section 9-5 of the GST Act are satisfied.