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Authorisation Number: 1051241500815
Date of advice: 23 June 2017
Subject: GST and sale of property
Is GST payable on the sale of your property?
Yes, based on the information provided, GST will be payable on the sale of your property if sold within five years as it constitutes new residential premises.
Relevant facts and circumstances
You are registered for GST.
You purchased a property. The property was leased from date of purchase.
You later commenced demolition of the existing house and subdivided the property into three lots. You built houses on all three lots.
While there was no written agreement made to document your original business plan, you advised that your original intention was to lease at least two of the three houses. However, due to financial circumstances, you sold two of the three houses after completion. Both of these sales included GST.
The subject of this private ruling relates to the third lot.
Since construction of the third lot was completed it has been leased through a property manager. The third lot has not yet been leased for five years.
You are now considering selling the third lot in the future. At this stage, the third lot is not advertised for sale and you have not appointed a real estate agent to assist with a sale.
You have not claimed any input-tax credits in relation to the third lot to date.
Relevant legislative provisions
A New Tax System (Goods and Services Tax) Act 1999
Reasons for decision
A sale of new residential premises is subject to GST where all of the requirements of a taxable supply are satisfied.
However, residential premises are not new residential premises if they have been leased for at least five years.
Therefore, if the third lot continues to be leased it will only constitute new residential premises for five years.
As such, based on the information provided, GST will only be payable on the sale of the third lot if it is sold on or before the expiry of the five years.
Section 9-40 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that you must pay GST on any taxable supply that you make.
In relation to taxable supplies, section 9-5 of the GST Act states:
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.
(*An asterisk denotes a defined term in section 195-1 of the GST Act.)
In this case, the sale of the third lot for consideration will satisfy paragraph 9-5(a) of the GST Act. In addition, the supply will be made in the course or furtherance of your leasing enterprise as the term 'carrying on’ includes doing anything in the course of winding up the enterprise, the third lot is connected with the indirect tax zone as it is located in Australia and you are currently registered for GST. Therefore, the requirements of paragraphs 9-5(b), (c) and (d) of the GST Act are also satisfied.
As such, the sale of the third lot will be subject to GST unless it is GST-free or input taxed. There are no provisions in the GST Act that will make the supply of the third lot GST-free.
Subsection 40-65(1) of the GST Act provides that a sale of residential premises is input taxed. This means you cannot charge GST or claim input tax credits on a sale of residential premises.
Section 195-1 of the GST Act defines 'residential premises’. It states:
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).
However, section 40-65(2)(b) of the GST Act provides that residential premises that are defined as 'new residential premises’ are not input taxed. As such, new residential premises are subject to GST where all of the other requirements of a taxable supply are satisfied.
In relation to new residential premises, section 40-75 of the GST Act states:
(1) *Residential premises are new residential premises if they:
(a) 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; or
(b) have been created through * substantial renovations of a building; or
(c) have been built, or contain a building that has been built, to replace demolished premises on the same land.
Paragraphs (b) and (c) have effect subject to paragraph (a).
Subsection 40-75(2) of the GST Act states:
However, the *residential premises are not new residential premises if, for the period of at least 5 years since:
(a) if paragraph (1)(a) applies (and neither paragraph (1)(b) nor paragraph (1)(c) applies) – the premises first became residential premises; or
(b) if paragraph (1)(b) applies – the premises were last *substantially renovated; or
(c) if paragraph (1)(c) applies – the premises were last built;
the premises have only been used for making supplies that are *input taxed because of paragraph 40-35(1)(a).
Section 40-35 of the GST Act provides that a supply of premises by way of lease, hire or licence is input taxed.
In this case, you have constructed a building on the third lot that has replaced demolished premises on the same land. When the construction of the building on the third lot was completed it was leased out.
Therefore, the third lot constitutes new residential premises under paragraph 40-75(1)(c) of the GST Act. Consequently, as you are currently registered for GST and all of the other requirements of a taxable supply would be satisfied, GST will be payable on a sale of the third lot if it is sold on or before the expiry of five years.
However, if you continue to lease the third lot for five years, it will no longer constitute 'new residential premises’ from that date. Instead, as per paragraph 40-75(2)c) of the GST Act, the third lot will be categorised as residential premises.
As a sale of residential premises is input taxed, GST will not be payable on the sale of the third lot if it is sold on or after the expiry of five years.