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Authorisation Number: 1051246645642
Date of advice: 5 July 2017
Subject: GST and sale of properties used to provide residential accommodation
Is the sale by X of land and buildings that have been used to provide residential accommodation and have reached the end of their useful lives an input taxed supply?
Yes, the sale by X of the land and buildings is input taxed under section 40-65 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), as a supply of residential premises.
Is the sale by X of vacant land that has been used to provide residential accommodation an input taxed supply where the buildings on that land have been either vandalised or fired and then demolished by X prior to sale?
Yes, the sale by X of the vacant land is input taxed under subsection 9-30(4) of the GST Act as a supply of anything (other than new residential premises) that X has used solely in connection with X’s supplies that are input taxed but not financial supplies.
Relevant facts and circumstances
X is registered for Goods and Services Tax.
X currently owns several properties and uses these properties solely to provide residential accommodation by way of rental houses and apartments.
X has never used these properties to make supplies other than input taxed supplies of residential premises.
Some of the properties include car parking, playgrounds and communal spaces.
The residential premises on these properties have reached the end of their useful lives.
Individual apartments or sections of apartment complexes at two of the properties have been vandalised or fired. X anticipates that more apartments or sections of apartment complexes will be fired or vandalised as existing tenants vacate. X is required to demolish the vandalised or fired buildings for safety reasons. Following demolition X will sell the vacant land to developers for residential development. It is proposed that the residential development will be a mix of residential social dwellings, residential private dwellings, and community space. The period from the termination of existing tenancies until demolition of the buildings and sale of the vacant land may be up to two years.
Relevant legislative provisions
A New Tax system (Goods and Services Tax) Act 1999 (the GST Act) section 9-5
A New Tax system (Goods and Services Tax) Act 1999 section 9-30(4)
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
Reasons for decision
Note: Where the term 'Australia’ is used in this document, it is referring to the 'indirect tax zone’ as defined in section 195-1 of the GST Act.
GST is payable on a taxable supply under section 9-5 of the GST Act.
From the facts provided, the supply by X of land and buildings used for residential leasing which have reached the end of their useful lives satisfies the requirements of paragraphs 9-5(a) to 9-5(d) of the GST Act as:
(a) X makes the supply for consideration; and
(b) the supply is made in the course or furtherance of an enterprise that X carries on; and
(c) the supply is connected with Australia as the supply will be a supply of real property located in Australia; and
(d) X is registered for GST.
However, the supply of the land and buildings is not a taxable supply to the extent that it is GST-free or input taxed.
The supply of the land and buildings is not a GST-free supply. We need to determine whether the supply is input taxed.
Section 40-65 of the GST Act states:
(1) 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).
(2) 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.
'Residential premises’ is defined in section 195-1 of the GST Act to mean 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 terms of the occupation or intended occupation) and includes a *floating home.
In determining whether the premises are 'residential premises’, paragraph 9 of Goods and Services Tax Ruling GSTR 2012/5 Goods and Services Tax: residential premises states:
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.
To be suitable and capable of providing residential accommodation, premises must provide shelter and basic living facilities. As the buildings at the properties have been providing shelter and living facilities by way of residential leasing, we consider that they meet the definition of residential premises. We also consider that the exceptions in subsection 40-65(2) of the GST Act do not apply.
Any parking spaces, playground and communal spaces included in the supply of a property by X are ancillary or incidental to the dominant component of the supply being the residential premises, on the basis that they are to be used for the better enjoyment of the residential premises. As such, the supply by X of a property inclusive of any parking, playgrounds or communal spaces is a composite supply of residential premises.
Section 9-30(4) of the GST Act states:
A supply is taken to be a supply that is *input taxed if it is a supply of anything (other than *new residential premises) that you have used solely in connection with your supplies that are input taxed but are not *financial supplies.
The supply of vacant land by X after demolition of apartments or sections of an apartment complex which have been vandalised or fired is input taxed if the land has been used by X solely in connection with X’s supplies that are input taxed other than financial supplies.
Prior to demolition, the land was used by X for the purpose of supplying residential premises by way of lease, hire or licence which is input taxed pursuant to subsection 40-35(1) of the GST Act. This was the sole use of the land by X until the buildings on the land were vacated and then vandalised or fired and X demolished those buildings.
We must determine whether the demolition of the buildings by X results in the land being used by X otherwise than solely in connection with supplies that are input taxed.
We consider that 'used’ has a broad meaning in the context of subsection 9-30(4) of the GST Act (see the interpretation of 'use’ in other statutory contexts in Council of the City of Newcastle v Royal Newcastle Hospital (1959) 100 CLR 1; Ryde Municipal Council v Macquarie University (1978)139 CLR 633; and Lennard v Jessica Estates Pty Ltd  NSWCA 121).
The Macquarie Dictionary, 2005, 4th edn, The Macquarie Library Pty Ltd, NSW, defines 'use’ as including 'to employ for some purpose’. In considering whether land has been used solely in connection with input taxed supplies, it is important to consider throughout the period of ownership by an entity:
● how the land has been exploited or enjoyed (for example, private use by the entity, business use by the entity, or leasing to a third party),
● what the entity has done to change or develop the land, and whether those things can be said to be connected to input taxed supplies, and
● what the entity’s purpose has been in holding the land (for example, if the land is dormant for a period of time, whether the purpose of holding the land is to achieve profits through appreciation in the capital value).
It is necessary to look at the surrounding circumstances to determine whether X’s demolition activities can be said to be connected with X’s input taxed supplies, or whether they instead should be regarded as having a separate purpose.
X’s activities in relation to the properties are that of leasing of residential premises, which is an input taxed activity. X’s decision to demolish the apartments or sections of apartment complexes on the relevant properties is made because they have been damaged by fire or vandalism, they are no longer able to be leased and they are required to be demolished for safety reasons.
X’s demolition activities are not being undertaken to significantly improve the value of the properties in order to maximise the return from sale.
In these circumstances, X’s demolition activities should not be regarded as a separate and distinct use of the properties, but rather as a consequential step between ending the leasing activity and the sale of the properties.
For the reasons set out above we consider that X’s use of the relevant properties is solely in connection with making input taxed supplies by way of lease of residential premises and the sale of the vacant land is an input taxed supply under subsection 9-30(4) of the GST Act.
Any parking spaces, playgrounds or communal spaces included in the supply of the vacant land are ancillary or incidental to the dominant supply of land which X has used solely in connection with supplies that are input taxed and therefore form part of a composite supply that is input taxed.