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Authorisation Number: 1051246721694
Date of advice: 06 July 2017
Subject: GST and the sale of renovated residential premises
Will your sale of the property in Australia be a taxable supply pursuant to section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999?
Are you entitled to the input tax credits on acquisitions related to the renovation of the property, pursuant to section 11-20 of the A New Tax System (Goods and Services Tax) Act 1999?
Relevant facts and circumstances
You are registered for GST.
You carry on an enterprise of renovating and selling residential property.
You do not deal with commercial residential premises.
You purchased the property in Australia.
You have spent $XX to renovate the property.
Work done on the property consists of:
● The kitchen has been replaced; including new cabinetry, tapware and appliances.
● Both bathrooms refurbished
● New flooring
● Internal and external walls repainted
● Balcony repaired and painted
● Roof, gutters and downpipes repaired
● External walls rendered
● Internal nibwall removed
● Meter box replaced
● Front entry door replaced
● Air conditioning installed
● A window replaced by French doors; and
● New lights installed.
No alterations to floorplan were completed.
Relevant legislative provisions
A New Tax System (Goods and Services Tax) Act 1999 section 9-5
A New Tax System (Goods and Services Tax) Act 1999 section 40-65
A New Tax System (Goods and Services Tax) Act 1999 section 40-75
Reasons for decision
Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides:
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.
The sale of the renovated property will be for consideration. The property is connected with the indirect tax zone as it is situated in Australia.
You are carrying on an enterprise of renovating and selling used residential properties. You will make the supply of your residential property in the course or furtherance of this enterprise. The sale of a renovated residential property is not a GST-free supply under any provision of the GST Act.
You are registered for GST.
Section 40-65 of the GST Act provides:
(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.
Therefore, it is necessary to establish whether your renovated property is new residential premises.
Subsection 40-75(1) of the GST Act provides that residential premises are new residential premises if they:
(b) have been created through substantial renovation of a building; or
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? sets out the Commissioner’s view on this issue.
Paragraph 64 of GSTR 2003/3 explains that for renovations to be substantial they must directly affect most rooms in a building. The renovation of only one part of a building, without any work on the remaining parts of the building, would not constitute substantial renovations. Paragraphs 68 to 80 of GSTR 2003/3 provide additional explanation:
68. The extent to which parts of a building are removed or replaced will determine whether the above criterion is satisfied. The definition of substantial renovations states that it is not necessary for foundations, external walls, interior supporting walls, floors, roof or staircases to be removed or replaced for renovations to be substantial.
69. This criterion is satisfied where there is a removal or replacement of a substantial part of the:
● structural components of the building; or
● non-structural components of the building.
70. Structural work may give rise to substantial renovations in its own right. Structural work includes such work as:
● altering, or replacing of, foundations;
● replacing, removing or altering of floors or supporting walls, or parts thereof (interior or exterior);
● lifting or modifying of roofs;
● replacing existing windows and doors such that it is necessary to alter brickwork (for example, replacing a single door with a double sliding door).
71. Structural work is also undertaken in the course of building an extension to a house or adding new bedrooms to a house.
72. Where a substantial part of the structural components of a building is removed or replaced this will often mean that a substantial part of the non-structural components is also removed or replaced.
73. However, substantial renovations may also occur where a substantial part of the non-structural components is removed or replaced but the structural components are not substantially affected. For example, in a unit, it is not essential that both components are substantially removed or replaced for substantial renovations to have occurred.
74. Non-structural building work includes:
● replacing electrical wiring;
● replacing, removing or altering non-supporting walls, or parts thereof (interior or exterior);
● plastering or rendering an entire wall or walls;
● plumbing (e.g. replacing old metal pipes with copper pipes or plastic pipes);
● removing or replacing kitchen cupboards, bathroom fixtures, etc.;
● removing or replacing air-conditioning or security systems.
75. Guidance is provided on what we regard as substantial renovations in Examples 3 to 5 at paragraphs 104 to 114 and Examples 8 to 9 at paragraphs 124 to 130 of this Ruling. For instance, in Example 8, the removal and replacement of the exterior walls, the removal of some internal walls, and the replacement of the flooring and the kitchen in a house are considered collectively to amount to substantial renovations.
76. However, the removal and replacement of a kitchen and bathroom with little else done to the building, apart from repainting and minor repair work, in most circumstances would not be sufficient for substantial renovations to have occurred.
77. As part of renovations, work is often undertaken which does not impact on the structure of the building but is more in the nature of renewing or refreshing what is already there. We consider work of this nature to be cosmetic. Cosmetic work by itself does not amount to substantial renovations. We consider cosmetic work includes:
● sanding floors;
● removing and replacing worn or out of date fittings such as light fittings;
● replacing curtains or carpets.
78. Cosmetic work may be undertaken to obtain a better price when selling a property (sometimes referred to as a 'makeover') or to obtain a higher rent. While this is often referred to as a renovation, this is not what the legislation contemplates as 'substantial renovations'. One example of where the work undertaken is largely cosmetic and does not result in substantial renovations, is contained in Example 4 at paragraphs 109 to 110.
79. Where structural or non-structural work amounts to substantial renovations that create new residential premises, any cosmetic work undertaken will form part of the new residential premises.
Renovation work by previous owners
80. Only renovations by the current owner which are reflected in the building at the time of sale are considered in determining whether new residential premises have been created through substantial renovations. Renovations undertaken by previous owners are disregarded in determining whether new residential premises have been created through substantial renovations by the current owner.
Your renovation work does not affect the building as a whole. Your work does not result in the removal or replacement of all or substantially all of the building. The work does not amount to creation of new residential premises through substantial renovations.
Therefore, your sale of the property will not be a taxable supply pursuant to section 9-5 of the GST Act. It will be an input taxed supply pursuant to subsection 40-65(1) of the GST Act.
As the acquisitions related to the renovation of the property, will relate to making an input taxed supply, you are not entitled to the input tax credits on those acquisitions.
Please note that substantial renovations of residential premises depend on what is actually done to the premises and that each case depends on its own facts. This means that you are constantly required to consider whether the renovations done by you on a property amount to substantial renovations and subsequently whether new residential premises have been created through the process of renovating residential premises.