Edited version of private ruling

Authorisation Number: 1011476613816

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Ruling

Subject: Goods and services tax and purchase of property

Question 1

Are you entitled to an input tax credit for your purchase of the property?

Answer

No.

Relevant facts and circumstances

You are registered for GST.

You will purchase a property located in Australia (the property) from the vendor.

There is a building on the property (the building).

The vendor is registered for GST.

The vendor carried on a business from the premises.

The property will be sold to you with vacant possession.

The property is zoned residential.

The building was built to be the home of a family.

A certain entity (X) later purchased the property from the family and resided in the building.

A wing was added by X to house people.

The vendor purchased the property from X in a certain year. At that time, the use of the building was residential.

The original building contains the following rooms:

§ upstairs - bedrooms and a bathroom (comprising a shower alcove, hand basin, separate bath and toilet alcove).

§ downstairs - kitchen, breakfast room, laundry, adjoining formal sitting and dining rooms and second toilet.

The wing built to house the people contains bedrooms, large sitting room, separate large dining room, kitchen, breakfast room, laundry, bathroom (with hand basin, shower alcove and toilet) and a separate second toilet.

During the vendor's period of ownership of the property, the rooms in the original building were used as follows:

§ the bedrooms and sitting room and dining room were used by the vendor as studios and offices.

§ the breakfast room was used as a room for eating.

§ the kitchen was used as a kitchen.

§ the bathroom was used as a bathroom.

§ the second toilet was used as a toilet.

During the vendor's period of ownership, the rooms in the wing that was built to house the people were used as follows:

§ one bedroom, the breakfast room, the sitting room and the bathroom were used as residential accommodation.

§ a number of bedrooms and the dining room were used as studios and an office on weekdays, and for residential accommodation after hours and on weekends.

§ the kitchen was used as a kitchen.

§ the second toilet was used as a toilet.

§ the laundry was used as a laundry.

The wing that was built to house the people has been leased out by the vendor to tenants for the past so many months.

The rooms have not been physically converted. The furniture in each room has been changed.

The vendor did not renovate the premises.

The building was not built, and does not contain a building that was built, by the vendor to replace premises it demolished on the same land.

The premises have not been used as commercial residential premises.

No part of the property is leased to students.

You will demolish the building and replace it with apartments. You will sell the apartments on completion. The apartments will contain bedrooms, kitchens, lounge areas, dining areas, and bathrooms with a shower and toilet.

Reasons for decision

Summary

You are not entitled to an input tax credit for your purchase of the property as the sale of the property to you was an input tax supply of residential premises under subsection 40-65(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

Detailed reasoning

Under section 11-20 of the GST Act, you are entitled to input tax credits for your creditable acquisitions.

Under section 11-5 of the GST Act, you make a creditable acquisition if:

a) you acquire anything solely or partly for a creditable purpose; and

b) the supply of the thing to you is a taxable supply; and

c) you provide, or are liable to provide, consideration for the supply;

and

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

Paragraph 11-5(a)

Under subsection 11-15(1) of the GST Act, you acquire a thing for a creditable purpose to the extent that you acquire it in carrying on your enterprise.

However, under subsection 11-15(2) of the GST Act, you do not acquire the thing for a creditable purpose to the extent that:

(a) the acquisition relates to making supplies that would be input taxed:

or

(b) the acquisition is of a private or domestic nature.

From the information received, you acquired the property in carrying on your property development enterprise. Subsection 11-15(1) of the GST Act is satisfied.

However, the next step is to determine whether subsection 11-5(2) of the GST Act applied.

Subsection 11-5(2) of the GST Act

Under subsection 40-65(1) of the GST Act, a sale of residential premises is input taxed to the extent that they are to be used for residential accommodation

However, under subsection 40-65(2) of the GST Act, 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 the occupation) before

2 December 1998.

Under subsection 40-75(1) of the GST Act, 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

(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.

Paragraph 28 of Goods and Services Tax Ruling GSTR 2003/3 (GSTR 2003/3) provides that paragraphs 40-75(1)(b) and 40-75(1)(c) of the GST Act raise the question of what has been done to the building or the activity of building by the current owner and this will determine whether the residential premises are new residential premises.

From the information received, you will demolish the building and replace it with apartments after purchasing it. The apartments will be residential premises. The apartments will be sold on completion. Accordingly, these apartments will be considered to be new residential premises under subsection 40-75(1) of the GST Act because you will have built them to replace premises you will have demolished on the same land and these new apartments will not have previously been sold as residential premises or the subject of a long term lease. Additionally, these new residential premises will not have been used for residential accommodation before 2 December 1998.

Accordingly, the sales of these new apartments will not be input taxed supplies under subsection 40-65(1) of the GST Act.

There are no other provisions of the GST Act or any other Act under which your sales of the new apartments will be input taxed.

Hence, your acquisition of the property does not relate to making supplies that would be input taxed.

Additionally, your purchase of the property was not an acquisition of a private or domestic nature.

The requirement of paragraph 11-5(a) of the GST Act is therefore satisfied.

For more information on when a sale of real property is a sale of new residential premises please refer to GSTR 2003/3 which is available at www.ato,.gov.au

Paragraph 11-5(b) of the GST Act

Under section 9-5 of the GST Act, a supply is 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 Australia; and

d. you are registered or required to be registered for GST.

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

From the information received, the vendor satisfied the requirements of paragraphs 9-5(a) to 9-5(d) of the GST Act as the vendor made a supply for consideration and in the course of enterprises that the vendor carried on; the supply was connected with Australia as the property is located in Australia and the vendor is registered for GST.

However the supply is not a taxable supply to the extent that the supply is GST-free or input taxed. There is no provision under the GST Act that made the supply of the property to you GST-free. The next step is to determine whether the supply of the property to you was input taxed.

Input taxed

In accordance with paragraph 20 of Goods and Services Tax Ruling GSTR 2000/20, (GSTR 2000/20), to be residential premises as defined, a place needs to provide sleeping accommodation and the basic facilities for daily living.

In accordance with paragraph 19 of GSTR 2000/20 it is the physical characteristics that determine when the use or proposed use of premises is for residential accommodation for the purposes of subsection 40-65(1) of the GST Act.

In accordance with paragraph 27 of GSTR 2000/20, premises that are to be used for residential accommodation will usually be in an area zoned by Council or Shire regulations as suitable for human habitation.

From the information received, the premises that you purchased provide sleeping accommodation and the basic facilities for daily living. Additionally, the premises you will purchase are in a residential zone. Hence, the premises are residential premises to be used for residential accommodation.

The premises are not commercial residential premises.

The premises have previously been sold as residential premises (other than commercial residential premises).

The premises were not created by the vendor through substantial renovations of a building.

The premises have not been built by the vendor, and do not contain a building that has been built by the vendor, to replace premises it demolished on the same land.

Therefore, the sale of the property to you was not a sale of new residential premises.

Consequently, the sale of the property to you was an input taxed supply under subsection 40-65(1) of the GST Act. Hence, the sale of the property to you was not a taxable supply, and therefore, you did not satisfy the requirement of paragraph 11-5(b) of the GST Act.

Paragraph 11-5(c) of the GST Act

You have satisfied the requirement of paragraph 11-5(c) of the GST Act, as you provide and were liable to provide consideration for the sale of the property.

Paragraph 11-5(d) of the GST Act

You have satisfied the requirement of paragraph 11-5(d) of the GST Act, as you are registered for GST.

Conclusion

As you did not satisfy all of the requirements of section 11-5 of the GST Act, you did not make a creditable acquisition of the property, and therefore, you are not entitled to an input tax credit for the purchase.

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