Edited version of private ruling

Authorisation Number: 1011547564222

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Ruling

Subject: GST and entitlement to input tax credits

Question

Was your purchase of the Property a creditable acquisition?

Advice/Answers

No, your purchase of the Property was not a creditable acquisition.

Relevant facts

You registered for GST on a specified date.

Later, you purchased the Property, with settlement occurring at a later date.

You use the building for commercial purposes.

The vendors were Mr and Mrs E.

A Clause of the Contract for sale of real estate, which deals with GST reads:

In this clause "GST" refers to goods and services tax under A New Tax System (Goods and services Tax) Act 1999 ("GST Act") and the terms used have the meanings as defined in the GST Act.

The Vendor warrants that the sale price set out in clause…assumes that the Vendor is not liable for GST in respect of the supply of the property because it is not a taxable supply.

The Vendor agrees not to become registered for GST before the completion thereby avoiding the supply of the property becoming a taxable supply.

If the Vendor is obliged to pay GST on this sale the Vendor will pay the GST from the sale price and provide the Purchaser with a tax invoice that satisfies the GST Act

This clause shall not merge on completion of this contract.

The Australian Business Register indicates that the vendors are registered for GST.

You provided:

· a sales report which shows that the Property, at the time of supply to the Vendor, was used for residential purposes.

· a copy of the property listing. The property was advertised as being zoned 'fringe business' and was described as ideal for a small office or development. The photo accompanying the advertisement gives the appearance of a standard residential building. There did not appear to be any trees, gardens or grassed areas

· interior photos of one of the rooms. The photos were inconclusive in determining the character of the building

· plans of the building.

When advertised for sale, the building was described as consisting of some offices plus kitchen and reception. The property was also advertised for lease at $X per annum plus GST.

You advised the following:

· the building itself is small

· the property has a large gravel parking area at the rear

· the property has no gardens, tree or grassed areas

· although capable of being used as residential accommodation, the property's best and highest use is as commercial premises

· that the Vendor's builder advised that the Vendor had spent in excess of $Y in repairs and improvements prior to offering the property to let as commercial offices. Your understanding is that the majority of the work was repairs, such as replacing the floorboards. There was no structural work.

· when supplied to you, the building contained a kitchen and ablution facilities

· prior to making a formal offer, you were advised that the price was inclusive of GST. After the final sale price was agreed, you were advised that the sale was a private sale and therefore GST was not applicable. As a consequence, a clause was incorporated into the contract.

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 11-5

A New Tax System (Goods and Services Tax) Act 1999 Section 11-15

A New Tax System (Goods and Services Tax) Act 1999 Section 11-20

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 Section 40-75

Reasons for decision

Section 11-20 of A New Tax System (Goods and Services Tax) Act 1999 ("GST Act") provides that you are entitled to the input tax credit for any creditable acquisitions that you make.

Section 11-5 of the GST Act states that you make a creditable acquisition if:

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

· the supply of the thing to you is a taxable supply; and

· you provide, or are liable to provide, consideration for the supply; and

· you are registered, or required to be registered.

Section 11-15 of the GST Act provides that you acquire a thing for a creditable purpose to the extent that you acquire it in carrying on your enterprise. However, you do not acquire the thing for a creditable purpose to the extent that:

· the acquisition relates to making supplies that would be input taxed; or

· the acquisition is of a private or domestic nature.

On the facts supplied, your acquisition of the Property satisfies paragraphs (a), (c) and (d) of 11-5 of the GST Act Therefore if the supply to you meets the requirements for a taxable supply, you will have made a creditable acquisition.

Section 9-5 of the GST Act provides that you make a taxable supply if:

you make the supply for consideration

· the supply is made in the course or furtherance of an enterprise that you carry on

· the supply is connected with Australia and

· 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.

On the facts supplied, the supply of the Property to you satisfied paragraphs (a), (c) and (d) of section 9-5 of the GST Act and is not a GST free supply of residential premises. However, in view of the Vendor's statement that the supply was a private transaction, it is not clear that paragraph (b) was satisfied. Further, it is also necessary to consider the nature of the Property; ie Is it an input taxed supply of residential premises?

Section 40-65 of the GST Act provides that:

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.

However, the sale is not input taxed to the extent that the residential premises are commercial residential premises or new residential premises.

Residential premises is defined in section 195-1 of the GST Act which provides that residential premises means land or a building occupied or intended to be occupied as a residence, and includes a floating home.

Goods and Services Tax Ruling 2000/20: commercial residential premises (GSTR 2000/20), provides guidance, amongst other things on what constitutes residential premises. Paragraphs 24 to 26 of GSTR 2000/20 list the physical characteristics of residential premises.

24. The definition of 'residential premises' in section 195-1 refers to land or a building that is occupied as a residence or for residential accommodation or is intended and capable of being occupied as a residence or for residential accommodation.

25. The definition requires that land must have a building affixed to it and that the building must have the physical characteristics that enable it to be occupied or be capable of occupation as a residence or for residential accommodation. Vacant land of itself can never have sufficient physical characteristics to mark it out as being able to be or intended to be occupied as a residence or for residential accommodation.

26. The physical characteristics common to residential premises that provide accommodation are:

The premises provide the occupants with sleeping accommodation and at least some basic facilities for day to day living.

The premises may be in any form, including detached buildings, semidetached buildings, strata-title apartments, single rooms or suites of rooms within larger premises.

From the facts you have provided, we have concluded that the property is residential premises but does not meet the criteria for commercial residential premises as set out in the GST Act and therefore we need to consider whether it is new residential premises.

New residential premises are defined in section 40-75 of the GST Act to mean amongst other things residential premises that have been created through substantial renovations of a building.

In your case, although the vendor expended funds on the building prior to sale, the work undertaken did not change the character of the Property to new residential premises as there were no significant structural changes.

On the facts supplied, the Property, at the time of supply, had the characteristics listed above. Although the Property was advertised as commercial premises and some repairs/renovations had been carried out, the premises still had the characteristics of residential premises.

Their character of residential premises is evidenced by:

· their last use prior to supply to the vendor was as residential accommodation

· your own observation that the Property is capable of being used as residential accommodation

· the photo accompanying the advertisement, which gives the appearance of a standard residential building

· when supplied to you, the building contained a kitchen and ablution facilities, thus containing sufficient facilities for day to day living.

Therefore your purchase of the Property was not a creditable acquisition because it was an input taxed supply of residential premises.

Further, you have not established that the supply to you was made in the course or furtherance of an enterprise that the vendor carried on.

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