Edited version of private ruling

Authorisation Number: 1011577698102

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Ruling

Subject: GST and residential property

Did you make a creditable acquisition, under section 11-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), when acquiring the property?

Answer

No, you did not make a creditable acquisition, under section 11-5 of the GST Act, when acquiring the property.

Facts

You, the purchaser, are registered for GST.

You acquired a property which is a number of acres and is currently zoned residential density 1.

Pursuant to the terms of their first mortgage over the property, X, (a GST registered entity), took possession of the property, from the mortgagor.

The mortgagor is registered for GST.

The mortgagor owned the property.

The mortgagor acquired the property with a house on it, and rented it to tenants.

While X had possession of the property the tenants were evicted.

After the tenants were evicted, the property was vandalised in a particular year and a police report was submitted for vandalism on property.

X had a dilapidation report prepared. The company that conducted the inspection of the property concluded that their detailed visual inspection found that the main dwelling including garage could not be used for residential purposes and therefore not tenantable.

You then engaged a licensed builder to demolish the building, who initially did an assessment of the property to determine whether there was anything salvageable.

Upon inspection the licensed builder found that the building had been extensively vandalised and stripped of any items of value.

The only salvageable items in the structure were some roofing materials. The remainder of the structure was damaged beyond any reasonable state of repair.

In its report the licensed builder concluded that due to the extensive damage to the exterior and interior, and the possibility of damage to the structural integrity of the house, it was not an option to repair the house and demolishing it was the appropriate course of action.

Marketing commenced for the sale of the property and the contract for houses and residential land states under the heading 'Property', that the present use of the property is 'residential'.

In a letter a registered real estate agent informed that they were appointed by X as agent and was responsible for the marketing of the property.

The agent advised that in order to obtain the highest price possible, their instructions were to auction the property and to market it as development land. The agent also informed that selling the property as residential property was never discussed.

The agent informed that soon after and prior to the commencement of the marketing campaign the building was partially destroyed by vandals; that the contracts were prepared on the basis that the property was for the sale of vacant land and that at the auction the auctioneer stated that the sale of the property would be subject to GST if it was purchased for commercial purposes, but it if was purchased for residential purposes, it would not be subject to GST.

The agent also informed that upon signing the contract the purchaser asked if the property was subject to GST. The agent then told the purchaser that the property was subject to GST as this was the advice given to them by a representative of the mortgagee exercising power of sale.

You therefore believed the sale to be subject to GST when you made your purchase, knowing that you intended to develop the property. You understood your bid to be inclusive of GST. You could then claim back the GST as an input tax credit.

In a letter X's legal representatives noted that you have requested that X provides a GST invoice at settlement on the basis that you are of the opinion that the residential exemption to GST does not apply.

X's legal representatives informed you that X asserted the property was tenanted for residential accommodation prior to X taking possession, that X marketed the property for sale as residential property and as evidenced from the terms of the sale contract, X intended only to sell the property as residential property.

X legal representatives also told you that X maintained that the property has been predominantly used for residential purposes, was sold on that basis and that the residential exemption to GST applied and that accordingly no tax invoice will be provided to you.

You are of the view that the supply of the property was a taxable supply. You asked for a tax invoice from the supplier. You reiterated your demand for a tax invoice sometime later. However, no tax invoice has been supplied to you.

Auction for the property was held in the recent year and the property settled in the subsequent year.

You demolished the property early in the subsequent year.

Detailed reasoning

In this case you informed that you acquired the property from X acting as mortgagee in possession. X treated the supply as input taxed. However, you believe that the supply was taxable and that as a consequence you made a creditable acquisition.

For an entity to make a creditable acquisition all the requirements of section11-5 of the GST Act have to be satisfied.

Section 11-5 of the GST Act provides that an entity makes a creditable acquisition if it acquires anything solely or partly for a creditable purpose, the supply of the thing to it is a taxable supply, the entity provides or is liable to provide consideration for the supply, and is registered or required to be registered for GST.

Section 11-15 of the GST Act provides that an entity acquires a thing for a creditable purpose to the extent that it acquires it in carrying on its enterprise.

However, a thing is not acquired for a creditable purpose to the extent that it relates to making supplies that would be input taxed or the acquisition is private or domestic in nature.

In this instance you acquired the property to develop new residential premises for sale in carrying on your enterprise. You provided consideration for the acquisition. You are registered for GST. Therefore, we need to look at whether the supply of the thing to you was a taxable supply.

Subsection 105-5(1) of the GST Act provides that:

an entity makes a taxable supply if:

· It supplies the property of another entity (the debtor) to a third entity in or towards the satisfaction of a debt that the debtor owes to it; and

· had the debtor made the supply, the supply would have been a taxable supply.

You acquired the property from X that sold the property as mortgagee in possession.

X supplied the property to you in or towards the satisfaction of a debt that the mortgagor owed X. Therefore, subparagraph 105-5(1)(a) of the GST Act is satisfied.

We need to consider whether the supply would have been a taxable supply had the mortgagor made the supply.

Section 9-5 of the GST Act must be considered in order to determine if the supply, had it been made by you (the mortgagor), would be a taxable supply. Section 9-5 of the GST Act provides that an entity makes a taxable supply if:

· it makes the supply for consideration

· the supply is made in the course or furtherance of an enterprise that it carries on

· the supply is connected with Australia and

· the entity is 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 property was made in return for consideration. The property is located in Australia. The supply was made in the course or furtherance of an enterprise that the mortgagor carried on. The mortgagor is registered for GST. Therefore, the supply would have been a taxable supply unless it was GST-free or input taxed.

In this situation there is no provision in the GST Act that would make the supply of the residential premises GST-free.

Residential Premises

Subsection 40-65(1) 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 (regardless of the term of occupation).

Real Property is defined in section 195-1 of the GST Act to include any interest in or right over land.

Section 195-1 of the GST Act defines residential premises as 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)…

Goods and Services Tax Ruling GSTR 2000/20 states the Commissioner's view on the meaning of the definition of commercial residential premises and provides guidance on the meaning of residential premises.

The paragraphs below have been reproduced from GSTR 2000/20 and state the following:

19. Further, the requirement in paragraph 40-35(2)(a) and subsection 40-65(1) that input taxing only applies to the extent that the premises are 'to be used predominantly for residential accommodation' indicates that premises that are residential premises are capable of use for purposes other than residential accommodation. It is their physical characteristics that mark them out as a residence. In turn, these characteristics determine when the use or proposed use is for residential accommodation.

20. To be used for 'residential accommodation' or to be 'occupied as a residence', premises do not have to be a home or a permanent place of abode. To be residential premises as defined, a place need only provide sleeping accommodation and the basic facilities for daily living, even if for a short term. This follows from the definition of commercial residential premises referred to in paragraph 18.

……

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

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

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

27. In addition to the physical characteristics, there are other factors which may be of use in determining whether premises are to be used for residential accommodation or accommodation of another kind. These characteristics would usually be present in residential premises that have the physical characteristics given in paragraph 26. These often, but not always, include:

(i) The purpose or context of the premises' use is for personal accommodation, rather than another purpose, such as for a business.

(ii) The tasks of day to day living, such as, preparing food, cleaning and laundering, are performed by the occupant, or by others under private arrangements.

(iii) The status of the occupant is most commonly that of owner, tenant or lessee. Any boarders, lodgers or guests occupy the premises by private arrangement with the owner, tenant or lessee.

(iv)The premises will be in an area zoned by Council or Shire regulations as suitable for human habitation.

Sleeping accommodation and facilities for human habitation

28. The definition states that residential premises must be capable of occupation as a residence. To be a residence in this sense, a place normally should have the facilities required for day to day living. These characteristics are inherent in the fabrication of the structure itself. The premises should have such things as areas for sleeping, eating and bathing, but it is not necessary that these things be arranged in a similar manner to a conventional house or apartment.

Hence, the issue in this case is whether, on the facts provided, the house in question is considered as residential premises in accordance with the definition in section 195-1 of the GST Act. In essence this comes down to whether the premises are capable of occupation as a residence or for residential accommodation which requires that a place normally should have the facilities for day to day living (paragraph 28 of GSTR 2000/20). This depends on the facts of this case. Where premises are in a temporary state of disrepair we would conclude that the premises are still residential premises.

In this instance you were supplied a house by X, as mortgagee in possession. The house had previously been used for residential accommodation but was in a vandalised state when supplied.

The facts of the original private ruling include:

· The house had been boarded up but had been badly vandalised and damaged. All electrical wiring and copper plumbing pipes have been stripped out and stolen. It was missing doors, windows and there were holes in walls and the roof. There was other extensive damage throughout the building.

· A competent authority did not issue a demolition notice.

· In the request for review of the private ruling the following additional facts have been provided by your representative:

· A dilapidation report prepared and the company that conducted the inspection concluded that their detailed visual inspection found that the main dwelling including a garage could not be used for residential purposes and therefore not tenantable.

· A licensed builder was then engaged to demolish the property.

· The builder initially did an assessment of the property to determine whether there was anything salvageable.

· In its report the builder concluded that due to the extensive damage and the possibility of damage to the structural integrity of the house plus lack of electrical wiring and plumbing, it was not an option to repair the house and demolishing it was the appropriate course of action.

· The reports mentioned in these facts were prepared after the time of supply but are said to represent the state of the premises when supplied.

· The facts suggest that the premises have obviously been significantly vandalised and damaged. However, in the absence of a demolition notice or similar information from a competent authority it is not clear on the facts that the premises were incapable of being repaired even if this may have been a costly course of action.

In Toyama Pty Ltd v Landmark Building Developments Pty Ltd 2006 ATC 4160; (2006) 62 ATR 73 (Toyama) the court considered that supplies of real property are input taxed, to the extent that the property is residential premises to be used predominantly for residential accommodation, and concluded that the expression requires a prediction of the use of the property and that the main factor to be considered in making that prediction is the subjective intention of the purchaser.

In this case it appears that the vendor (X) considered that the premises were still residential premises when supplied. This is evidenced by the fact that at the auction the auctioneer was questioned about the GST treatment of the sale and after seeking instructions responded that the sale would be input taxed if sold to an entity to be used for residential accommodation and taxable if sold to a developer.

This is obviously a Toyama interpretation of the law but it supports the finding that the vendor thought the premises were residential premises in accordance with section 195-1 of the GST Act when supplied (otherwise the implied view in relation to section 40-65 of the GST Act would have been irrelevant). It also suggests that the vendor thought the premises could be repaired to a state where the premises could continue to be used for residential accommodation.

As noted in the Decision Impact statement for Toyama Pty Ltd v Landmark Building Developments Pty Ltd the Commissioner will continue to administer the law in accordance with the view in GSTR 2000/20. Consequently, your argument that you acquired the land for development purposes does not mean that the supply was a taxable supply irrespective of whether it is considered to be residential premises in accordance with the definition in section 195-1 of the GST Act.

Additionally, ATO ID 2009/18 provides some principles that can be applied in this case. In considering the application of subsection 9-30(4) of the GST Act it is necessary to identify the uses to which the entity has put the land and whether these uses are solely in connection with the entity's input taxed supplies. This requires that the land, whether by itself or as part of the residential premises, has been used in any other way than in connection with the entity's input taxed supplies. In this case, since the property was damaged, nothing was done to improve the value of the land or to occupy the land in a way to suggest that it was held for a purpose not connected with the input taxed supplies of residential leasing.

In effect subsection 9-30(4) of the GST Act passes input taxed treatment to the supply of anything used solely in connection with making input taxed supplies, apart from new residential premises, or where the other input taxed supplies are financial supplies.

For example, if an enterprise provided residential rental accommodation through its rental office, the subsequent sale of equipment used in the office would be an input taxed supply. Since the subsequent supply of a thing to which subsection 9-30(4) of the GST Act applies will be an input taxed supply.

Therefore, in this case we consider that had the mortgagor made the supply it would have been an input taxed supply. As a result the supply of the house to you was not a taxable supply. Consequently you did not make a creditable acquisition.

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