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This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law.

You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4.

Edited version of private ruling

Authorisation Number: 1011618029867

Ruling

Subject: GST and the sale of real property

Questions

1. Should your supply to Entity A of the 'A' units be subject to GST?

2. Should your supply to Entity B of the remainder of the real property be subject to GST?

3. If any of these supplies are input taxed, are you entitled to a refund of the GST you have remitted?

Relevant facts and circumstances

You are registered for GST (and were registered at the time of your supply of real property).

You supplied by way of sale real property to two entities (Entity A and Entity B) as taxable supplies.

The real property (herein known as the Property) is located in Australia.

The Property consists of units, a residential house and vacant land with leisure facilities.

All the units are self contained and have kitchen, bathroom, toilet and sleeping facilities.

You used the Property to carry on your enterprise of supplying short term holiday accommodation and it was run by you as commercial residential premises.

Some of the units are strata titled and have common property.

Entity A purchased some of the strata titled units ('A' units) and their common property.

The remainder of the Property (the house, the remaining units ('B' and 'C' units) and the vacant land was sold to Entity B.

The vacant land also included a small parcel of land (herein known as Lot A). Lot A is on its own accessory title. From the site plans supplied with your private ruling application it is similar in size and shape to the common property of the strata titled units.

The vacant land (apart from Lot A) and house are on the same title.

You sold the actual business part of your enterprise to a third entity.

Selling the Property in this manner was done at the request of all the buyers.

As provided in the documentation supplied with your private ruling application, the buyers were the subject of a Tax Office audit and were refused the input tax credits (GST credits) on the acquisitions.

The previous owner purchased the Property as a residential house with vacant land and used it as residential premises.

The previous owner then built the 'A' units to sell. Shortly after, they then built the leisure facilities anticipating this would make these units more sellable. The previous owner did use these facilities but treated the vacant land more as common ground for themselves and the units.

The previous owner then built the 'B' units to sell.

The 'B' units were strata titled and along with the 'A' units were eventually sold as residential premises and were used by the buyers as such.

The previous owner decided to run the complex as commercial short-term accommodation so built the 'C' units and started to buy back the 'A' and 'B" units (the last of these units was bought back in 2009 by you).

The previous owner sold the complex as a GST-free going concern to you in 2007 having run the complex as commercial residential premises.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999:

Section 7-1

Section 9-5

Paragraph 9-10(2)(d)

Division 40

Section 40-65

Subsection 40-75(1)

Division 75

Section 195-1

Reasons for decision

Summary

The first sale of units only used as commercial residential premises is the sale of new residential premises.

Detailed reasoning

1. Should your supply to Entity A of the 'A' units be subject to GST?

Section 7-1 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that GST is payable on taxable supplies.

Paragraph 9-10(2)(d) of the GST Act provides that a grant, assignment or surrender of real property is a supply for GST purposes.

Furthermore, under section 9-5 of the GST Act, you make a taxable supply if:

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

In your case, you supplied to Entity A by way of sale the 'A' units for consideration, the sale was made in the course or furtherance of your enterprise, the sale is connected with Australia as it was made in Australia and you were registered for GST at the time of the sale.

There are no provisions in the GST Act or any other Act that would allow the sale to be treated as GST-free. However, division 40 of the GST Act includes as an input taxed supply the sale of residential premises. Therefore, before considering if your sale of the 'A' units is taxable, it is necessary to consider whether your sale should have been treated as the sale of residential premises and hence, input taxed.

What are 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:

Section 195-1 of the GST Act further provides the definition of residential premises as land or a building that:

regardless of the term of the occupation or intended occupation.

Goods and Services Tax Ruling GSTR 2000/20 provides the Australian Tax Office view on the characteristics indicative of residential premises. In particular, paragraphs 25 and 28 of GSTR 2000/20 state:

In your case, the 'A' units are fixed to land which includes common property and are self contained having sleeping, kitchen and toilet facilities. They are also intended to be occupied (and are capable of being occupied) as a residence. Consequently, the units are residential premises.

Hence, your sale of the 'A' units should have been input taxed under section 40-65 of the GST Act, provided they are not new or commercial residential premises.

What are new residential premises

Subsection 40-75(1) of the GST Act provides that residential premises are new residential premises if they:

In your case, the 'A' units and their common property have previously been used and also sold as residential premises. They have neither been created through substantial renovations of a building, nor been built, or contain a building that has been built, to replace demolished premises on the same land. Consequently; they are not new residential premises as per subsection 40-75(1) of the GST Act.

What are commercial residential premises

Section 195-1 of the GST Act defines commercial residential premises to include anything similar to a hotel, motel, inn, hostel or boarding house (the other parts of the definition not being relevant to your circumstances).

In your case, the Property was run by you as commercial residential premises given what was being offered to your customers was similar to hotel / motel type accommodation. It was then sold in parts to different (although associated) entities at the request of the buyers. The actual business part of your enterprise was also sold separately from the units and vacant land.

We consider that as a result of selling the Property in this manner, those characteristics that are indicative of commercial residential premises (as provided in GSTR 2000/20) have been lost and what was sold were components of an enterprise that only together could operate as commercial residential premises. Consequently, the 'A' units are not commercial residential premises and as a result should have been sold as an input taxed supply of residential premises as per section 40-65 of the GST Act.

2. Should your supply to Entity B of the remainder of the real property be subject to GST?

'B' and 'C' units, residential house and vacant land (including Lot A)

As per the reasons given in question 1 the supply of the 'B' units and the house is the supply of residential premises and hence input taxed as per section 40-65 of the GST Act.

The vacant land was originally purchased by the previous owner to be used as residential premises (including Lot A at that time). The vacant land (apart from Lot A) is still on the same title along with the house. The facilities built on the land are enjoyed by all occupants of the Property.

The vacant land (not including Lot A) was not sold as part of commercial residential premises (as discussed in question 1). Hence, we consider that given it was not sold as part of a commercial residential complex and remains on the same title as the house, it retains its character as land used for residential purposes and therefore, its supply is input taxed.

Lot A is on its own accessory title and surrounds the 'B' units. It too was not sold as part of a commercial residential complex. From the site maps supplied with your private ruling application, this parcel of land would have been used almost exclusively by the occupants of the 'B' units due to its size, shape and positioning. We consider therefore that Lot A is allied to the 'B' units (albeit they are not on the same title) and hence, its supply is also input taxed.

Remaining 'C' units

The Property was run as commercial residential premises by the previous owner and yourself. The previous owner build the 'C' units and they have never been sold in their own right as residential premises (the supply to you being a supply of commercial residential premises as a GST-free supply of a going concern).

Consequently, this is the first sale of these units as residential premises and consequently they are new residential premises as defined by subsection 40-75(1) of the GST Act (having have not previously been sold as residential premises and have not previously been the subject of a long-term lease).

Hence, the supply of these units is taxable.

Retrospectively applying the margin scheme

As you acquired the Property as a GST-free going concern, you may be able to apply the margin scheme retrospectively. Applying the margin scheme has the effect of possibly reducing the amount of GST payable on the taxable supply of real property (such as the 'C' units).

Division 75 of the GST Act allows the sale of real property to be sold under the margin scheme provided certain requirements are met. One of these requirements is that the supplier and purchaser agree in writing before the supply (usually at settlement) that the supply is to be made under the margin scheme.

In your case, this has not been done with respect to the sale of the 'C' units. However it may be possible to retrospectively apply the margin scheme given that the purchaser was under the impression that GST credits could be claimed.

I have enclosed a fact sheet on the margin scheme and the Law Administration Practice Statement PS LA 2005/15 which provides information on what is required to enable you to apply the margin scheme retrospectively. More information can be found at the Australian Tax Office website www.ato.gov.au.

3. If any of the supplies are input taxed, are you entitled to a refund of the GST remitted?

You treated all of the supply of the Property as taxable which, apart from the 'C' units, should have been treated as input taxed. Consequently, provided certain requirements are met, you would be entitled to a refund of all the remitted GST apart from the GST payable on the 'C' units (unless the GST payable is subsequently reduced as a result of retrospectively applying the margin scheme).

Apportionment

As stated, no GST is refundable to you on the sale of the 'C' units. It is therefore necessary for you to make an apportionment as to the value of the 'C' units to ensure you only claim a refund of GST on those parts of your supply of the Property that were input taxed.

Information on apportionment methods can be found in the Public Ruling GSTR 2001/8 (copy enclosed), this being the Tax Office view on mixed supplies. GSTR 2001/8 provides that any apportionment method can be used provided it is fair and reasonable.

Requirements to be met before a refund is paid

Section 105-65 of the Taxation Administration Act 1953 provides that the Commissioner of Taxation need not give you a refund where you have treated an input taxed supply as taxable unless you first refund the overpaid amount to the recipient of your supply.

In relation to this legislative provision, it is Tax Office policy that a refund will not be made to the supplier unless the recipient is first refunded. This ensures that the supplier is not put into a net gain position, that is, they obtain a refund but do not (or are unable) to refund the recipient.


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