Edited version of private ruling

Authorisation Number: 1011630833843

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Ruling

Subject: GST on the sale of a property

Question 1

Will the purchase of a property be a creditable acquisition?

Answer

The purchase of the property will be a creditable acquisition if the conditions of section 11-5 of A New Tax System (Goods and Services Tax) Act 1999 (GST Act) are met.

Facts

You have entered into a contract to purchase a property to be used as your business premise.

Settlement for the property is subject to a number of conditions being met.

The contract includes a clause that Goods and Services Tax (GST) is to be included in the purchase price if this Office decides the transaction is subject to GST.

You are registered for GST.

The vendor of the relevant premises is registered for GST.

The vendor converted a residential premise into an office complete with reception area, administration, waiting rooms etc. The modifications included the removal of the kitchen and showering facilities.

While the property is located in a residential area, permission was provided by the relevant council to run a business from that location.

The premises are utilised during normal working hours only and are vacated each day at the close of business. No part of the premises is used for residential accommodation.

The contact of sale does not stipulate that the parties agree to apply the margin scheme.

You contend that the sale of the premises to you will not be subject to GST on the grounds the supply is not in the course of a furtherance of the vendor's legal practice.

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 9-5

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 Division 75

Reasons for Decision

Under section 11-20 of the GST Act, you are entitled to a GST credit for any creditable acquisition that you make.

Section 11-5 of the GST Act provides that 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.

Section 11-15 of the GST Act provides that you acquire a thing for a creditable purpose to the extent that you acquire the thing in carrying on your enterprise. However you do not acquire a thing for a creditable purpose to the extent that the acquisition relates to making input taxed supplies or the acquisition is of a private or domestic nature.

In your case the purchase of the premises will be for a creditable purpose as it will be used to conduct a business. You are registered for GST and will be liable to provide the relevant consideration should settlement occur. As such subsections 11-5(c) and (d) of the GST Act will be satisfied and the only issue to resolve is if the sale of the property to you will be a taxable supply.

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

(a) you make the supply for consideration;

(b) the supply is made in the course or furtherance of an enterprise
that you carry on;

(c) the supply is connected with Australia, 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.

Where all the elements of section 9-5 of the GST Act are satisfied, the supplier is liable to remit GST on supplies made, unless they are GST-free or input taxed.

The sale of the property will not be GST-free in your case as it is not covered by any of the provisions in Division 38 of the GST Act. Under certain circumstances it will be input taxed if it is a sale of residential premises. This is covered by section 40-65 of the GST Act which provides that:

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 the 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 that those used for residential accommodation (regardless of the term of occupation) before 2 December 1998.

Clearly subsection 40-65(2) of the GST Act does not apply in this case (the premises are not new, nor are they commercial residential premises) and therefore the supply of the property will be input taxed if it is residential in nature.

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

· is occupied as a residence; or

· is intended to be occupied, and is capable of being occupied, as a
residence.

Goods and Services Tax Ruling GSTR 2000/20 covers the ATO view on commercial residential premises. Paragraph 28 of GSTR 2000/20 states that to be a residence in the sense defined in the definition of residential premises, the premises should have the facilities required for day to day living. These characteristics are inherent in the fabrication of the structure itself. The premises should include such things as areas for sleeping, eating and bathing, although it is not necessary that these things be arranged in a similar manner to a conventional house or apartment.

Paragraph 29 of GSTR 2000/20 states that premises that lack these basic features may not be considered either residential or commercial residential premises. As a result, the supply of a building or other structure without these characteristics will be subject to GST under the basic rules, regardless of whether or not they are or have been at one time, occupies as some form of residence.

As you have described that the premises do not contain facilities for bathing, showering, or eating, the premises do not meet the requirements of being residential premises according to the GST Act. It is noted that this is reinforced by the fact that none of the rooms are used as bedrooms.

As such the sale of the property to you will not be an input taxed supply.

Your contention

You contend that the sale of the property does not constitute an activity or series of activities done in the form of the vendors business or any of the other qualifications contained in section 9-20 of the GST Act. As such it is not a taxable supply. You clarify that the sale of the property is not in the course of a furtherance of the type of business the vendor conducts.

Our response

The second requirement in section 9-5 of the GST Act is that you make a taxable supply if the supply is made in the course or furtherance of an enterprise that you carry on. The phrase "in the course or furtherance of" is not defined in the GST Act. Accordingly, it is appropriate to examine the ordinary meaning of those words.

The Australian Concise Oxford Dictionary (1997) Oxford University Press, Melbourne defines the phrase 'in the course of' as 'during'. The word 'furtherance' is defined to mean 'furthering or being furthered; the advancement of a scheme etcetera'.

The Explanatory Memorandum relating to the A New Tax System (Goods and Services Tax) Bill 1998 confirms this ordinary meaning at paragraph 3.10 which states:

   'In the course or furtherance' is not defined, but is broad enough to cover any supplies made in connection with your enterprise. An act done for the purpose or object of furthering an enterprise, or achieving its goals, is a furtherance of an enterprise although it may not always be in the course of that enterprise.

The vendor has entered into a contract to sell its business premise, a property that was purchased as a private residence and was converted to be used in their enterprise. For this reason the property's impending sale is connected with the entity's enterprise. Therefore, although the vendor is not in the business of selling properties, the sale of the business premises is clearly associated with that enterprise and is "in the course of" running an enterprise.

Incidentally it can also be argued that a supply may also be "in furtherance of an enterprise" as an entity may choose to move their business by selling their old premises and acquire a new property to operate from. Clearly in this situation the sale of the old premises is for the purposes of furthering their enterprise.

As such the second requirement of section 9-5 of the GST Act is satisfied. Therefore, the supply to you will be subject to GST assuming the other conditions of section 9-5 of the GST Act are satisfied at the time of settlement.

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