Edited version of private ruling

Authorisation Number: 1011731135659

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Ruling

Subject: GST and supply of property

Question 1

Will your supply of your property be a taxable supply?

Advice/Answers

Your supply of your property will be a mixed supply of commercial property (taxable supply) and residential property (input taxed).

Relevant facts

You own a property and you are registered for GST.

The property contains two separate brick buildings (main buildings) and a separate freestanding garage.

The main buildings was designed for commercial and residential purposes. The premises used for commercial purposes, has not been used for any other purposes.

Both main buildings are roughly the same size.

One of the main buildings was built as a residence. You confirmed that you do not require any confirmation in relation to that building as you are satisfied that it is residential premises. The freestanding garage has been used in connection with the residential property.

The property's zoning permits residential accommodation, however it has to be in combination with commercial use. Council is reluctant to permit an exclusive residential use.

There is a shared driveway between the two main buildings, which leads to a garage and parking area at the rear of the property.

The garage and parking area are not attached to either of the buildings and are accessed by the driveway. The parking area was used by the staff in the commercial building, and the resident used the garage. Visitors would park on the street.

You intend to market the property and sell it at auction.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Section 9-.

A New Tax System (Goods and Services Tax) Act 1999 Section 9-80.

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 38-220.

A New Tax System (Goods and Services Tax) Act 1999 Section 38-250.

A New Tax System (Goods and Services Tax) Act 1999 Division 75.

Reasons for decision

GST is payable on taxable supplies.

Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (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 the entity's enterprise

§ 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.

You are registered for GST and you will be selling the property for consideration. The supply is connected with Australia as the property is situated in Australia. The property has been used for conducting your activities in your normal operations. As such, the sale will be made in the course or furtherance of the enterprise that you carry on.

Your property consists of land, two main buildings, a freestanding garage and a parking space. The buildings are used for separately identifiable purposes. You are satisfied that the building used as a residence is correctly classified as residential property. Therefore, we need to look at the building used for commercial purposes and the garage and parking areas with regards to the application of the GST.

In your situation, there is no provision in the GST legislation that would treat the sale of this property as a GST-free supply under Division 38.

Therefore, we need to consider whether the sale of the property is input taxed.

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).

'Residential premises', as defined in section 195-1 of the GST Act means land or a building:

§ that is occupied as a residence or for residential accommodation; or

§ that 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) and includes a floating home.

Goods and Services Tax Ruling GSTR 2000/20 Goods and Services Tax: commercial residential premises (GSTR 2000/20) also deals with residential premises. It provides discussion on the definition under section 195-1 of the GST Act and the characteristics of residential premises in paragraphs 18 to 36. Of particular relevance to this case are paragraphs 28 and 29 which states:

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.

29. Premises that lack these basic features may not be either residential premises or commercial residential premises. Supplies of buildings or other structures without these characteristics are subject to GST under the basic rules, regardless of whether or not they are or have been at one time, occupied as some form of residence.

You have stated that the building used for commercial purposes will be able to be converted into residential premises with some minor renovations.

However, paragraph 19 of GSTR 2000/20 explains that input taxing only applies to the extent that the premises are to be used predominantly for residential accommodation. This 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.

It is the purpose for which the premises were designed, built or modified that is relevant in determining whether they meet the characteristics of residential premises.

In your case:

§ the building was built for commercial use.

§ the building has been used for commercial purposes since its construction pre 1 July 2000.

§ it has never been used for residential purposes.

§ the Council zoning requires mixed use of the property.

§ you have not carried out any renovations on the building.

§ the building has all relevant services, such as water, electricity connected

§ the building contains a reception area, kitchen, two offices, four storage areas, two separate toilets, a garage etcetera.

Based on the above we consider that when viewed objectively, the property does not display the characteristics of residential premises. It has been used for commercial purposes as opposed to residential accommodation. Therefore, the supply of the building used for commercial purposes satisfies all the requirements of a taxable supply under section 9-5 of the GST Act. As such, the sale of that part of the property will be a taxable supply.

Your supply of the commercial building will not be an input taxed supply of real property under subsection 40-65(1) of the GST Act as it is not residential premises to be used predominantly for residential accommodation.

You have advised that the other main building is residential premises. Therefore, your supply of this part of the property will be an input taxed supply of residential property.

Consequently, you are selling a property which comprises a taxable part, and an input taxed part. As these two areas are separately identifiable parts, you are making a mixed supply when you sell your property.

GST is payable on the sale of the property to the extent that it is used for commercial purposes. GST is not payable to the extent that the property is used for residential accommodation.

It is also necessary to consider the status of the parking area and the freestanding garage. Goods and Services Tax Ruling GSTR 2003/3 Goods and services tax: when is a sale of real property a sale of new residential premises? (GSTR 2003/3) contains an example that looks at two buildings on the same land, and gives the following discussion:

Sale of residential premises with more than one residential building

94. Where there is more than one residential building on the same land, it may be necessary to apportion the consideration for a supply of the land and all of the buildings. This will be required where, for example, one or more of the residential buildings is new residential premises that were not used for residential accommodation before 2 December 1998 or commercial residential premises and one or more is not. The words 'to the extent' in subsection 40-65(2) operate to exclude the new residential premises from the input taxed treatment of the rest of the property.

95. An example is where a new residential building is constructed on land that contains an existing residential building which has previously been sold. The new residential premises part of a supply of the land and buildings is the new residential building together with the land on which the building is located and the land surrounding it. Various acceptable methods of apportionment are discussed in GSTR 2001/8.27 One method which is acceptable to determine the extent of the surrounding land is that area that actually or substantially contributes to the enjoyment of the building or to the fulfilment of its purposes as a residence. See also Example 12 at paragraphs 136 to 140.

Similarly, in your situation the sale of any land surrounding the building used for commercial purposes, such as the parking space could be considered to be part of the taxable component of the property and will be a taxable supply. The sale of the land surrounding the residence will be input taxed; this would include the freestanding garage used by the resident.

Mixed Supplies

As your supply of the total property will be a mixed supply, you are required to apportion the consideration for that supply between the taxable part and the input taxed part.

Goods and Services Tax Ruling GSTR 2001/8 apportioning the consideration for a supply that includes taxable and non-taxable parts (GSTR 2001/8) explains that you may use any reasonable method to apportion the consideration between the taxable part and the input taxed part. Various methods are discussed in paragraphs 92 to 113 of GSTR 2001/8. The method used must be supportable in the particular circumstances and you should keep records that explain the method you used.

A copy of this ruling can be found at our website www.ato.gov.au and will assist you to work out how to apportion the consideration for a mixed supply.

Margin Scheme

Division 75 of the GST Act provides for the use of the margin scheme in calculating the amount of GST payable on taxable supplies of real property, where the requirements of the Division are satisfied. Please note that if you choose to apply the margin scheme, you and the purchaser must agree in writing that the margin scheme is to be used in respect of this sale.

Further, as the sale of the property is partly input taxed, you will not be entitled to claim full input tax credits on acquisitions that you make in relation to this sale. You cannot claim input tax credits on your acquisitions to the extent that they relate to the input taxed portion of the sale.

For further reference on the margin scheme, you may also refer to the GST and the margin scheme guide (NAT 15145) which is available on our website.

Additional information

GSTR 2003/3 has further application to this case; specifically paragraph 41 which explains:

Residential premises previously sold as commercial property

41. Residential premises have not been sold as residential premises where the real property was previously sold only as commercial property. For example, where land had only previously been sold with a warehouse constructed on it, and the building is converted to residential premises, the residential premises would be new residential premises. Where a warehouse is converted to residential premises it is unnecessary to look beyond paragraph 40-75(1)(a). The resulting residential premises have not been previously sold as residential premises, or been the subject of a long-term lease.

Therefore, even if the building used for commercial purposes could properly be described as residential premises, (and we have already determined that they are not), then you would be making the first sale of new residential premises. As a consequence your supply of that building would also not be input taxed by virtue of paragraph 40-65(2)(b) of the GST Act.

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