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Ruling

Subject: GST and entitlement to input tax credit on acquiring real property

Question

Were you entitled to an input tax credit under Division 11 of the GST Act when you acquired the Property?

Answer

Yes. You were entitled to an input tax credit under Division 11 of the GST Act, to the extent that you were making a creditable acquisition.

Based on information you have provided, the supply of the property by the vendor to you may generally be a supply that is partly taxable and partly input taxed. If this is the case, your entitlement would be limited to that part of the supply to you that was a taxable supply, but only to the extent that you acquired that part for a creditable purpose.

Relevant facts and circumstances

You are a sole trader and registered for GST.

You entered into a contract to purchase a property located at a specified address in Australia (the Property). Settlement for your purchase took place recently.

Your tax agent provided a copy of the contract, the valuation report and a sketch plan of the buildings on the Property. The information on these documents and your submission includes:

· The Property is zoned industrial and has two existing main buildings being an industrial shed and a caretaker's dwelling.

The Council's objective is to contain industrial uses and development in a specific area for the purpose of a mixture of services, trades and small general industrial uses where there is a maximum benefit and access by the public and minimum detrimental effect to the residential areas and the town centre precinct.

The Council may permit the development and occupancy of a single house upon a lot for the purpose of caretaker's residence for security and management providing the occupants of that residential unit are directly related to the operations of the predominant permitted use. The predominant land use within the locality includes a range of light industrial applications with most properties having some form of shed structure and in many cases also an onsite residential accommodation.

The vendor provides business services and their subcontractors reside at the Property for free whilst they work in the area. You have been living at the Property previously, and prior to that other subcontractors have lived there on an ad hoc basis with the length of their stay being dependent on the nature of the job. The work that the contractors performed for the vendor has been away from the Property.

The Property was referred to as a commercial property by the financial institution that financed your loan. The valuation report which was prepared by a professional valuer for the financial institution states that the last sale of the Property was made in X year. The house was constructed and used as residential accommodation before 2 December 1998. It was acquired by the vendor in X year. There were no substantial renovations carried out on the buildings during the ownership of the Property by the vendor.

Details of the industrial shed and the caretaker's dwelling, as described by you, are as follows:

The industrial shed:

· a detached single level building with sliding access doors and fluorescent lighting.

· described as an industrial shed/workshop, with gravel driveway and dual street access.

· concrete floors. Floor area is of a specified m².

· clear span industrial accommodation with the exception of the inbuilt office. The office is approximately of a specified m² built with brick elevations within the shed.

· connected by a concrete path to a detached ablution. The ablution is of a specified m² in floor area, comprises an outdoor shower, a toilet, a laundry, a sink and washing machine taps.

· you consider the shed is of a size to garage a vehicle and materials, with quite a lot of excess capacity.

· you consider the workshop has been used in the immediate past, and will be used by you, more as a dormant storage building.

The house:

· the building is detached from the workshop and ablution.

· described as a demountable caretaker's dwelling, being of transportable donga style accommodation with an attached verandah.

· comprises a number of bedrooms, living area, bathroom/laundry, toilet, kitchen area in the main demountable unit together with another bedroom within the verandah.

· floor area of house is of a specified m² and the verandah is of a specified m².

· floor: steel frame and stumped flooring with particle board cladding.

· main external walls: sandwich panel.

· you intend to live at the premises as your primary place of residence.

Relevant legislative provisions

The A New Tax System (Goods and Services Tax) Act 1999 Section 9-5

The A New Tax System (Goods and Services Tax) Act 1999 Section 11-5

The A New Tax System (Goods and Services Tax) Act 1999 Paragraph 11-5(a)

The A New Tax System (Goods and Services Tax) Act 1999 Paragraph 11-5(b)

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

The A New Tax System (Goods and Services Tax) Act 1999 Division 38

The A New Tax System (Goods and Services Tax) Act 1999 Division 40

The A New Tax System (Goods and Services Tax) Act 1999 Subdivision 40-C

The A New Tax System (Goods and Services Tax) Act 1999 section 40-65

The A New Tax System (Goods and Services Tax) Act 1999 Subsection 40-65(1)

The A New Tax System (Goods and Services Tax) Act 1999 Subsection 40-65(2)

The A New Tax System (Goods and Services Tax) Act 1999 Paragraph 40-65(2)(a)

The A New Tax System (Goods and Services Tax) Act 1999 Paragraph 40-65(2)(b)

The A New Tax System (Goods and Services Tax) Act 1999 section 195-1

Reasons for decision

Note: In this ruling, unless otherwise stated:

· all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)

· all reference material is available on the Australian Taxation Office (ATO) website www.ato.gov.au

Section 11-20 provides that you are entitled to the input tax credit for any creditable acquisition that you make.

Whether you make a creditable acquisition is considered under section 11-5:

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. You make a creditable

The terms marked with an asterisk are defined in section 195-1.

In your situation, it is relevant to firstly consider paragraph 11-5(b), that is, whether the supply of the Property to you is a taxable supply made by the vendor.

Section 9-5 provides for taxable supplies:

You make a taxable supply if:

(a) you make the supply for *consideration; and

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

(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.

Divisions 38 and 40 deal with GST-free and input taxed supplies respectively.

On the basis of the information you have provided, the supply of the Property was not a GST- free supply under Division 38. Whether the supply of the Property by the vendor to you was an input taxed supply needs to be considered.

Subdivision 40-C provides for sales of residential premises. Section 40-65 states:

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

Section 195-1 defines:

real property includes:

(a) any interest in or right over land; or

(b) a personal right to call for or be granted any interest in or right over land; or

(c) a licence to occupy land or any other contractual right exercisable over or in relation to land.

residential premises means 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) and includes a *floating home.

Draft Goods and Services Tax Ruling GSTR 2012/D1, Goods and services tax: residential premises and commercial residential premises (GSTR 2012/D1) consider, amongst other things, how Subdivision 40-C applies to supplies of residential premises.

Paragraphs 156 to 160 of GSTR 2012/D1 explain that before considering whether a supply of premises consists of residential premises, commercial residential premises, or another type of premises, it is necessary to identify the premises subject to the supply. In this context it is possible for premises to be part of larger land or a building. For example, if the subject of the supply is limited to a strata-titled room or apartment within a larger building, it is necessary to consider the character of that room or apartment, not the character of the larger building.

In your case, the Property with 2 existing main buildings is supplied to you on a single land title. Applying the principle in GSTR 2012/D1, it is necessary to consider the character of each of the 2 buildings separately.

The house:

Goods and Services Tax Ruling GSTR 2000/20, Goods and services tax: commercial residential premises (GSTR 2000/20) outlines the Commissioner's view on the characteristics of residential premises. Paragraph 26 and 28 of GSTR 2000/20 state:

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.

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.

Information you have given in relation to the house includes that:

a. it is a caretaker's residence/dwelling.

b. it appears to have been constructed in a specified year.

c. Council has zoned the Property industrial or light industrial, and that it is legal for the Property to be used for residential purposes.

d. it includes a specified number of bedrooms, living area, bathroom/laundry, toilet, and kitchen area.

On the facts provided, we consider the house satisfies the definition of residential premises to be used predominantly for residential accommodation. Therefore, subject to subsection 40-65(2) the supply of the house (and the surrounding areas used in conjunction with the house) was an input taxed supply.

Paragraph 40-65(2)(a) states that the sale of real property is not input taxed to the extent that the residential premises are commercial residential premises.

As defined in section 195-1, 'Commercial residential premises' means:

(a) a hotel, motel, inn, hostel or boarding house; or

(b) premises used to provide accommodation in connection with a *school; or

(c) a *ship that is mainly let out on hire in the ordinary course of a *business of letting ships out on hire; or

(d) a ship that is mainly used for *entertainment or transport in the ordinary course of a *business of providing ships for entertainment or transport; or

(da) a marina at which one or more of the berths are occupied, or are to be occupied, by *ships used as residences; or

(e) a caravan park or a camping ground; or

(f) anything similar to *residential premises described in paragraphs (a) to (e).

However, it does not include premises to the extent that they are used to provide accommodation to students in connection with an *education institution that is not a *school.

On the information provided, the part of the Property relating to the house is unlikely to satisfy the definition of commercial residential premises.

Paragraph 40-65(2)(b) provides that the sale of real property is not input taxed to the extent that the residential premises are new residential premises other than those used for residential accommodation (regardless of the term of occupation) before 2 December 1998.

Section 40-75 provides for the meaning of 'new residential premises' and states:

(1) *Residential premises are new residential premises if they:

(a) have not previously been sold as residential premises (other than *commercial residential premises) and have not previously been the subject of a *long-term lease; or

(b) have been created through *substantial renovations of a building; or

(c) have been built, or contain a building that has been built, to replace demolished premises on the same land.

Paragraphs (b) and (c) have effect subject to paragraph (a).

However, the *residential premises are not new residential premises if, for the period of at least 5 years since:

(a) if paragraph (1)(a) applies (and neither paragraph (1)(b) nor paragraph (1)(c) applies)-the premises first became residential premises; or

(b) if paragraph (1)(b) applies-the premises were last *substantially renovated; or

(c) if paragraph (1)(c) applies-the premises were last built;

the premises have only been used for making supplies that are *input taxed because of paragraph 40-35(1)(a).

Your submission includes that:

· the house and workshop were built around a specified year.

· the house has been used as a residential accommodation before 2 December 1998.

· the vendor acquired the Property in a specified year. You were informed that the vendor acquired the Property through a taxable supply.

· there were no substantial renovations carried out on the buildings during the vendor's ownership of the Property.

On the facts provided, the residential premises were not new residential premises.

Subdivision 40-C establishes the vendor's GST liability on the sale of the Property to you. Accordingly, it is not appropriate to rule on the vendor's liability to you being a separate entity. Furthermore, the facts are provided by you and not by the vendor, and it is noted that the facts may also be subject to uncertainty.

However, to assist you we consider that where the house is not new residential premises then the supply by the vendor of that part of the Property containing the house (and the surrounding areas used in conjunction with the house) would generally be an input taxed supply and GST would not be payable on the supply.

Accordingly, we determine that where this is the case, you will not be entitled to the input tax credits in relation to your purchase of that part of the Property which relates to the house, as you are not making a creditable acquisition by virtue of paragraph 11-5(b) not being satisfied.

The workshop:

You have described the workshop as:

a. an industrial shed/workshop, with gravel driveway and dual street access.

b. a detached single level building with sliding access doors and fluorescent lighting.

c. having concrete floors of a specified m² floor area,

d. clear span industrial accommodation with the exception of the inbuilt office. The office is approximately of a specified m² built with brick elevations within the shed.

e. connected by a concrete path to a detached ablution. The ablution is of a specified m² in floor area, comprises an outdoor shower, a toilet, a laundry, a sink and washing machine taps.

You consider the workshop is of a size to garage a vehicle and materials, with quite a lot of excess capacity.

You consider the workshop has been used in the immediate past, and will be used by you, more as a dormant storage building.

The explanation in GSTR 2012/D1 on 'other premises' includes:

157. A variety of buildings may include basic living facilities, including office buildings and hospitals. However, it does not follow that all premises that have these facilities are necessarily residential premises to be used predominantly for residential accommodation.

158. Although these premises have, in part, physical characteristics common to premises that provide living accommodation, they also have physical characteristics which reflect their suitability for another purpose. Where premises' suitability for the provision of living accommodation is ancillary to the premises' prevailing function, they are not residential premises to be used predominantly for residential accommodation.

159. Even if an office worker eats and sleeps overnight in an office building for a period, it does not follow that the premises are residential premises to be used predominantly for residential accommodation. Rather, the physical characteristics of the premises reveal that the building is an office. Similarly, a squatter might eat and sleep in an otherwise vacant factory or warehouse but this does not make it residential premises to be used predominantly for residential accommodation.

On the description provided, although the workshop and the ablution may have some physical characteristics common to premises that provide sleeping accommodation and other basic living facilities, the workshop also has the physical characteristics which reflect its suitability for another purpose. The common use would be as a workshed/workshop.

Accordingly, we consider the supply of the workshop (and the surrounding areas used in conjunction with the workshop) does not satisfy the requirements of section 40-65 to be an input taxed supply of residential premises to be used predominantly for residential accommodation. There are no other provisions in Division 40 that will apply to the supply of the workshop to give rise to an input taxed supply. Accordingly, the vendor would be making a taxable supply on that part of the Property not relating to the residence to you, provided the vendor also satisfies all the other requirements of section 9-5.

Mixed supply:

As the supply of the Property by the vendor to you would generally comprise a taxable part and a non-taxable part. That is:

· that part of the Property relating to the workshop would be the taxable part, and

· that part of the Property relating to the house would be the non-taxable part the vendor would be making a mixed supply.

Further information on mixed supplies is available on Goods and Services Tax Ruling GSTR 2001/8, Goods and services tax: apportioning the consideration for a supply that includes taxable and non-taxable parts. The ruling also provides guidance on apportionment of the consideration for a mixed supply between the taxable and non-taxable part of the supply to find the consideration for the taxable part.

Creditable purpose:

One of the requirements in paragraph 11-5(a) as stated earlier in this ruling is that you make a creditable acquisition if you acquire anything solely or partly for a creditable purpose. The meaning of creditable purpose is provided in section 11-15 as follows:

(1) You acquire a thing for a creditable purpose to the extent that you acquire it in *carrying on your *enterprise.

(2) However, you do not acquire the thing for a creditable purpose to the extent that:

(a) the acquisition relates to making supplies that would be *input taxed; or

(b) the acquisition is of a private or domestic nature.

You state that you are a sole trader carrying on the specified enterprise, that you intend to live at the premises as your primary place of residence and will garage your motor vehicle, and store material and tools in the workshop. You consider the workshop has quite a lot of excess capacity and, other than using it for some administration work, it will be used more as a dormant storage building.

Accordingly, as the supply of that part of the Property not relating to the residence would generally be a taxable supply, you are entitled to the associated input tax credits where you are acquired it in carrying on your enterprise. Where you acquired the workshop partly for private or domestic use, you need to make an apportionment that is fair and reasonable to work out the input tax credit that you are entitled to.

Goods and Services Tax Ruling GSTR 2006/4, Goods and services tax: determining the extent of creditable purpose for claiming input tax credits and making adjustments for changes in extent of creditable purposes (GSTR 2006/4) provides guidance on how to determine the extent of your creditable purpose in making acquisitions to enable you to claim the correct amount of input tax credits.

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