Edited version of your private ruling

Authorisation Number: 1012456030865

Ruling

Subject: GST and supply of real property

Questions

1 Will a supply of Lot X be the supply of 'new residential premises' within the meaning of section 40-75 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

2 Can the margin scheme be applied to the supply of Lot X under Division 75 of the GST Act?

Answers

1 No. The supply of Lot X will not be the supply of new residential premises. The supply will be an input taxed supply of residential premises.

2 This question is not relevant as the supply is input taxed.

This ruling applies for the following periods:

The scheme commences on:

Relevant facts and circumstances

On ddmmyyyy, you were appointed as Receiver and Manager over certain property of entity A, including Lot X.

Entity A is the registered owner of Lot X and the property is held by Entity A in its capacity as trustee of a Trust (Trust A). As the acts of Entity A bind Trust A we will refer to Entity A or Trust A as Trust A.

Trust A has been registered for Goods and Services Tax (GST) since ddmmyyyy.

Lot X is a stratum unit located in a resort in Australia.

You are a representative of Entity A (being an incapacitated entity) for the purpose of Division 58 of the GST Act.

You have advised the ATO of your appointment and a Client Activity Account was created on the ABN of Trust A with a registration start date from your date of appointment.

You have been marketing Lot X for sale and you intend to sell it as soon as a suitable buyer is found. It is proposed that the contract will include an agreement that the margin scheme will be applied for the supply of the lot. The sale of Lot X will also include various furniture and other chattels.

You understand that Lot X was originally built as a residential unit containing a kitchen, bathroom and lounge room and used as such up until it was modified for use as a child care area some time after the start of GST.

You understand that the resort was built before the start of GST and consisted of XXX units. Historical title searches indicate that Lot X has been owned by a number of entities since it was created:

Prior to the acquisition of Lot X by Trust A, it was owned by entity D. You understand entity D used the following lots in carrying on the following enterprises:

Initially the Community Management Statement by-Laws of the resort provided that each Lot shall be used for holiday purposes only. An owner of a Lot (and if more than one owner, the owners jointly and severally) may occupy their Lot for residential purposes.

Lot X changed hands a number of times before the start of GST and a number of times after the start of GST. After the first sale after the start of GST it was sold to entity C who intended to use it for specific care services. This use continued on to some time prior to your appointment.

The by-laws in a second Community Management Statement registered on after this purchase indicates that the earlier statement was amended by the insertion of a new By-Law, which provided that:

Childcare Facilities

Lot X may be used for:-

the purpose of providing childcare services for owners or occupiers of lots in the Building; and

residential purposes.

Childcare Services Deed

The amendment to the Community Management Statement to allow Lot X to be used for the purpose of providing childcare services was made after Lot X was sold to entity C by entity B after the start of GST.

A Childcare Services Deed dated ddmmyyyy was prepared for the operation of the child care service. The Childcare Services Deed was assigned to entity D when lot X was sold, and then subsequently assigned to entity A when it purchased Lot X.

You supplied a valuation report that provides details on activities associated with lot X after it was acquired by entity C.

The valuation report contains the following information in relation to the Childcare Services Deed:

"Child Care Services Deed has been signed between the Body Corporate for "the resort" and entity C as a child care provider. This agreement engages entity C for a period of YY years commencing…. to be a child care provider with an Occupational Authority to occupy that area outside Lot X on which the outdoor play area has been constructed. This agreement allows entity C to undertake the service.

The report indicates that an adjacent lot had been combined with Lot X to form a large kiosk area and that the adjacent lot was owned by entity E at that time.

The Valuation Report contains the following statements in relation to Lots X and the adjacent lot:

This facility comprises a converted residential allotment incorporating kitchen, bathroom and enclosed living spaces with attached patio.

This former residential unit has been converted and attached to Lot X child care centre facility. Kitchen and bathroom areas have been retained as part of this facility."

The following works were undertaken

· combination ceramic tiled and wall to wall carpet finishes

· standard bathroom facilities incorporating lowset toilet suites to both care facility and kiosk

· standard kitchen facilities remain to units.

· dividing wall between Lot X and the adjacent lot have been removed and counter area installed between kiosk and child care facility

· additional servery area has been installed as an extension of the kitchen area.

History of Trust A and purchase of Lot X

On ddmmyyyy entity F set up a trust deed with entity A as trustee for Trust A.

On ddmmyyyy, Trust A, entered into the following agreements with entity D:

· a contract to acquire a management rights business

· a contract to acquire Lots W, X and Y and

· a contract to acquire Lot Z.

Each of the contracts was subject to and conditional upon contemporaneous settlement of the other contracts. The Management Rights Purchase Contract indicates that entity D assigned its rights under a Childcare Services Deed.

On ddmmyyyy Trust A registered for GST.

Some number of months prior to your appointment, Trust A reinstalled the stud walls between Lot X and the adjacent lot.

On ddmmyyyy you terminated the Childcare Services Deed and around this time the area outside Lot X on was returned to the body corporate. You had all the equipment removed and cleared the area back to concrete.

Since your appointment you have undertaken the following works in Lot X:

· relocation of plumbing works for the bathroom, laundry and kitchen including installation of new tap equipment, toilets, a wash tub, basins, a kitchen sink, towel rails, toilet roll holders and shower mixers

· laying of floor and wall tiles and waterproofing to bathroom floors

· installation of a new shower in the main bathroom

· fitting of a new kitchen, including new vanities, laminex doors and bench tops

· fitting glass splashbacks;

· installation of new shower screens to bathrooms

· plastering the new wall in main bathroom and painting all walls and ceilings

· fitting of electrical works including new lights and light switches

· installation of internal doors and

· laying carpets to the main bedrooms and living rooms.

You provided the following summary of the above details.

Lot X was originally a unit that was converted into a club by opening up to one large space except for the bathrooms that remained in situ on both sides. When I undertook the works to return the unit, the external structure inclusive of entry fire doors were untouched. However internal walls (non-structural) were reinstated to partition the room, plaster, paint carpet, bathroom refurbished as toilets had been installed and new kitchen installed.

Relevant legislative provisions

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

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

A New Tax System (Goods and Services Tax) Act 1999 40-75,

A New Tax System (Goods and Services Tax) Act 1999 58 and

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

Reasons for decision

In this ruling, all reference materials referred to that are published by the Australian Taxation Office are available on our website www.ato.gov.au

Section 58-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that a representative of an incapacitated entity is required to be registered in that capacity if the incapacitated entity is registered or required to be registered for GST. In addition section 58-10 of the GST Act includes that a representative is liable to pay any GST that the incapacitated entity would, but for this section, be liable to pay on a taxable supply, to the extent that the making of the supply to which the GST relates is within the scope of the representatives responsibility or authority for managing the incapacitated entity's affairs.

You advised that you are a representative of Trust A (being an incapacitated entity) for the purpose of Division 58 of the GST Act. Therefore, you are required to be registered for GST and are liable to pay the GST on any supply made within the scope of your appointment.

You have registered for GST and reported your GST liabilities under the relevant CAC account of Trust A. Therefore, where the supply of Lot X meets the conditions of a taxable supply under section 9-5 of the GST Act and is not input taxed you will be required to pay for the GST on the supply pursuant to Division 58.

Subsection 40-65(1) of the GST Act 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 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.

The term 'residential premises' is defined in section 195-1 to mean land or a building that:

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

§ 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 2012/5 Goods and services Tax: residential premises (GSTR 2012/5) considers how Subdivision 40-B and Subdivision 40-C of the GST Act apply to supplies of residential premises. It states at paragraph 15 that premises must provide shelter and basic living facilities to satisfy the definition of residential premises.

These characteristics will be inherent in the design and fabrication of the premises, which typically include areas for sleeping, eating and bathing. However, these things do not need to be arranged in a manner that is similar to a conventional house or apartment.

Lot X consisted of bed rooms, a kitchen, lounge room and bathroom at the time of its construction and has been returned currently to this state. We therefore consider that Lot X exhibits the physical characteristics to provide basic shelter and living facilities and satisfies the definition of 'residential premises to be used predominantly for residential accommodation. The sale of Lot X will be input taxed under subsection 40-65(1) of the GST Act unless section 40-65(2) of the GST Act is applicable.

We consider Lot X does not satisfy the definition of commercial residential premises within the meaning of section 195-1 of the GST Act.

Therefore, we will consider whether a supply of Lot X in its current form will be a supply of new residential premises.

New Residential premises

Residential premises are new residential premises, as defined in section 40-75 if they:

(a) have not previously been sold as 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).

It may be possible that in some circumstances more than one of the categories is satisfied. However, provided residential premises satisfy any one of the categories, they are new residential premises. Where none of the categories is satisfied the residential premises are not new residential premises.

When Lot X was constructed before the start of GST it met the current definition of residential premises.

Prior to its conversion for use as an area which could provide specific care services it was used as residential premises and sold a number of times and one of these times was after the introduction of GST.

Therefore prior to its use to provide care services it was sold as residential premises.

Some time after that date it was modified and used to provide care services to guests of the resort. The date of the cessation of the care enterprise is not clear however the stud walls previously removed had been reinstalled prior to your appointment.

You consider that the relevant sale in relation to paragraph 40-75(1) (a) is the sale between entity D and Trust A. However prior to this sale, Lot X was sold as residential premises as defined in the GST Act.

The contract for the sale of the Property that includes Lot X, from entity D to Trust A provides that the sale is input taxed to the extent that the Property is residential premises to be used predominantly for residential purposes, and where the Property is sold with the Management Rights Business and Property forms part of the enterprise of the Management Rights Business, then the Property will form part of a going concern for GST purposes and sold as such.

However, irrespective of whether the sale from entity D to Trust A is the sale of residential premises for the purpose of subsection 40-65(1), Lot X had already been previously sold as residential premises prior to this sale. Accordingly, we consider paragraph 40-75(1)(a) does not apply. In addition paragraph 40-75(1)(c) of the GST Act has no application to your case.

Therefore, we need to consider whether Lot X in its current condition is considered to have been created through substantial renovations as per paragraph 40-75(1)(b) of the GST Act.

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) explains when the supply of real property is a supply of new residential premises.

GSTR 2003/3 considers new residential premises created through substantial renovations - paragraph 40-75(1)(b) of the GST Act, from paragraphs 53 to 83.

The term 'substantial renovations' is defined in section 195-1:

'substantial renovations' of a building are renovations in which all, or substantially all, of a building is removed or is replaced. However, the renovations need not involve removal or replacement of foundations, external walls, interior supporting walls, floors, roof or staircases.

This definition requires consideration of what work has been done to the building since it was acquired by the current owner. Paragraphs 56 to 62 of GSTR 2003/3 are reproduced below:

56. The word 'building' is not defined in the GST Act. 'Building' means 'a substantial structure with a roof and walls, as a shed, house, department store etc'.^F21 In the context of the provision, we consider that an individual strata title unit or apartment is a 'building' and its structure is enclosed within the external walls of the unit, rather than the entire complex.

57. The general usage of the term 'renovate' is 'to make new or as if new again; restore to good condition; repair; to reinvigorate; refresh; revive'.^F22 However, the term needs to be considered in the light of the surrounding words in the definition of substantial renovations.

58. The section 195-1 definition of 'substantial renovations' stipulates that the renovations are substantial by requiring all or substantially all of the building to be removed or replaced. We consider the statement '...the renovations need not involve removal or replacement of foundations, external walls, interior supporting walls, floors, roof or staircases', means that the renovations may, but need not, involve the removal or replacement of foundations, external walls, interior supporting walls, floors, roof or staircases.

59. A building comprises a number of components, which can be termed either structural (i.e. the foundations, external walls, interior supporting walls, floors, roof, etc) or non-structural (including fixtures, fittings, plumbing, mechanical, fire systems, electrical, lifts, air conditioning, etc.

Criteria for substantial renovations

60. Whether renovations are substantial is to be determined in the light of all the facts and circumstances.

61. We consider that for substantial renovations to occur for the purposes of the GST Act, the renovations need to satisfy the following criteria before it is necessary to make further inquiry to establish whether the renovations are substantial:

(i) the renovations need to affect the building as a whole; and

(ii) the renovations need to result in the removal or replacement of all or substantially all of the building.

62. Where one of the above criteria is not satisfied substantial renovations have not occurred and no further inquiry needs to be made.

Further explanations on 'substantial renovations' detailed with examples are also available on Property and Construction Industry Partnership - Issues Register - Section 15 - Sale of real property. (Issues Register)

The renovations you made includes electrical work, plastering and plumbing, painting, retiling and other works listed by you as necessary to convert Lot X back to a unit. We do not consider this meets the definition of renovations that affect the building as a whole and result in the removal or replacement of all or substantially all of the building. Therefore Lot X in its current form is not new residential premises and therefore will be input taxed pursuant to section 40-65 of the GST Act.

Accordingly, we consider a supply of Lot X will not be the supply of 'new residential premises' within the meaning of section 40-75 of the GST Act. The sale will be an input taxed supply of residential premises under section subsection 40-65(1).

Additional information:

(1) We note the sale of Lot X will include various furniture and chattels.

Goods and Services Tax Advice (GSTA TPP 013) explains the ATO view on the sale of new residential premises with chattels included.

We consider the principle of the explanation also applies to the sale of residential premises that are not new residential premises where furniture and chattels are included in the sale.

(2) You submitted that the previous sale by entity D to Trust A would not have been a 'previous sale as residential premises' because the supply of Lot X by entity D to Trust A was GST-free, as the purchase contract indicates that the unit was sold as part of a going concern (to the extent it was not residential premises to be used for residential accommodation).

However we note the relevant contract states that where the Property (including Lot X) was sold with the Management Rights Business, and to the extent that the Property forms part the Management Rights enterprise (rather than to the extent it was not residential premises...), then the supply will be part of the going concern for GST purposes.

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