Edited version of your private ruling

Authorisation Number: 1012481512605

Ruling

Subject: GST and supply of residential premises

Question 1

Is the supply of your property located in Australia (Property) an input taxed supply under section 40-65 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes

Question 2

If the answer to question 1 is in the affirmative, are you entitled to a refund of the overpaid GST amount on the basis that you undertakes that it provides the Commissioner with a payment direction which authorise the Commissioner to pay the refund to the recipient of the supply?

Answer

Yes

Relevant facts and circumstances

· You are registered for goods and services tax (GST).

· After 1 July 2000 you entered into a Sale contract (Contract) to sell your Property.

· The purchaser is registered for GST.

Background

· The Property was sold with vacant possession. Prior to being vacated the Property had been used as a specific facility.

· The zoning of the property is mixed use.

· At settlement, you treated the sale of the Property as taxable supply.

Information you have provided

· The Contract

The following are noted on page 1 of the Contract:

· Improvements:

· Vacant Possession: the box is ticked.

· Commercial property (formerly used as a medical centre): the box is ticked.

· GST: Taxable supply: the Yes box is ticked.

· Margin scheme will be used in making the taxable supply: The No box is ticked.

· A schedule of the contract provides that the inclusions are built-in cupboards, blinds, file compactors in the storage area, shelving in the storage area, light fittings.

· A promotional video clip

· A 1.30 minute promotional video clip that shows one room, the kitchen of the Property, the surrounding garden and car park.

Information obtained from other source

· Promotional material (leaflet) for the sale of the Property states that:

- the Property 'Suit Residential or Commercial'.

- Ideal corner location with parking for cars off street

Decorative ceilings, timber floors, original fireplaces

Versatile floor plan, with a large number of bedrooms.

Spacious kitchen style area, wash room and two toilets

Landmark building, great street presence, air conditioned throughout.

· You acquired the Property earlier as a residence.

· There was no major modification that may have been made that would take away the character of the premise being residential premise used for residential accommodation.

· The Property was advertised as a house that was zoned in a commercial/ residential area.

· Floor plan showing bedrooms, bathrooms, kitchen, laundry, storage…

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Sections 9-5, 11-5, 40-65.

Reasons for decision

Question 1

Summary

The physical characteristics of the Property indicate that it is suitable and capable for residential accommodation.

Detailed reasoning

Under section 40-65 of the GST Act, a sale of a 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).

The term 'residential premises' is defined in section 195-1 of the GST Act as follows:

Residential premises means land or building that:

(a) is occupied as 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.

The asterisk denotes a defined term in the GST Act.

The second limb of the definition refers to premises that are designed, built or modified so as to be suitable to be occupied, as a residence or for residential accommodation. This is demonstrated through the physical characteristics of the premises [emphasis added].

Goods and services tax ruling GSTR 2012/5 considers how Subdivision 40-B and Subdivision 40-C of the GST Act (which section 40-65 is a part of) apply to the supply.

The effective date

This ruling applies both before and after its date of issue. However, this ruling does not apply to taxpayers to the extent that it conflicts with the term of a settlement of a dispute agreed to before XX. If prior to the issue of this ruling, you relied on GSTR 200/20, you are protected in respect of what you have done up to the date of issue of this ruling and the withdrawal of GSTR 2000/20.

Physical characteristics of the premises

Paragraph 9 of GSTR 2002/5 states:

The requirement in sections 40-35, 40-65 and 40-70 that premises be 'residential premises to be used predominantly for residential accommodation (regardless of the term of occupation)' is to be interpreted as a single test that looks to the physical characteristics of the property to determine the premises' suitability and capability for residential accommodation.

It is noted that under paragraph 10 of GSTR 2012/5, the requirement for residential premises to be used predominantly for residential accommodation does not require an examination of the subjective intention of, or use by, any particular person. Premises that display physical characteristics evidencing their suitability and capability to provide residential accommodation are residential premises even if they are used for a purpose other than to provide residential accommodation (for example, where the premises are used as a business office).

To satisfy the definition of 'residential premises' paragraph 15 and 20 of GSTR 2012/5 provide that:

15. To satisfy the definition of residential premises, premises must provide shelter and basic living facilities. Premises that do not have the physical characteristics to provide these are not residential premises to be used predominantly for residential accommodation.

It is considered that the physical characteristics common to residential premises that provide accommodation are:

- the premises provide the occupants with sleeping accommodation and at least some basic facilities for day to day living.

- these characteristics are inherent in the fabrication of the structure itself.

- the premises should have areas for sleeping, eating and bathing but it is not necessary that these things be arranged in similar manner to a conventional house or apartment.

Paragraph 20 of GSTR 2012/5 adds that:

20. Premises must be fit for human habitation in order to be suitable for, and capable of, being occupied as a residence or for residential accommodation. An objective consideration of the relevant facts and circumstances determines whether residential premises are fit for human habitation. Residential premises are not fit for human habitation when they are in a dilapidated condition which prevents them being occupied for residential accommodation

Mixed use zoning

As the concepts of 'residential' are given a broad treatment under GST, it is only necessary that the land on which the premises stand is zoned by the Council in a way that contemplates human habitation. Therefore, a mixed use zoning cannot by itself alter the character of the premises.

In your circumstances:

o the previous sale of the Property is recorded as sale of residential premises. There was no major modifications that may have been made by you that would take away the character of the premise being residential premise used for residential accommodation.

o Although the subsequent use of the Property is not considered to determine the character of the supply, the fact indicates that the Property was later offered to the public for residential accommodation without alteration which would consolidate the notion that the Property has the physical characteristics of residential premises.

o The floor plan reading in conjunction of the Inclusions of the Contract (the fittings, shelving, cupboard included in the sale) indicate that there was no major modification of the Property to change the physical characteristics of the Property.

o Although the number of the rooms are sizable. This would not change the character of the Property.

o As discussed above, the mixed use zoning by the local government, itself, cannot change the character of the Property.

In conclusion, the Property has the physical characteristics of residential premises and was constructed to be residential premises.

The supply of the Property by way of sale is input taxed under section 40-65 of the GST Act.

Question 2

Summary

Section 105-65 of Schedule 1 to the Taxation Administration Act 1953 (TAA) does apply to prevent the refund of the GST incorrectly paid unless you have reimbursed the recipient the overpaid GST amount.

Detailed reasoning

Under the general rules the Commissioner is required to give a refund or apply that amount in accordance with the running balance account provisions in Divisions 3 and 3A of Part IIB of the TAA.

However, the requirement to give a refund of overpaid GST is subject to section 105-65 of Schedule 1 to the TAA (section 105-65) which modifies the general rules so that the Commissioner need not give a refund or apply that amount if an entity overpaid its net amount or an amount of GST where the requirements of the section are satisfied.

Subsection 105-65(1) states:

(1) The Commissioner need not give you a refund of an amount to which this section applies, or apply (under Division 3 or 3A of Part IIB) an amount to which this section applies, if:

(a) you overpaid the amount, or the amount was not refunded to you, because a *supply was treated as a *taxable supply, or an *arrangement was treated as giving rise to a taxable supply to any extent; and

(b) the supply is not a taxable supply, or the arrangement was treated as giving rise to a taxable supply, to that extent (for example, because it is *GST-free); and

(c) one of the following applies:

(i) the Commissioner is not satisfied that you have reimbursed a corresponding amount to the recipient of the supply or (in the case of an arrangement treated as giving rise to a taxable supply) to an entity treated as the recipient;

(ii) the recipient of the supply, or (in the case of an arrangement treated as giving rise to a taxable supply) the entity treated as the recipient, is *registered or *required to be registered.

Whether subsection 105-65(1) applies to your circumstances

The restriction of refunds of overpaid GST under section 105-65 will apply if all three of the following conditions are present:

· there was an overpayment of GST

· a supply was treated as a taxable supply when it was not a taxable supply or was taxable to a lesser extent, and

· the recipient(s) has not been reimbursed a corresponding amount of the overpaid GST and/or the recipient(s) of the supply is registered or required to be registered for GST.

Miscellaneous Tax Ruling MT 2010/1, which was issued on 15 December 2010, provides the view of the Commissioner on the application of section 105-65.

Paragraph 20 of MT 2010/1 explains the meaning of 'overpaid'. It states:

In the context of 105-65 'overpaid' means the amount that has been remitted must be in excess of what was legally payable on the particular supply in the relevant tax period prior to taking into account or applying section 105-65.

In your circumstances, it is considered that no GST was payable on your supply of the Property as it was an input taxed supply under section 40-65 of the GST Act.

Had the mischaracterisation of the supply not occurred, the GST payable for the relevant tax period would be lower. Therefore, the amount of GST remitted was in excess of the GST amount legally payable had the mistreatment of the supply not been taken into account in the GST calculation. As the GST payable was overstated, the net amount for the tax period was also overstated.

Paragraph 21 of MT 2010/1 explains the meaning of 'treated' as taxable supply. It states:

In the context of section 105-65 a supply would be treated as a taxable supply where the supplier has mischaracterised a supply as taxable because they believed the supply to be a taxable supply, has dealt with the recipient of the supply as if the supply was a taxable supply and has remitted an amount as GST to the Commissioner on that supply in the calculation of their net amount. A supply would also be treated as a taxable supply where a supplier correctly characterises a supply as GST-free or input taxed but mistakenly includes GST for that supply in the calculation of their net amount. A supply would also be treated as a taxable supply where a supplier correctly characterises a supply as taxable but miscalculates the GST for that supply in the calculation of their net amount. [emphasis added]

Broadly, in the context of section 105-65 a supply would be treated as a taxable supply where the supplier mischaracterises a supply as taxable, either in whole or in part.

For section 105-65 to apply, the relevant supply must be 'treated' as a taxable supply. Broadly, in the context of section 105-65 a supply would be treated as a taxable supply where the supplier believes the supply to be a taxable supply, has dealt with the recipient of the supply as if the supply was taxable and has remitted GST to the Commissioner on that supply or arrangement.

In your circumstances:

· The overpayment arose because the supply was mischaracterised as taxable supply rather than an input taxed supply which does not attract GST.

· The mischaracterisation of the supply led you to pay a higher amount of GST on your supply than was legally payable as well as a higher net amount of GST for the relevant tax periods that was correctly payable.

The third requirement is that the recipient(s) has not been reimbursed a corresponding amount of the overpaid GST and/or the recipient(s) of the supply is registered or required to be registered for GST.

You have provided that the recipient is registered for GST and received a tax invoice from you.

Section 105-65 does apply to restrict the refund as all of the requirements above are met.

When the Commissioner exercises the discretion

As section 105-65 applies, the Commissioner has no obligation to pay a refund that would otherwise be payable under section 8AAZLF of the TAA.

However, it is the view of the Commissioner that he has discretion in certain limited circumstances to pay a refund even though the conditions in paragraphs 105-65(1)(a), (b) and (c) are satisfied:

Paragraphs 116 and 117 of MT 2010/1 provide that:

116. The operation of section 105-65 to deny the requirement to pay refunds that would otherwise be payable is not discretionary … The words of the provision say that where the section applies the Commissioner need not give you a refund of the amount or apply the amount under the relevant RBA provisions.

…

117. The Commissioner considers that the words "need not", in the context of section 105-65, do not prohibit the giving of a refund and accordingly the Commissioner has discretion to pay a refund in appropriate circumstances.

This view is supported by the decision in Luxottica Retail Australia Pty Ltd v FC of T 2010 ATC 10-119 at 57 where the AAT referred to 'residual discretion':

As to paragraph (c), and accepting of course that subparagraph (ii) cannot apply, it is a fact that the customer has not been "reimbursed" to the extent of the overpayment. The question then becomes whether, in these circumstances, the residual discretion to pay the refund to the Applicant should be exercised. We think it should. [Emphasis added].

Paragraph 128 of MT 2010/1 provides some guiding principles to consider when exercising the discretion. It states:

Section 105-65 does not specify what factors are relevant to the exercise of this discretion. In exercising the discretion, the Commissioner will have regard to the following guiding principles:

(a) The Commissioner must consider each case based on all the relevant facts and circumstances.

(b) The Commissioner needs to follow administrative law principles such as not fettering the discretion or taking into account irrelevant considerations.

(c) The Commissioner must have regard to the subject matter, scope and purpose of section 105-65. As explained in paragraph 127 of this Ruling, it clear from the scope and purpose that section 105-65 is designed to prevent windfall gains to suppliers and to maintain the inherent symmetry in the GST system and is based on the underlying design feature and presumption of the GST system that the cost of the GST is ultimately borne by the non registered end consumer.

(d) The discretion should be exercised where it is fair and reasonable to do so and must not be exercised arbitrarily. The circumstances in which the Commissioner considers it may be fair and reasonable to exercise the discretion include, but are not limited to, the following:

Of relevance to your circumstances is that the Commissioner must have regard to the subject matter, scope and purpose of section 105-65. This is explained in paragraph 127 of MT 2010/1 that states:

"… the provision is designed to prevent windfall gains to suppliers and to require the supplier to ensure that any refund ultimately compensates the person or entity who ultimately bore the cost. In relation to a refund of overpaid GST, the potential or otherwise for a windfall gain, the requirement to ensure the refund compensates the person or entity that ultimately bore the cost and the potential to disturb the symmetry envisaged by the GST system, are factors that must be taken into account in relation to the exercise of the discretion."

The Explanatory Memorandum to the Tax Law Amendment (2008 Measures No 3) Act (which introduced the current version of section 105-65) adds further:

2.2 Without the restriction on refund requirement, there is a potential for windfall gain to arise to businesses that receive the refund of GST but have not borne the incidence of tax.

It is clear from the scope and purpose of section 105-65 that the provision is designed to prevent windfall gains to suppliers and to require the supplier to ensure that any refund ultimately compensates the person or entity that ultimately bore the cost.

It follows from the above that it is important when exercising the discretion to determine who has borne the burden of the GST. That is, whether a supplier has passed on the GST to the recipients.

The following is considered fact:

· Although the recipient is registered and received a tax invoice from you (as you believed that the supply was taxable) the Commissioner has not allowed the recipient's claim of input tax credit arising from the acquisition on the basis that the Property was used for residential accommodation under section 40-35 of the GST Act and therefore was not acquired for an creditable purpose.

· As the GST amount has been overpaid, it is the recipient who is the entity that has ultimately borne the tax.

· You undertake to pay the refunded amount to the recipient. You would be prepared to provide the Commissioner with a payment direction which authorises the Commissioner to pay the refund amount to the recipient of the supply in question.

The Commissioner is satisfied that the facts and arrangements above bring about a fair and reasonable outcome to enable him to exercise his discretion to refund the overpaid GST.

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