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Edited version of your private ruling
Authorisation Number: 1012564263590
Ruling
Subject: Supply of residential properties
Question
Was the supply of the properties by X a taxable supply?
Answer
No
Relevant facts and circumstances
X is registered for GST.
Y is not registered for GST.
On ddmmyyyy, X and Y entered into a contract for the supply of the properties located in Australia. Settlement occurred later. Consideration was $xx plus GST.
X treated the sale as a taxable supply due to the units needing repairs following certain events, in particular, on the basis that X could not satisfy themself conclusively that the units were an input taxed supply of residential accommodation (specifically as to whether they were 'fit for human habitation' and 'residential premises' as per the Commissioner of Taxation's views).
Property details:
The properties consist of a number of townhouses constructed before 2000. The townhouses contained bedrooms, plus one bathroom, one kitchen and a single car garage with roller door.
The internal floor coverings are tiles.
The townhouses were used as residential accommodation up until the time of the events.
The properties were impacted by the events in mmyyyy.
X did not undertake repairs or reinstatement works to the units and disposed of the properties on an "as is" "where is" basis. However, X did remove certain items that would be expected to be replaced. The premises were also cleaned.
All units have been vacant since the events.
State of units at time of sale
Externally and structurally the units are in good condition and will be fit for occupation as soon as the internal repairs / reinstatement works have been completed. Y provided a photo of the unit complex and a photo of one of the units as an example of the overall condition of the buildings.
The nature of the main internal repair / reinstatement works that needs to be undertaken is specified.
There is no structural or external building work that needs to be undertaken.
Further, the works do not require any development approval, building approval or building certification in order to be undertaken.
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 40-65
A New Tax System (Goods and Services Tax) Act 1999 section 195-1
Reasons for decision
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 materials, published by the Australian Taxation Office (ATO), that are referred to are available on the ATO website www.ato.gov.au
Under section 9-5, you make a taxable supply if:
· You make the supply for consideration;
· The supply is made in the course or furtherance of your enterprise;
· The supply is connected with Australia, and
· You are registered or required to be registered for GST.
However, the supply is not a taxable supply to the extent that it is GST-free or input taxed.
On the facts supplied X's supply satisfies the positive elements of section 9-5. In this factual situation, there is no provision of the GST Act which would make the supply GST-free. Therefore, the supply will be a taxable supply unless it is an input taxed supply.
Under section 40-65, 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).
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.
Under section 195-1, 'residential premises' is defined as 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.
On the facts supplied, the properties are not commercial residential premises or new residential premises.
Goods and Services Tax Ruling GSTR 2012/5: residential premises (GSTR 2012/5) contains the Commissioner's view on when premises are residential premises. Paragraphs 6-11 state:
6. Premises comprising land or a building, are residential premises under paragraph (a) of the definition of residential premises in section 195-1 where the premises are occupied as a residence or for residential accommodation, regardless of the term of occupation. The actual use of the premises as a residence or for residential accommodation is relevant to satisfying this limb of the definition.
7. Premises, comprising land or a building, are also residential premises under paragraph (b) of the definition of residential premises if the premises are intended to be occupied, and are capable of being occupied, as a residence or for residential accommodation, regardless of the term of the intended occupation. This limb of the definition refers to premises that are designed, built or modified so as to be suitable to be occupied, and capable of being occupied, as a residence or for residential accommodation. This is demonstrated through the physical characteristics of the premises.
8. A supply of residential premises may consist of a single room or apartment, or a larger complex consisting of rooms or apartments.
Residential premises to be used predominantly for residential accommodation (regardless of the term of occupation) - physical characteristics
9. 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.
10. 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).
11. Premises that do not display physical characteristics demonstrating that they are suitable for, and capable of, being occupied as a residence or for residential accommodation are not residential premises to be used predominantly for residential accommodation, even if the premises are actually occupied as a residence or for residential accommodation. For example, someone might occupy premises that lack the physical characteristics of premises suitable for, or capable of, residential accommodation (such as a squatter residing in a disused factory). Although the premises may satisfy paragraph (a) of the definition of residential premises in section 195-1, the premises are not residential premises to be used predominantly for residential accommodation.
The townhouses were constructed before 2000. Each townhouse includes bedrooms, one bathroom, one kitchen and a single car garage with roller door.
The physical characteristics of the premises demonstrate that that were intended to be occupied as a residence or for residential accommodation. Further, prior to the events, they were used to provide residential accommodation.
Paragraph 21 of GSTR 2012/5 further explains that residential premises that are in a minor state of disrepair; or subject to a temporary legal prohibition for occupation pending minor repairs; are still suitable for, and capable of, being occupied as a residence or for residential accommodation, and are capable of being occupied.
As explained in paragraph 20 of GSTR 2012/5, 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. Immediately after the events, the premises were temporarily not suitable for occupation as residences.
Example 3 at paragraphs 23 and 24 of GSTR deals with the issue of temporary disruption to occupation.
23. Ashlea is registered as a hairdresser and owns and rents residential premises that she formerly resided in at a costal town in northern Australia. The premises are not new residential premises
24. A tropical cyclone crosses the coast leading to windows being shattered and damage to the roof. The damage is readily repairable but Ashlea fails to make the repairs resulting in the local Council issuing a notice stating that the premises are not fit for habitation. As a result, the tenant's occupation of the premises is temporarily disrupted. Ashlea sells the premises before making the repairs. Despite the damage to the premises and the action taken by the Council, the physical characteristics of the premises show that it is suitable for, and capable of, being occupied as a residence or for residential accommodation. The sale of the premises is therefore an input taxed supply of residential premises to be used predominately for residential accommodation.
The photos indicate that, externally and structurally, all units are in good condition. No structural or external building works need to be undertaken. Although the repairs required for the properties are more extensive than the repairs in Example 3 above, we do not consider them to be substantial. This assessment is supported by the fact that the works do not require any development approval, building approval or building certification.
Although temporarily unsuitable for occupation as residences, the townhouses are not in a dilapidated condition. On an objective assessment the physical characteristics of the property, they are suitable for and designed for residential accommodation, but in need of repairs for the damage caused by the events.
Accordingly, the properties are residential properties and X's supply of them to Y was an input taxed supply.
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