Edited version of private advice

Authorisation Number: 1012655466407

Ruling

Subject: Goods and services tax (GST and the sale of residential premises

Question:

Please confirm that:

(1) this property is residential premises or will be residential premises to be used predominantly for residential accommodation at the time of supply under section 195-1 of A New Tax System (Goods and Services Tax) Act 1999 (GST Act); and

(2) the sale of this property is an input taxed supply of residential premises under section 40-65 of the GST Act.

Answer:

(1) Yes. This property will be residential premises to be used predominantly for residential accommodation at the time of supply under section 195-1 of the GST Act.

(2) Yes. The sale of the property will be an input taxed supply of residential premises for the purposes of section 40-65 of the GST Act.

This ruling applies for the following periods:

Not Applicable

The scheme commences on:

Not Applicable

Relevant facts and circumstances

• The vendor is registered for GST.

• The vendor is the owner of a property located in Australia ('the property').

• An entity is the purchaser of the property ('the purchaser')

• The purchaser is registered for GST.

• The vendor of the property and the purchaser have signed a draft contract of sale ('the contract') and other documents for the supply of property.

• The contract of sale is a standard contract for sale of land for the state in which the property is located.

• The contract is marked to indicate that there is a house listed as an improvement on the property.

• The appropriate portions of the contract are marked by way of boxes being ticked such that the sale of the property:

(i) is not a taxable supply, but

(ii) is an input taxed supply, and

(iii) will not be made under the margin scheme.

• There is one building located on the property, which was constructed as a residential dwelling.

• Structurally the building on the property has maintained the appearance of a residential dwelling.

• The vendor has used the property as a clinic.

• Minor work was previously carried out to interior of the property to enable its use as the premises of a clinic, including:

(a) the addition of a 'half wall' in one of the bedrooms to separate two patient beds, and

(b) the replacement of the front doors with aluminium hinged doors.

• Under a condition of the contract of sale, at least seven days before the sale of the property the company will at its own expense:

(i) remove the 'half wall', and

(ii) replace the front aluminium hinged doors with timber doors.

• Under special condition 24 of the contract of sale, at least seven days before the sale of the property the vendor must remove all fixtures, fittings and furniture related to the chiropractic clinic.

• The net consequence of the company and vendor undertaking the particular alterations under special condition 24 of the contract of sale will be to restore the building so that it will have no physical remnants of the chiropractic clinic.

• It is the ultimate intention of the company to develop the property.

• The building contains the following features which make it capable of being used as residential premises:

(i) a bathroom

(ii) a kitchen

(iii) spaces which are capable of being used as bedrooms and a dining room .

• The exterior of the building has the appearance of a residential dwelling.

• Copies of documentation from the local planning authorities, copies of title searches, and copies of lease agreements submitted with the company's application for a private ruling indicate that the building on the property:

(i) had previously been used as a residence prior to its use as a chiropractic clinic

(ii) is more than five years old with residency going back to the 1970s and earlier

(iii) the property is zoned R4 High Density Residential, and

(iv) has previously been sold as residential premise..

• Clause 13.2 of the deed provides that:

(a) the company as purchaser of the property and the vendor agree that the company or its nominee will prepare and lodge a request for a private ruling from the Commissioner of Taxation to confirm that the sale of the property is an input taxed supply;

(b) the company and the vendor agree to adhere to the outcome of the ruling provided by the Commissioner, and

(c) the vendor shall see the application requesting the private ruling prior to its submission.

• Clause 13.3 of the deed provides that if the Commissioner of Taxation rules that:

(a) the sale of the property is a taxable supply, then the details of the contract would be amended to reflect the decision that the supply of the property is a taxable supply rather an input taxed supply; and

(b) sale of the property is a input taxed, then the details of the contract are to remain unchanged.

• The deed includes a Call Option Notice as a schedule.

• In telephone discussion on 1 July 2014, the company's agent confirmed that there is no ruling requested over the Call Option Notice that forms a schedule to the deed.

Relevant legislative provisions

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

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

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

Reasons for decision

Section 40-65 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. However, the sale is not input taxed to the extent that the property is commercial residential premises or new residential premises.

Under section 195-1 of the GST Act the term residential premises is defined as 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.

Our ruling GSTR 2012/5 Goods and services tax: residential premises ('GSTR 2012/5') sets out the Commissioner's view on what constitutes residential premises for the purposes of an input taxed supply under section 40-65 of the GST Act. GSTR 2012/5 states:

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.

…

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).

GSTR 2012/5 also states:

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.

GSTR 2012/5 further states:

Fit for human habitation

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.

Based on the Commissioner's view, whether or not a building is residential premises must be based on the physical characteristics of the building, and must provide shelter and basic living facilities.

The building on the property has the physical structure of a house. Further, it has a kitchen and bathroom, which are requirements as basic living facilities. It also has spaces which are capable of being used as bedrooms and a dining room. As such, it is capable of providing shelter as well as basic living facilities. Thus, the building has the characteristics of residential premises.

Further, the building on the property does not have the character of commercial residential premises because it does not have the characteristics of an establishment providing commercial accommodation such as a hotel, motel or boarding house.

However, it must also be considered whether or not the building on the property constitutes new residential premises.

Section 40-75 of the GST Act provides that residential premises are new residential premises if they:

• have not previously been sold as residential premises, or

• have been created through substantial renovations of a building, or

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

It is apparent from information contained in the documentation provided that the house on the property has been sold previously as residential premises. Further, there is also no evidence that the house has been built, or contains a building that has been built, to replace demolished premises on the same land.

However, there have been some alterations to the interior of the house previously, and some further interior alterations are planned in preparation for the sale of the property.

Our ruling GSTR 2003/3 Goods and services tax: when is a sale of real property a sale of new residential premises ('GSTR 2003/3') sets out the Commissioner's view on issues pertaining to GST and new residential premises, including on the issue of substantial renovations.

GSTR 2003/3 states:

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.

…

Building in its entirety

64. Whether substantial renovations have occurred should be based on consideration of the building in its entirety, that is the building as a whole, and not by reference to specific or individual rooms in the building. For renovations to be substantial they must directly affect most rooms in a building. The renovation of only one part of a building, without any work on the remaining parts of the building, would not constitute substantial renovations.

The previous planned interior alterations in the house have been the replacement of the original door with aluminium hinged doors, and the addition of a 'half wall' in one of the bedrooms to separate two patient beds. These do not constitute substantial renovations to the building as they do not effect the building as a whole, and have not resulted in the removal or replacement of all or most of the building.

Further, the planned replacement of the aluminium hinged doors by timber doors and removal of the 'half-wall' partition in one room also do not constitute substantial renovations to the building as they do not effect the building as a whole, and have not resulted in the removal or replacement of all or most of the building.

In addition, the planned removal of all fixtures, fittings and furniture related to the chiropractic clinic by the vendor do not constitute substantial renovations to the building as they do not effect the building as a whole, and have not resulted in the removal or replacement of all or most of the building.

Thus the building has not been the subject of any substantial renovations. Therefore, it cannot be regarded as new residential premises. Therefore building on the property remains as residential premises for the purposes of section 40-65 of the GST Act.

As a consequence, this property will be regarded as residential premises at the time of supply, and the sale of the property will be an input taxed supply of residential premises to be used predominantly for residential accommodation for the purposes of section 40-65 of the GST Act.

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