Edited version of your written advice

Authorisation Number: 1012776450227

Ruling

Subject: GST and sale of renovated house

Questions

1. Did the work undertaken on the house constitute substantial renovations and therefore create new residential premises pursuant to paragraph 40-75(1)(b) of the A New Tax system (Goods and Services Tax) Act 1999 (GST Act)?

2. Was the sale of the renovated house a taxable supply under section 9-5 of the GST Act?

Advice

1. No, the work undertaken on the house did not constitute substantial renovations and therefore did not create new residential premises pursuant to paragraph 40-75(1)(b) of the GST Act.

2. No, the sale of the renovated house was not a taxable supply under section 9-5 of the GST Act. The sale of the renovated house was an input taxed supply under subsection 40-65(1) of the GST Act.

Relevant fact

You are a property developer and are registered for the goods and services tax (GST).

You purchased a residential property with the intention of renovating and selling it. The house is more than five years old.

You have renovated the entire house. No rewiring, re-plumbing and extensions were done during the renovation. The original floor plan and building was not altered. Some interior timber floorboards needed to be replaced due to age and cracks and were replaced with matching timber.

You sold the property after the renovation was completed.

Work carried out in the house is as follows:

Works done outside the house are as follows:

• Tidy up gardens, some new mulch and plants;

• Re-gravelled driveway;

• Turf laid;

• Porch floorboards sanded and resealed - replaced as required due to age;

• Painted exterior;

• Rainwater tank installed;

• Fence repaired and rebuilt as required.

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 subsection 40-65(1)

A New Tax System (Goods and Services Tax) Act 1999 paragraph 40-75(1)(b)

Reasons for decisions

Question 1

Section 40-75 of the GST Act defines the term 'new residential premises' and includes residential premises that have been created through substantial renovation of a building (paragraph 40-75(1)(b) of the GST Act).

The term 'substantial renovations' is defined in section 195-1 of the GST Act as:

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

The definition of substantial renovations requires consideration of what work has been done to the building since it was acquired by the current owner.

Goods and Services Tax Ruling GSTR 2003/3 provides guidance on when substantial renovations apply in practice.

Paragraph 61 of GSTR 2003/3 provides that, for the purposes of the GST Act, if substantial renovations to a building are to occur then the renovations must satisfy the two following criteria:

i. The renovations need to affect the building as a whole.

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

Renovations need to affect the building as a whole.

Paragraphs 63, 64 and 66 of GSTR 2003/3 state:

63. Under this heading we discuss the concept of a building in its entirety, works on surrounding land (for example curtilage) and additions to the building/

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. 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.

Curtilage

66. Work associated with the renovations, but not directly attributable to the building itself, for example, landscaping and beautification of surrounding land, is not renovations of a building.

From the facts given the entire house has been affected by the renovations. This condition has been satisfied.

Further the works done outside the house were not directly attributable to the house itself and therefore were not renovations of the house.

Removal or replacement of all or substantially all of the building

The extent to which parts of a building are removed or replaced will determine whether the above criterion is satisfied. The definition of substantial renovations states that it is not necessary for foundations, external walls, interior supporting walls, floors, roof or staircases to be removed or replaced to be substantial. This criterion is satisfied where there is a removal or replacement of a substantial part of the:

• structural components of the building; or

• non-structural components of the building.

Paragraphs 70, 74 and 77 of GSTR 2003/3 state:

70. Structural work may give rise to substantial renovations in its own right. Structural work includes such work as:

• Altering, or replacing of, foundations;

• Replacing, removing or altering of floors or supporting walls, or parts thereof (interior or exterior);

• Lifting or modifying of roofs;

• Replacing existing windows and doors such that it is necessary to alter brickwork (for example replacing a single door with a double sliding door).

74. Non-structural building work includes:

• Replacing electrical wiring;

• Replacing, removing or altering non-supporting walls, or parts thereof (interior or exterior);

• Plastering or rendering an entire wall or walls;

• Plumbing (e.g replacing old metal pipes with copper pipes or plastic pipes);

• Removing or replacing kitchen cupboards, bathroom fixtures, etc;

• Removing or replacing air-conditioning or security system.

77. As part of renovations, work is often undertaken which does not impact on the structure of the building but is more in the nature of renewing or refreshing what is already there. We consider work of this nature to be cosmetic. Cosmetic work by itself does not amount to substantial renovations. We consider cosmetic work includes:

• Painting;

• Sanding floors;

• Removing and replacing worn or out of date fittings such as light fittings;

• Replacing curtains or carpets.

Cosmetic work may be undertaken to obtain a better price when selling a property (sometime referred to as a 'makeover') or to obtain a higher rent. While this is often referred to as a renovation, this is not what the legislation contemplates as substantial renovations.

Paragraphs 109 and 110 of GSTR 2003/3 provide an example of non-substantial renovations where the renovations are largely cosmetics:

109. Bob, a property speculator is registered for GST. He acquires Tangalooma, a historic federation style residence, in July 2000. Bob does not live in the house and immediately patches some of the walls in a few of the bedrooms with gyprock cement, repaints the whole house, inside and out, and replaces the kitchen.

110. Although Bob has made changes to all the rooms the work done is largely cosmetic in nature. We do not consider that Bob has substantially renovated Tangalooma. The sale of the property will be an input taxed supply. Whether or not a person resides in the premises does not alter the analysis.

Further paragraph 118 of GSTR 2003/3 states:

118. Where the restoration work affects most of the rooms in the house, but is largely cosmetic in nature (for example, replastering and repainting) and only the kitchen and bathroom are replaced, we consider there have not been substantial renovations.

From the facts received, the structure of the house has not been affected by the renovations. The major part of the renovations involves the replacement of the kitchen and bathroom which are considered to be non-structural work. The balance of the renovations is cosmetic in nature.

In this case, the extent of renovations done in the house has more in common with paragraphs 109,110 and 118 of GSTR 2003/3, which leads to the conclusion that the house did not have substantial renovation.

Accordingly, this condition has not been satisfied.

Summary

The renovations to the house were not substantial renovations of a building despite the fact the entire house was affected by the renovations. The renovated house was therefore not new residential premises under paragraph 40-75(1)(b) of the GST Act.

Question 2

GST is payable on a taxable supply. You make a taxable supply under section 9-5 of the GST Act 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 for GST.

However, the supply is not a taxable supply to the extent that it is GST-free or input taxed.

All of the above requirements must be satisfied for a supply to be a taxable supply under section 9-5 of the GST Act.

From the information received, you satisfied paragraphs 9-5(a) to 9-5(d) of the GST Act when you sold the house as:

a) you made the supply for consideration; and

b) the supply was made in the course of the property business that you carry on; and

c) the supply was connected with Australia as the house is located in Australia; and

d) you are registered for GST.

However your supply was not a taxable supply to the extent that it was GST-free or input taxed.

Input taxed supply

Under subsection 40-65(1) of the GST Act, 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, under subsection 40-65(2) of the GST Act, 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.

From the facts given, subsection 40-65(2) of the GST Act is not applicable to you since the house is not a commercial residential premise and as discussed in question 1 is not new residential premises.

Accordingly, the sale of the house would be input taxed under subsection 40-65(1) of the GST Act since the house is residential premises to be predominantly used for residential accommodation.

Summary

The sale of the renovated house was not a taxable supply for GST purposes. The sale was an input taxed supply under subsection 40-65(1) of the GST Act.

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