Edited version of your written advice

Authorisation Number: 1012815387854

Ruling

Subject: GST and property

Question

Was Entity A's sale of specified property (the Property) a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes, in part. The sale of the Property was a mixed supply. The garage converted into administrative offices is a taxable supply under section 9-5 of the GST Act.

Relevant facts and circumstances

Entity A is registered for goods and services tax (GST).

Entity A entered into a contract on a specified date for the sale of a specified property (the Property) to entity B (the Purchaser). The sale of the Property settled on a specified date.

The Property was purchased by entity A in a specified year.

Entity A converted the house and garage such that it finally had a specified number of bedrooms, a specified number of other rooms, a kitchen, bathrooms, toilets, a laundry room and administrative offices.

Entity A created the administrative offices by closing off the garage entrance to prevent vehicle access and using internal partitioning to create an office area with built in/fixed workstations.

The renovations were completed in a specified year. The premises were used for residential accommodation between the completion of renovations and 2 December 1998.

The Property was not sold as a GST-free supply of a going concern pursuant to section 38-325 of the GST Act.

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 section 195-1

Reasons for decision

In this reasoning, please note:

• all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)

• all reference materials referred to are available on the Australian Taxation Office (ATO) website www.ato.gov.au

• all legislative terms of the GST Act marked with an asterisk are defined in section 195-1 of the GST Act

Under section 9-5, you make a taxable supply if:

a) you make the supply for consideration

b) the supply is made in the course or furtherance of an enterprise that you carry on

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.

The entity A supply of the Property is made for consideration and in the course or furtherance of their enterprise. In addition, the Property is located in Australia and the entity is registered for GST.

Therefore, the entity's supply will be a taxable supply unless it is GST-free or input taxed. There is no provision in the GST Act whereby any portion of the property supplied would be GST-free.

The issue in this case is whether the supply of the Property is partly or wholly an input taxed supply of residential premises. Input taxed means that GST is not payable on the supply and there is no entitlement to input tax credits for anything acquired to make the supply.

Subsection 40-65(1) 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 (regardless of the term of occupation).

'Residential premises' is defined in section 195-1 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.

Goods and Services Tax Ruling GSTR 2012/5 Goods and services tax: residential premises (GSTR 2012/5), provides guidance on what is considered to be residential premises to be used predominantly for residential accommodation for the purposes of subsection 40-65(1).

Paragraph 9 of GSTR 2012/5 advises that the requirement in section 40-65 that premises be 'residential premises to be used predominantly for residential accommodation' 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.

Paragraph 10 clarifies that 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).

In this case, while the majority of the property meets the definition of residential premises and the guidelines provided in GSTR 2012/5, the entity A has made some physical modifications to convert the Property for business use.

Paragraphs 41 to 43 GSTR 2012/5 give an example of residential premises that are partly converted to business use. The paragraphs state:

41 Shannon decides to partly modify her house to use in her profession as a doctor. She modifies an area of the house to provide office and consulting room space, an operating theatre, a waiting room and storage for the business. A sealed car park is also added to the property. Significant physical modifications are made to these areas, including the removal and alteration of walls, and the addition of lighting, hygiene facilities and security to meet industry standards. The existing lounge room is used as the patients' waiting room. An existing bedroom is used for storage. No physical modifications are made to the lounge room or bedroom.

42 The modifications result in the part of the premises consisting of the office, consulting room, operating theatre and car park no longer being residential premises to be used predominantly for residential accommodation. Objectively, part of the premises is still designed predominantly for residential accommodation, comprising bedrooms (including the bedroom used for storage), bathroom, kitchen, living room, lounge room and gardens.

43 If Shannon later sells or leases the premises, she will need to apportion the value of the supply between the taxable and input taxed parts of the supply.

The modifications by entity A have resulted in the part of the premises consisting of the administration offices (converted garage) no longer being residential premises to be used predominantly for residential accommodation. It follows that, the supply of the administrative offices is a taxable supply subject to GST.

The remaining part of the Property (excluding the administrative offices) is residential premises. Therefore, the supply of that part of the Property is input taxed and not subject to GST.

Apportionment

The issue of when a supply contains both a taxable and non-taxable part (mixed supply) is discussed in Goods and Services Tax Ruling GSTR 2001/8 Goods and services tax: apportioning the consideration for a supply that includes taxable and non-taxable parts (GSTR 2001/8).

GST is payable on a mixed supply that the entity A makes, but only to the extent that the supply is taxable. The entity A is required to apportion the consideration for a mixed supply between the taxable and non-taxable parts of the supply to establish the consideration for the taxable part.

Paragraph 92 of GSTR 2001/8 provides that a taxpayer may use any reasonable method to apportion consideration to the separately identifiable taxable part of a mixed supply. However, the apportionment must be supportable by the facts in the particular circumstances and be undertaken as a matter of practical common sense.

Paragraphs 93 to 113 of GSTR 2001/8 discuss reasonable methods of apportionment including direct and indirect methods of apportionment and situations where a method may not be reasonable.

The entity A will need to apportion the consideration between the taxable part (the administrative offices) and the non-taxable part of the supply to establish the consideration for the taxable part.

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