Edited version of your written advice

Authorisation Number: 1013006705287

Date of advice: 5 May 2016

Ruling

Subject: GST and the supply of real property

Question

Will you be required to pay GST on the supply of the property located in Australia (the Property) pursuant to section 7-1 of The A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes except for the portion that makes up the supply of the residential premises. You may use any reasonable method to apportion the consideration for the supply between the input taxed and taxable portion.

Relevant facts and circumstances

You are registered for GST.

You acquired a property located in Australia in the 19X0's.

The Property comprises:

1. A two storey commercial building and

2. A two storey residence which is at the back of the commercial building.

The residence has X bedrooms, a lounge, kitchen, laundry and bathrooms. Both premises are located on the one title and are a similar size.

You have entered into a contract to sell the property to an entity for $X million plus applicable GST.

Clause 1 of the special conditions provides relevantly that

'A private ruling will be obtained or sought from the Australian Taxation Office on the amount of GST applicable to this transaction.

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 and

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

Reasons for decision

In this ruling, please note that unless otherwise stated:

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

Section 7-1 provides that Goods and services tax (GST) is payable on taxable supplies. Section 9-5 provides that you make a taxable supply if:

(a) you make a 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 the indirect tax zone

(d) you are registered, or required to be registered.

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

You will be supplying real property for consideration in the course of your enterprise. The supply will be connected with Australia and you are registered for GST. In addition there is no provision of the GST Act that will make your supply GST free. Therefore your supply will be taxable except to the extent it is input taxed.

Input taxed

Subsection 40-65(1) provides that a sale of real property is input taxed to the extent that the property is residential premises to be used predominantly for residential accommodation. However, a sale is not input taxed to the extent the premises are either commercial residential premises or new residential premises. Your premises do not meet the GST definitions for commercial residential premises or new residential premises.

The term 'residential premises', as defined in section 195-1, refers to 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 (regardless of the term of the occupation or intended occupation).

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 15 of GSTR 2012/5 outlines that the premises must provide shelter and basic living facilities. The premises must also be fit for human habitation in order to be suitable for, and capable of, being occupied as a residence or for residential accommodation (paragraph 20 of GSTR20212/5).

In your case, the residence on the back of the property meets the definition of residential premises and will therefore be an input taxed supply.

However, the commercial building on the front of the property does not meet the definition of residential premises and the supply of this portion of the property will be a taxable supply.

Apportionment

Section 9-80 provides that, where a supply is partly taxable and partly input taxed, the value of the supply is to be apportioned between the taxable and non-taxable (that is, input taxed) parts of the supply.

A supply which contains both taxable and non-taxable parts is referred to as a mixed supply. 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), provides guidance on the GST treatment of mixed supplies, and in particular, provides methods and examples that you may use to help you work out how to apportion the consideration for a supply that contains separately identifiable taxable and non-taxable parts. The general principle provided in the ruling is that an entity can use any reasonable method of apportionment that is supportable under the circumstances. Records must be retained to support the method of apportionment that you have used.

What constitutes reasonable methods of apportionment is discussed at paragraphs 92 to 113 of GSTR 2001/8.

Examples 15C and 17 at paragraph 103F and paragraph 107 to 108 may have relevance to your situation. In addition paragraph 106 gives an example of where the relative floor area of a property is considered reasonable. These paragraphs are reproduced below.

Example 15C - commercial and residential premises

103F. Hilary is registered for GST. She sells a property that consists of commercial premises and residential premises. The property is on a single title and is currently untenanted, although the commercial part was recently rented for $1,000 per week and the residential part for $500 per week Hilary may reasonably apportion two thirds of the consideration for the sale (the same proportion the rent for the commercial premises bears to the total rent of $1500) to the commercial part and one third to the residential part to ascertain the value of the taxable part.

Relative floor area in a supply of property

106. In some cases, it is reasonable for you to allocate the consideration for a mixed supply by reference to the relative floor area of the property being supplied. To make an allocation on this basis, you also need to consider the relative price of different types of floor space (for example, floor space in residential, retail and industrial property are often priced differently). That is, you may simply work out the proportionate floor area if the value per square metre does not vary. However, if the value per square metre is variable, then you can reasonably apportion on a basis of each area and its relative value. You may also need to take into account external features, such as the value of recreational areas.

Example 17 - commercial and residential premises

107. Warren rents out a property to Josef for $2,000 per month. The property is comprised of residential and commercial premises. The floor area of the residential part is 160 square metres and the commercial part is 80 square metres. In the locality, the rental of commercial space is worth twice as much as residential space.

108. It would be reasonable for Warren to base the taxable proportion of the supply on the floor area of the commercial part as a proportion of the combined floor area of the commercial and residential parts. However, he also needs to take into account the difference in the relative value of the commercial and residential floor space. Warren may reasonably apportion the consideration equally between the commercial and the residential parts.

108A. The taxable proportion is therefore 50%. Applying the formula in section 9-80, the taxable value of the actual supply is calculated as ($ 2000 x 10)/( 10 + 0.5). The value of the taxable part is $952.38 and the GST payable is $95.23.

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