Edited version of your written advice

Authorisation Number: 1013050700923

Date of advice: 23 September 2016

Ruling

Subject: Sale of premises

Question 1

Is the sale of the property subject to GST?

Answer

No. The sale of the property is an input taxed supply of residential premises and GST is not payable on the sale.

Question 2

If no to question 1, are you entitled to claim a refund on the overpaid GST on the sale of the property for the relevant tax period?

Answer

Yes. You are entitled to claim a refund on the overpaid GST if you have not passed on the GST to the purchaser of the property.

Relevant facts and circumstances

• You are registered for GST.

• You acquired the property, an existing residential premises in 19XX.

• During the period of ownership, you granted leases over the property including commercial offices and residential premises.

• You entered into a contract to sell the property.

• The contract for sale stated that the supply was a taxable supply and GST was payable in full.

• The sale was not made under the margin scheme.

• At the time of the sale, the property had living areas, a number of bedrooms and a functional kitchen and bathroom. The living areas and bedrooms have been used as offices and a reception area. Minor modifications were made to the property during your ownership of the property including installation of commercial signage and some wiring to facilitate the lease of the property as commercial premises.

• At the time of settlement, the property was vacant.

• The settlement statement incorrectly set out the GST-exclusive consideration as the GST-inclusive consideration. The purchaser paid you the GST- exclusive consideration to settle the contract of sale.

• You reported and paid the GST amount based on the GST-inclusive consideration on the contract of sale of the property for the activity statement for the relevant tax period which starts on or after 31 May 2014.

• You produced a tax invoice for the sale of the property to the purchaser some time after settlement requesting the payment of the outstanding GST amount.

• The purchaser challenged the GST outstanding on the tax invoice and refused to pay the GST on the basis that the property was existing residential premises and not a taxable supply.

• You advised that negotiations to procure the payment of GST were not successful and the GST remains unpaid by the purchaser. The evidence you provided included:

• a copy of the tax invoice provided to the purchaser which shows the GST remaining outstanding

• correspondences from the purchaser's and your legal advisors; and

• bank and financial statements.

Relevant legislative provisions

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

A New Tax System (Goods and Services Tax) Act 1999 Division 142.

Reasons for decision

Summary

The sale of the property is an input taxed supply of residential premises as the characteristics of the property are consistent with residential premises. This means GST is not payable on the sale and you are not entitled to claim GST credits or input tax credits for any acquisitions relating to the sale.

Detailed reasoning

All legislative references in this private ruling are to the A New Tax System (Goods and Services Tax) Act 1999.

Under section 40-65 the sale of property is an input taxed supply if the property is residential premises to be used predominantly for residential accommodation unless the premises are

• commercial residential premises, or

• new residential premises other than those used for residential accommodation before 2 December 1998.

The exceptions in section 40-65 do not apply. It is clear that the property is not commercial residential premises such as a hotel, motel, inn and other commercial residential premises set out in section 195 of the definition. The property did not undergo substantial renovations to qualify as new residential premises as defined under section 40-75.

We then turn to consider whether the property is residential premises. The term 'residential premises' is defined in section 195-1 to mean 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 occupation or intended occupation) and includes a floating home.

The Commissioner considers that the sale of a property is made at settlement. At settlement, the property was vacant and therefore it does not satisfy paragraph (a) of the definition of "residential premises". In determining whether paragraph (b) applies, we refer to paragraph 7 of the Goods and Services Tax Ruling GSTR 2012/5 Goods and services tax: residential premises (GSTR 2012/5) which provides that paragraph (b)

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.

Similarly, the requirement in section 40-65 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. Both clauses do 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).

The property has characteristic of residential premises. It had living areas, bedrooms, kitchen and bathroom. The furnishings and had minor modifications for use as commercial premises including wiring and signage did not change the physical characteristics of the residential premises. Therefore the sale of the property is an input taxed supply of residential premises. The sale of the property is not subject to GST.

As the sale of the property is input taxed you are not entitled to claim input tax credits on the sale of the property. It is important that you review the relevant activity statements leading up to the sale and amend the activity statements to repay the GST credits claimed in connection with the sale. Alternatively, you may want to include these debit errors in the next activity statement if you satisfy the requirements under the Correcting GST Errors Guide. In doing so, you are not liable to any general interest charge or penalties. For more information, refer to the Correcting GST Errors Guide at ato.gov.au.

Question 2

Summary

Detailed reasoning

Division 142 applies to tax periods starting on or after 31 May 2014 and operates to ensure that excess GST is not refunded if this would give an entity a windfall gain. Under Division 142, a supplier is not entitled to a refund of an amount of excess GST where the supplier has passed on the GST to another entity (the recipient), and has not reimbursed that other entity for the passed-on GST. Section 142-10 provides that the excess GST that has been passed on to a recipient is taken to have always been payable, and payable on a taxable supply, until the recipient is reimbursed for the passed on excess GST.

Our view on the phrase 'passed on' for the purposes of Division 142 is explained in Goods and services tax ruling GSTR 2015/1: the meaning of the terms 'passed on' and 'reimburse' for the purposes of Division 142 of the A New Tax System (Goods and Services Tax) Act 1999 (GSTR 2015/1).

Paragraph 24 of GSTR 2015/1 states that the design of the GST as an indirect tax envisages that the supplier has 'passed on' the GST to the recipient of the supply. That is, there is a general expectation in the ordinary circumstances that excess GST is passed on to the customer. However, the particular facts and circumstances of an individual case may demonstrate that the excess GST has not in fact been passed on. The supplier claiming the refund, because it considers that the excess GST has not been passed on, must "clearly substantiate the grounds on which it claims the refund". That is, the supplier has the onus of proving that its circumstances are outside the ordinary and that they did not pass on the GST.

Paragraph 28 of GSTR 2015/1 outlines matters relevant in determining whether GST has passed on:

(i)  the manner in which the excess GST arose

(ii)  the supplier's pricing policy and practice

(iii)  the documentary evidence surrounding the transaction, and

(iv)  any other relevant circumstances.

In your case, you had mistakenly charged GST on the sale of the property and reported and paid the GST for the relevant tax period. This is evidenced by the contract of sale and tax invoice which clearly state that the sale of the property is taxable and subject to GST.

Although subsection 142-25(2) provides that a tax invoice, issued to or by another entity, containing enough information to allow the amount of GST payable in relation to the supply to be clearly ascertained, is prima facie evidence of the excess GST having been passed, non-payment is evidence that the excess GST has not yet been passed on.

In your case, you have provided the following to show that the purchaser has not paid the outstanding GST amount:

• bank and financial statements; and

• correspondence from yours and the purchaser's legal advisors.

The evidence and information supplied show that the GST remains unpaid. If this remains so, you will be entitled to claim the refund of the excess GST amount by amending your activity statement for the relevant tax period. Alternatively, you may want to include the credit error in your next activity statement if you satisfy the requirements under the Correcting GST Errors Guide. For more information, refer to the Correcting GST errors guide at ato.gov.au.

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