Edited version of your written advice

Authorisation Number: 1051183548477

Date of advice: 1 February 2017

Ruling

Subject: Sale of property

Question 1

Will you be liable to pay GST in relation to the sale of a property?

Answer

Yes, you are liable to pay GST in relation to the sale of the property.

Relevant facts and circumstances

You sold a property.

The Property was constructed as a dwelling around 1950. The physical characteristics of the Property are that of a residential dwelling and the Property has an external appearance of a dwelling.

Since the mid-1980s the Property was occupied as a medical clinic.

After you purchased the Property in the mid1990s, you used it as an office until the Property was sold.

When originally built, the Property contained 3 bedrooms, lounge room, kitchen/meal area, 2 toilets and laundry.

Extra facilities were added.

A separate and distinct area was created for use as reception and a permanent fixture was built for filing.

The lounge was used as waiting room/office.

The original 'bathroom' was fully converted into a toilet. The toilet does not currently have any shower or bath facilities and the Property does not have any bathroom.

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.

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

Reasons for decision

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).

(* denotes a term defined in section 195-1)

“Real property” is defined in section 195-1 to include any interest in or right over land.

“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 the occupation or intended occupation) and includes a “floating home.

The Commissioner's view on residential premises is found in Goods and Services Tax Ruling GSTR 2012/5 Goods and services tax: residential premises (GSTR 2012/5).

To satisfy the definition of residential premises, premises must provide shelter and basic living facilities to enable it to be used predominantly for residential accommodation purposes. Paragraphs 9 and 15 explain that a single test looking at the physical characteristics will determine the premises' suitability and capability for residential accommodation.

In the context of the definition of residential premises and section 40-65, suitability refers to the suitability of the premises by reference to their physical characteristics. Premises are suitable for, and capable of, occupation as a residence or for residential accommodation if they possess the necessary features to provide residential accommodation and are able to be occupied as residential premises.

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).

Physical characteristics of premises may be altered after the premises are first designed and built. It is necessary to determine the suitability of the premises at the time the relevant supply is made.

In South Steyne Hotel Pty Ltd v. FC of T [2009] FCA 13 (South Steyne), Stone J held that only the elements of shelter and basic living facilities such as are provided by a bedroom and bathroom are necessary for premises to satisfy the definition of residential premises. That conclusion was accepted by the Full Court in South Steyne Hotel Pty Ltd v Commissioner of Taxation 2009 ATC 5068.

In Vidler v FC of T (2009) 74 ATR 520 (Vidler) Stone J, at [12], reinforced that “only the element of shelter and basic living facilities such as are provided by a bedroom and bathroom” were necessary.

“The reference to bedroom and bathroom in the above comment was given as an example only; it does not limit the concept of shelter and basic living facilities. Indeed it may well be that shelter and living facilities could exist without there being, in any conventional sense, a bedroom or a bathroom”.

Stone J went further to conclude that subparagraph (b) of the definition of 'residential premises' is focused on the capacity of the land to be used at the relevant time for nominated purposes; it is not concerned with the potential for the land to be developed to have that capacity.

In Sunchen Pty Ltd v FC of T and Anor [2010] FCAFC 138 (Sunchen) the full Federal Court held that the phrase 'to be used predominantly for residential accommodation' in subsection 40-65(1) is only concerned with the attributes of the property at the time it is supplied, and to what use those attributes or characteristics are suited. Given this, it was concluded that in determining whether a property is 'residential premises to be used predominantly for residential accommodation' the intention of the future owner is irrelevant.

Applying the law to your situation

When determining whether the Property satisfies the requirements of subsection 40-65(1), i.e. as residential premises to be used predominantly for residential accommodation, it is necessary to determine the suitability of the Property at the time the relevant supply is made, ie. at settlement date.

Although the Property has never been occupied as a residence or for residential accommodation for an extended period of time, the Property can still be residential premises if its physical characteristics at the time of settlement show that it is suitable for, and capable of, providing shelter and basic living facilities to enable it to be used predominantly for a residential accommodation purpose.

The current layout of the Property shows that that Property had been modified to enable it to be used predominantly as a medical clinic. Significant physical modifications were made to the internal setting of the Property, including the addition of extra facilities. A separate and distinct area was created for use as reception and permanent fixtures were built for filing. The lounge was used as waiting room/office. The original 'bathroom' was fully converted into a toilet and the toilet does not currently have any shower or bath facilities. The Property does not have any other designated area and/or facility for shower or bath.

Relying on Stone J's decision in both South Steyne and Vidler, it is expected that to satisfy the requirements in subsection 40-65(1), a premises must provide the element of 'shelter and basic living facilities'. The word 'basic' does not require that the facilities be made available in the conventional form, for example, they may be in the form of shared facilities. However, the word 'basic' must be read by reference to the minimum standard, the norm and/or the ordinary form of living facilities that are required to be made available in ordinary residential accommodation within Australia. Another emphasis of Stone J's decision is that the basic living facilities such as are provided by a bedroom and bathroom are necessary, essential and/or required. This is consistent with the current law governing construction of residential premises for accommodation within Australia where one of the requirements is that premises must provide basic sanitary facilities to the occupants. The sanitary facilities, which include the bathroom, need not be provided in a conventional form. It can be provided, for example, as ensuites or shared facilities. However to achieve the minimum standard, such sanitary facilities must be readily available to the occupants of the premises at the time of supply.

Applying this to your case, it is noted that the current physical layout of the Property does not have a space, a designated area and the relevant set up, fixture or facilities to have a shower or bath. Although a conventional bathroom is not a prerequisite, it is expected that the Property must provide at least the basic sanitary facilities to enable the occupants to have shower or bath. Premises that do not have the physical characteristics to provide shelter and basic living facilities are not suitable to be used predominantly for residential accommodation.

In light of the above, the Commissioner is of the view that the sale of the Property will not satisfy the requirements in subsection 40-65(1) and hence is not an input taxed supply.

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