Edited version of your written advice

Authorisation Number: 1051191566214

Date of advice: 23 March 2017

Ruling

Subject: Proposed sale of property

Question 1

Is the proposed sale of the Properties by A Ltd in the capacity of joint venture operator of a GST joint venture in which B Ltd (as trustee for the Y Trust) and C Ltd (as trustee for the Z Trust) are participants (Vendor) for an input taxed supply?

Answer

Yes, the proposed sale of the Properties by the Vendor is an input taxed supply.

Question 2

If the proposed sale of the Properties by the Vendor is a taxable supply, can the Vendor apply the margin scheme in working out the amount of GST on that taxable supply?

Answer

As the proposed sale of the Properties by the Vendor is an input taxed supply it is not necessary to consider the application of the margin scheme.

Relevant facts and circumstances

Acquisition of the Properties:

In 20XX B Ltd, as trustee for the Y Trust and C Ltd, as trustee for the Z Trust acquired the three Properties.

Joint Venture Agreement:

One of the attachments to the ruling request was a copy of an unsigned Joint Venture Agreement (JVA) dated 20XX

The parties to the JVA are:

S Ltd as trustee for the Y Trust (Venturer 1);

C Ltd, as trustee for the Z Trust (Venturer 2);

Vendor; and

F Ltd - appointed project manager for the joint venture pursuant to clause 9(a) of the JVA).

We assume that the reference to S Ltd in the JVA is intended to refer to B Ltd.

The JVA provides that the joint venturers' purpose is to acquire the Properties, design and construct a complex of strata title home units and sell those home units and divide the expected profits between the joint venturers. A recital to the JVA states that the Vendor will act as agent of the Venturers to co-ordinate and facilitate their project and manage book keeping and banking and an operative clause obliges the Vendor to act only in accordance with the JVA and resolutions of the Venturers.

Leases:

It was stated in the ruling request that after the purchase of the Properties each Property was leased to a separate tenant.

Included in the attachments to the ruling request were copies of:

● A Standard Form Residential Tenancy Agreement dated 20XX in respect of the first Property between A Ltd and a tenant for a term of one year commencing on 20XX at a rent of $ per week;

● A Standard Form Residential Tenancy Agreement dated 20XX in respect of the second Property between A Ltd and the tenant for a term of 52 weeks commencing 20XX at a rent of $ per week; and

● A Standard Form Residential Tenancy Agreement dated 20XX in respect of the third Property between A Ltd and the tenant for a term of 52 weeks commencing 20XX at a rent of $ per week.

Development Consent:

Another attachment to the ruling request was a copy of a Development Consent dated 20YY issued by City of X to B Ltd and C Ltd which consented (subject to specified conditions) to a development described as:

Construction of a…residential flat building containing units -x X bedroom units and XY bedroom units with X and X/Y levels of basement car parking.

Off-plan sales of apartments:

It was stated in the ruling request that four of the proposed apartments have been sold to less than five separate purchasers off-plan.

Proposed sale of the Properties:

It was stated in the ruling request that in 20ZZ the venturers decided to sell the Properties and that at present the dwelling on each Property continues to be occupied by tenants pursuant to the Residential Tenancy Agreements. It was further stated that the venturers intend to sell the three Properties as a development site in one line together with the Development Consent and the contracts in respect of the off-plan sales of four apartments.

Relevant legislative provisions

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

Reasons for decision

Question 1

Summary of decision:

The proposed supply of the Properties in one line together with the Development Consent and the contracts in respect of the off-plan sales of four apartments is a single supply which is input taxed.

Detailed reasoning:

Subsection 40-65(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) 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 of the GST Act:

residential premises means 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.

Paragraph 6 of Goods and Services Tax Ruling GSTR 2012/5 states:

6. Premises, comprising land or a building, are residential premises under paragraph (a) of the definition of residential premises in section 195-1 where the premises are occupied as a residence or for residential accommodation, regardless of the term of occupation. The actual use of the premises as a residence or for residential accommodation is relevant to satisfying this limb of the definition.

It was stated in the ruling request that the original dwelling remains standing on each Property and is occupied by tenants. Consequently each Property is actually being used as a residence or for residential accommodation and paragraph (a) of the 'residential premises' definition is satisfied.

Subsection 40-65(1) requires that the residential premises are 'to be used predominantly for residential accommodation (regardless of the term of occupation). Paragraphs 9 and 10 of GSTR 2012/5 state:

9. The requirement in sections 40-35, 40-65 and 40-70 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.

10. 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).

In the present case the photographs and diagram displayed in the advertisement of the 20XX sale of the Properties on the real estate agent's website confirm that the physical characteristics of each Property make each Property suitable for and capable of providing residential accommodation. The fact that the purchaser of the Properties will demolish the dwellings and proceed with the development permitted by the Development Consent does not mean that each Property is not to be used predominantly for residential accommodation. This is demonstrated by Example 1 in paragraphs 12 and 13 of GSTR 2012/5:

Example 1 - purchaser's intention not to use premises for residential accommodation

12. John carries on an enterprise which involves leasing a house on property which he owns. Based on the physical characteristics of the house it is residential premises to be used predominantly for residential accommodation. The area in which the house is located has recently been rezoned by the local Council to permit higher density residential apartments. Following the rezoning, a developer, Knock Them Down Co, approaches John and offers to purchase his property. Knock Them Down Co intends to demolish the house, redevelop the property into a new apartment building, and sell the apartments.

13. The fact that Knock Them Down Co does not intend to use the house to provide residential accommodation does not mean that the house is not residential premises to be used predominantly for residential accommodation. Knock Them Down Co's intention is not a relevant factor in determining the character of the premises. Based on its physical characteristics, the house is residential premises to be used predominantly for residential accommodation. The sale of the house by John to Knock Them Down Co is an input taxed supply under section 40-65.

In Toyama Pty Ltd v Landmark Building Developments Pty Ltd 2006 ATC 4160 (Toyama) the NSW Supreme Court held that the sale of land on which a dwelling was situated and in respect of which a Development Consent for the construction of 14 apartments had been granted was a taxable supply, notwithstanding that the Commissioner had issued a private ruling which confirmed that the sale of the property was an input taxed supply. The issue in that proceeding was whether the trustees appointed to sell the property had failed to exercise the requisite standard of care where they stated in the contract for sale that the sale was a taxable supply. White J held that the sale was a taxable supply and that the trustees did not fail to exercise the requisite standard of care. The Commissioner was not a party to the proceedings and White J stated that the court's decision on the GST issue did not bind the Commissioner.

White J held that the phrase 'to be used predominantly for residential accommodation' in subsection 40-65(1) required a prediction of the use of the property based on the subjective intention of the purchaser. We consider that requiring the GST liability of a vendor to be determined by the subjective intention of a purchaser (which the vendor may not know) would cause difficulty for vendors generally. We also note that in Marana Holdings Pty Ltd v Commissioner of Taxation [2004] 141FCR 299, 313 the Full Federal Court held that the words 'intended to be occupied…as a residence' in paragraph (b) of the 'residential premises' definition in section 195-1 of the GST Act is not the subjective intention of any person but the objective intention with which the particular premises are designed or built. Similarly, in Sunchen Pty Ltd v FCT [2010] FCAFC 138 Edmonds and Gilmour JJ held 'to be used predominantly for residential accommodation' to be concerned with the physical characteristics of the property rather than the intended use by any person. We therefore consider that the phrase 'to be used predominantly for residential accommodation' in subsection 40-65(1) requires an objective approach rather than the subjective approach taken in Toyama.

Subsection 40-65(1) of the GST Act is qualified by subsection 40-65(2) which states:

(2) However, 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.

The Properties do not fall within the definition of 'commercial residential premises' in section 195-1 of the GST Act. The definition of 'commercial residential premises' refers to a hotel, motel, inn, hostel or boarding house or anything similar.

Nor do the Properties fall within the definition of 'new residential premises' in section 40-75 of the GST Act:

(1) *Residential premises are new residential premises if they:

(a) have not previously been sold as residential premises (other than *commercial residential premises) and have not previously been the subject of a *long term lease; or

(b) have been created through *substantial renovations of a building; or

(c) have been built, or contain a building that has been built, to replace demolished premises on the same land.

Paragraphs (b) and (c) have effect subject to paragraph (a).

In the present case paragraph (a) of the 'new residential premises' definition does not apply as each of the Properties were sold to the Vendor as residential premises (as confirmed by the photographs and diagram displayed in the advertisement of the May 20XX sale of the Properties on the real estate agent's website). Those photographs also indicate that substantial renovations (defined in section 195-1 as renovations in which all, or substantially all, of a building is removed or replaced) have not been undertaken. As the dwelling on each Property has been rented out by the Vendor since June or July 20XX, it has not been possible for each dwelling to be demolished and replaced.

We do not consider that the supply to a purchaser of the Development Consent and the contracts in respect of the four off-plan sales will be a separate taxable supply. The Development Consent is stated to be in respect of the Properties and in respect of the proposed construction on the Properties and will transfer to the purchaser as a consequence of the sale of the Properties. Consequently there will not be a transfer to a purchaser of anything that was not already transferred to that purchaser as a consequence of the sale of the Properties. There will not be a separate supply of the Development Consent but a single supply of the Properties which includes the Development Consent.

The same reasoning applies to the contracts in respect of the four off-plan sales. Those contracts are in respect of apartments in an unregistered plan of strata subdivision of the Properties. Consequently there will not be a transfer to the purchaser anything that was not already transferred to that purchaser as a consequence of the sale of the Properties.

Question 2

Summary of decision:

As the supply of the Properties is an input taxed supply (rather than a taxable supply), the question of whether the margin scheme can be applied does not arise.

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