Edited version of your written advice

Authorisation Number: 1051424678767

Date of advice: 4 September 2018

Ruling

Subject: GST and sale of real property

Question 1

Was your sale of the property a taxable supply, pursuant to 9-5 A New Tax System (Goods and Services Tax) Act 1999?

Answer

No, it was an input taxed supply.

Question2

Was the additional amount of $xx, paid pursuant to special condition x, consideration for a taxable supply?

Answer

No

The scheme commences on:

1 July 2018

Relevant facts and circumstances

You registered for GST on DDMMYYYY.

You acquired the property in YYYY.

The property contained a three by one house with car parking for two vehicles.

You leased the property until MMYYYY.

At acquisition, the property was zoned residential. Later, you had the property rezoned as a mixed use site.

In YYYY you applied for an application to have the property rezoned to commercial.

The council subsequently granted approval for the property to be used as a commercial site and the buyer offered to purchase the property on the condition approval would be granted to construct a business.

You entered into a contract on DDMMYYYY to sell the property for $xxx plus GST. The purchaser is registered for GST.

Settlement was scheduled for DDMMYYYY.

Special condition 4 stated:

The Buyer acknowledges and accepts the Property is currently the subject of a lease expiring on ddmmyyyy and the seller agrees to obtain confirmation from the Buyer prior to granting any further extensions of this lease. The Buyer agrees to pay the seller $xx/day paid at the end of each calendar month) from ddmmyyyy until Settlement Date (the words Plus GST if applicable were added to the contract)

Prior to settlement the purchaser queried whether GST was payable on the supply.

Settlement occurred on DDMMYYYY.

In accordance with special condition x, an amount $xx was also charged.

The GST amount withheld has been placed in a lawyers trust account.

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

Reasons for decision

● 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

Question 1

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 the indirect tax zone; and

(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 meet the requirements of paragraphs 9-5 (a) to 9-5(d) and your sale of the property will not be GST-free. Therefore, we need to consider whether your sale of the property will be input taxed.

Input taxed GST treatment for residential rental income

Paragraph 40-65 provides that a sale of real property is input taxed only to the extent that the property is residential premises to be used predominantly for residential accommodation regardless of the term of occupation.

However the sale is not input taxed to the extent that the residential premises are:

● Commercial residential premise or

● New residential premises other than those used for residential accommodation before 2 December 1998.

‘Residential premises’ is defined in section 195-1 as 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) and includes a *floating home.

The ATO view on what comprises residential premises is set out in Goods and Services Tax Ruling GSTR 2012/5 Goods and services tax: residential premises. It provides the following information at paragraphs 9 and 10.

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).

The property you acquired in YYYY meets the definition of residential premises as it has the physical characteristics of residential premises, as evidenced by the fact that it was tenanted until the originally scheduled settlement date of DDMMYYYY. Further, at settlement, it was neither commercial residential premises nor new residential premises.

Therefore your supply of the property was an input taxed supply.

Question2

Is the additional consideration paid for the late settlement fee consideration for a taxable supply?

The Commissioner has set out his view on the GST treatment of consideration charged under a contract when a payment fails in the Goods and Services Tax Determination GSTD 2013/1 Goods and services tax: when a payment for a supply fails, is a failed payment fee charged by the supplier consideration for a supply? (GSTD 2013/1).

Although a late payment fee is not the same as the fees charged in this GSTD we consider the principles apply. Relevantly parts of paragraph 2 are reproduced below.

2. This Determination applies where:

● the supplier and the recipient have agreed that if the payment fails the recipient will be liable to pay a fee ('failed payment fee'). The obligation to pay the failed payment fee may be included in the agreement or contract for the underlying supply, or in the terms of the Direct Debit Authority for a direct debit, or because the supplier's ability to charge a failed payment fee is specified by statute;

● the recipient's failure to fulfil its payment obligations causes the supplier to incur additional costs, such as the inward dishonour fee charged by the supplier's financier, or to suffer other loss, such that the failed payment fee is characterised as compensatory for the additional costs or loss incurred; and

● there is nothing in the agreement between supplier and recipient that describes the failed payment fee as part of the consideration for anything supplied by the supplier.

3. In the circumstances described in paragraph 2 of this Determination, payment of a failed payment fee is not consideration for either a financial supply or another supply (for example, a supply of administrative services).

4. However, the characterisation of a payment for GST purposes is dependent upon the facts in each case. It follows that in other circumstances not covered by this Determination, it may be possible for the payment of a failed payment fee to have a sufficient nexus with the underlying supply for the failed payment fee to form part of the consideration for that supply. This Determination is limited to the circumstances set out in paragraph 2.

Applying the principles in GSTD 2013/1 to your situation, we consider that the fee is not consideration for any supply you have made. Rather, it is an agreed payment for a loss suffered by you between the termination of the tenancy and the settlement date. As you have not made any supply in relation to this payment, GST is not payable on this amount.

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