Edited version of private advice

Authorisation Number: 1051563454476

Date of advice: 22 August 2019

Ruling

Subject: GST and the sale of real property

Question

Is the sale of the property an input taxed supply of residential premises under section 40-65 of the A New Tax System (Goods and Services Tax) Act 1999?

Answer

Yes, the sale of the property is input taxed.

Relevant facts and circumstances

You are registered for GST.

You purchased a property in April 20XX and have rented it out since that time.

The premises have four bedrooms, a lounge room, kitchen dining area, bathroom and laundry.

A dental practice is operated from the property and the tenants have made changes to the interior of the premises to suit their needs. There have not been any structural changes or walls removed. The footprint of the building remains the same as when the property was purchased. The gardens and car parking arrangements have also not changed. The kitchen, bathroom and laundry have not been altered.

The master bedroom is currently used as a reception area and now includes a reception desk. The lounge room is being used as a waiting room. One of the bedrooms is now used as an office. It has had some additional storage built in the room. The two other bedrooms are currently being used as consulting rooms. A sink and some cabinetry have been installed in the rooms and the floor covering changed from carpet to linoleum.

The terms of the lease are that at the end of the term, the tenant must return the building to its original state before the leasehold improvements were undertaken.

The property will not be sold as a GST-free supply.

Relevant legislative provisions

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

A New Tax System (Goods and Services Tax) Act 1999 section 40-75.

Reasons for decision

Generally, the sale of real property is an input taxed supply under section 40-65 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) if the property:

·         is 'residential premises to be used predominantly for residential accommodation'; and

-        is not 'commercial residential premises'; or

-        is not 'new residential premises' (unless it was used for residential accommodation prior to 2 December 1998); and

·         is not sold GST-free (eg as the supply of a going concern).

The goods and services tax ruling, Goods and services tax: residential premises (GSTR 2012/5) explains that the physical characteristics of the property determine whether a property is 'residential premises to be used predominantly for residential accommodation '. GSTR 2012/5 states:

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).

Although currently being used as a dental practice, the property retains all of the physical features that an ordinary residential premises should have. The kitchen, bathroom and laundry are each capable of being used for their original, designed purpose. The lounge room has been re-purposed as a waiting room but this has been done with the use of furniture rather than making any significant structural changes to the room. The bedrooms, in particular the two which are being used as consulting rooms have been modified to include built in cabinetry and plumbing but this does not stop the rooms from being capable of being used as bedrooms. The master bedroom, which is currently being used as a reception area is capable of being used as a bedroom with only minor furniture changes required. Furthermore, the lease agreement with the tenant requires the rooms to be restored to their original state when the lease terminates. Consequently, the property has the physical characteristics of residential premises and is capable of being used for residential accommodation.

The property is not 'commercial residential premises' as it is not a hotel, motel, inn, hostel, boarding house or similar.

Section 40-75 of the GST Act defines 'new residential premises' as premises that:

·         has been created through substantial renovation; or

·         has not previously been sold as residential premises; or

·         has been built to replace a demolished premises on the same land.

Substantial renovation of a building is defined as renovations in which all, or substantially all, of a building is removed or replaced. However, the renovations need not involve removal or replacement of foundations, external walls, interior supporting walls, floors, roof or staircases. The alterations undertaken on the premises to allow the operation of the dental practice did not involve the removal or replacement of substantially all of the building. Therefore, the alterations do not amount to substantial renovations. Furthermore, as the property has been sold previously and no building has replaced a demolished building on the land, the property is not 'new residential premises'.

As the sale of the property is of residential premises but neither commercial residential premises, nor new residential premises and is not GST-free, the sale is input taxed under section 40-65 of the GST Act. This means that the sale doesn't include GST in the price and you can't claim GST credits for the GST included in the price of your 'inputs' (such as real estate agent's fees).

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