Edited version of private advice

Authorisation Number: 1051644952433

Date of advice: 10 March 2020

Ruling

Subject: GST on the purchase and sale of a property

Question

Is X (You) required to pay GST on the renovation and sale of a property at W (the Property)?

Answer

No. The Property when sold will not be a supply of new residential premises as defined in subsection 40-75 (1), but rather an input taxed supply pursuant to section 40-65.

This ruling applies for the following period:

X to Y

Relevant facts and circumstances

You have been registered for GST since Z.

You are re-purposing your activities to a property development and asset management company, with the intention to renovate residential houses (amongst other business activities). The W property is the first one to be purchased.

On X September Y you purchased the Property with the intention to renovate and sell it.

The W property is the first one to be purchased and it is your intention to renovate and sell within 6 to 8 months.

The renovation works are as follows:

·         removing asbestos;

·         painting the inside, outside, and roof;

·         landscaping;

·         replacing floors, kitchen and bathrooms;

·         re-plastering; and

·         re-tiling.

There will be no change to the external footprint.

The renovation costs are estimated to be $X,000.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999, section40-65

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

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

Reasons for Decision

Under section 40-65, a sale of residential premises is input taxed but, relevantly not to the extent that the residential premises are 'new residential premises '. Residential premises are 'new residential premises' if amongst other things they have been created through substantial renovations of a building.

Goods and Services Tax Ruling GSTR 2003/3 Goods and services tax: when is a sale of real property a sale of new residential premises? considers substantial renovations.

The term 'substantial renovations' is defined in section 195-1:

substantial renovations of a building are renovations in which all, or substantially all, of a building is removed or is replaced. However, the renovations need not involve removal or replacement of foundations, external walls, interior supporting walls, floors, roof or staircases.

The above definition is exhaustive. Renovations are "substantial renovations" of a building if, and only if, they are renovations "in which all, or substantially all, of a building is removed or replaced". The question, ultimately, is whether in the renovations which will be carried out, "all, or substantially all, of the Unit will be "removed or replaced". That requires a consideration of:

·         what constitutes the "building";

·         how much of it will be "removed" or "replaced"; and

·         whether the extent to which the building, or parts of it, will be "removed" or "replaced", amounts to "all, or substantially all, of the building.

It is only necessary to consider if there have been substantial renovations if:

·         the renovations affect the building as a whole; and

·         the renovations result in the removal or replacement of all or substantially all of the building.

Paragraphs 68 to 79 of GSTR 2003/3 consider the extent to which parts of a building are removed or replaced and in summary for renovations to result in the removal or replacement of all or substantially all of the building there must be a removal or replacement of a substantial part of the:

·         structural components of the building, or

·         non-structural components of the building.

·         Structural work includes:

·         altering, or replacing of, foundations

·         replacing, removing or altering of floors or supporting walls, or parts thereof

·         lifting or modifying of roofs

·         replacing existing windows and doors such that it is necessary to alter brickwork (for example, replacing a single door with a double sliding door).

Non-structural work includes:

·         replacing electrical wiring

·         replacing, removing or altering non-supporting walls, or parts thereof

·         plastering or rendering an entire wall or walls

·         plumbing (eg replacing old metal pipes with copper pipes or plastic pipes)

·         removing or replacing kitchen cupboards, bathroom fixtures

·         removing or replacing air-conditioning or security systems.

Renovation work that does not impact on the structure of the building and is in the nature of reviewing or refreshing what is there is considered to be cosmetic work and includes:

·         painting

·         sanding floors

·         removing and replacing worn or out of date fittings such as light fittings

·         replacing curtains or carpets.

Paragraph 60 of GSTR 2003/3 provides that whether the renovations are substantial is to be determined in the light of all the facts and circumstances. The question is one of fact and degree. The modifications you intend to make include the following:

·         removing asbestos;

·         painting the inside, outside, and roof;

·         landscaping;

·         replacing floors, kitchen and bathrooms;

·         re-plastering; and

·         re-tiling.

Although there will be some structural work such as replacing the floors, kitchens and bathrooms, the majority of the work is cosmetic. We are therefore of the view that "substantially all" of the Property will not be removed or replaced.

Therefore the renovated Property will not be new residential premises as defined in subsection 40-75 (1) and therefore will not be a taxable supply but an input taxed supply pursuant to section 40-65 when sold.

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