Edited version of private advice

Authorisation Number: 1051816396389

Date of advice: 16 March 2021

Ruling

Subject: GST and sale of renovated house

Question 1

Did the work undertaken on the house constitute substantial renovations and therefore create new residential premises pursuant to paragraph 40-75(1)(b) of the A New Tax system (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes, the renovated house is a new residential premise under paragraph 40-75(1)(b) of the GST Act.

Question 2

Will the sale of the renovated house be a taxable supply under section 9-5 of the GST Act?

Answer

Yes, the sale of the renovated house will be a taxable supply under section 9-5 of the GST Act.

Relevant facts

The trustee for XYZ Property Trust (you) carries out renovations to existing homes which are always sold immediately once the renovation is complete. You also do small land subdivisions and have done a couple of small developments. You are registered for GST.

You purchased an Australian property recently. You purchased the property with the view to cosmetically renovate the existing portion of the property, put on a significant extension at the rear and then sell the property for a profit. The sale of the property will be in the course of your usual business activity.

The renovating work commenced within a few days after settlement. The renovation is scheduled to be completed soon. You will advertise the sale of the property immediately after the renovation is completed.

Renovation is being done on the entire house (2 bedrooms, lounge, 1 bathroom, kitchen, toilet and a lean-to laundry) and an extension is being added to the rear of the house doubling the home's footprint.

You have provided us with a copy of the plan of the house before and after the renovation, the purchase contract of the property and the settlement deed.

Structural and non-structural work done in the house

•         Original lounge room to be converted in the master bedroom with built in robe (BIR) installed and access to the new ensuite (previously the kitchen) - some plasterwork, floorboards to be sanded and coated, painted, new lighting

•         Original Bedroom 1 to become a secondary bedroom - BIR installed, some plasterwork, floorboards to be sanded and coated, painted, new lighting

•         Original Bedroom 2 to become a secondary bedroom - BIR installed, some plasterwork, floorboards to be sanded and coated, painted, new lighting

•         Original hallway - plasterwork, floorboards to be sanded and coated, painting, new lighting

•         Original bathroom being gutted, reconfigured and completely redone

•         The original kitchen is being turned into the ensuite

•         Lean-to/laundry has been demolished

•         100m2 extension which includes activity/games area, 4th bedroom, kitchen/butler's pantry, lounge/dining, laundry

Work carried outside the house

•         Construction of a 24m2 deck and cantilevered pergola adjacent to the extension

•         Construction of a new carport, including paving

•         Regravelling of the driveway

•         Upgrading and painting of a large shed

•         Demolition and removal of a small shed

•         Painting of the roof and exterior

•         Installation of a new fence and electric gates

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 subsection 40-65(1);

A New Tax System (Goods and Services Tax) Act 1999 paragraph 40-75(1)(b);

Reasons for decision

Note: Where the term 'Australia' is used in this document, it is referring to the 'indirect tax zone' as defined in section 195-1 of the GST Act.

Question 1

Summary

The renovated house is a new residential premise under paragraph 40-75(1)(b) of the GST Act

Detailed reasoning

Section 40-75 of the GST Act defines the term 'new residential premises' and includes residential premises that have been created through substantial renovation of a building (paragraph 40-75(1)(b) of the GST Act).

The term 'substantial renovations' is defined in section 195-1 of the GST Act as:

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

The definition of 'substantial renovations' requires consideration of what work has been done to the building since it was acquired by the current owner.

Goods and Services Tax Ruling GSTR 2003/3 provides guidance on when substantial renovations apply in practice.

Paragraph 61 of GSTR 2003/3 provides that, for the purposes of the GST Act, if substantial renovations to a building are to occur then the renovations must satisfy the two following criteria:

•         the renovations need to affect the building as a whole; and

•         the renovations need to result in the removal or replacement of all or substantially all of the building.

Where one of the above criteria is not satisfied substantial renovations have not occurred and no further inquiry needs to be made.

Renovations need to affect the building as a whole

Paragraphs 63, 64 and 66 of GSTR 2003/3 state:

63. Under this heading we discuss the concept of a building in its entirety, works on surrounding land (for example curtilage) and additions to the building.

Building in its entirety

64. Whether substantial renovations have occurred should be based on consideration of the building in its entirety, that is, the building as a whole and not by reference to specific or individual rooms. For renovations to be substantial they must directly affect most rooms in a building. The renovation of only one part of a building, without any work on the remaining parts of the building, would not constitute substantial renovations.

Curtilage

66. Work associated with the renovations, but not directly attributable to the building itself, for example, landscaping and beautification of surrounding land, is not renovations of a building.

In your case the entire house has been affected by the renovations. This condition is satisfied.

Removal or replacement of all or substantially all of the building

The extent to which parts of a building are removed or replaced will determine whether the above criterion is satisfied. The definition of substantial renovations states that it is not necessary for foundations, external walls, interior supporting walls, floors, roof or staircases to be removed or replaced to be substantial. This criterion is satisfied where there is a removal or replacement of a substantial part of the:

•         structural components of the building; or

•         non-structural components of the building.

Paragraphs 70 to 77 of GSTR 2003/3 state the following:

70. Structural work may give rise to substantial renovations in its own right. Structural work includes such work as:

•         Altering, or replacing of, foundations;

•         Replacing, removing or altering of floors or supporting walls, or parts thereof (interior or exterior);

•         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).

71. Structural work is also undertaken in the course of building an extension to a house or adding new bedrooms to a house.

72. Where a substantial part of the structural components of a building is removed or replaced this will often mean that a substantial part of the non-structural components is also removed or replaced.

73. However, substantial renovations may also occur where a substantial part of the non-structural components is removed or replaced but the structural components are not substantially affected. For example, in a unit, it is not essential that both components are substantially removed or replaced for substantial renovations to have occurred.

74. Non-structural building work includes:

•         Replacing electrical wiring;

•         Replacing, removing or altering non-supporting walls, or parts thereof (interior or exterior);

•         Plastering or rendering an entire wall or walls;

•         Plumbing (e.g. replacing old metal pipes with copper pipes or plastic pipes);

•         Removing or replacing kitchen cupboards, bathroom fixtures, etc;

•         Removing or replacing air-conditioning or security system.

77. As part of renovations, work is often undertaken which does not impact on the structure of the building but is more in the nature of renewing or refreshing what is already there. We consider work of this nature to be cosmetic. Cosmetic work by itself does not amount to substantial renovations. We consider cosmetic work includes:

•         Painting;

•         Sanding floors;

•         Removing and replacing worn or out of date fittings such as light fittings;

•         Replacing curtains or carpets.

Guidance is provided on what we regard as substantial renovations in Examples 8 and 9 at paragraphs 124 to 130 of GSTR 2000/31. For example, in Example 8, the removal and replacement of the exterior walls, the removal of some internal walls and the replacement of the flooring and the kitchen in a house are considered as collectively to amount to substantial renovations.

Where structural or non-structural work amounts to substantial renovations that create new residential premises, any cosmetic work undertaken will form part of the new residential premises.

Regarding additions to the house paragraph 67 of GSTR 2003/3 state the following:

67. Additions that are undertaken with renovations are not included in determining whether a building has been substantially renovated. However, once it is determined that a building has been substantially renovated and new residential premises created, all additions to the building form part of the new residential premises. This will occur, for example, where all or substantially all of a two-bedroom bungalow is removed and replaced and a covered rear deck is added.

In this case, a substantial part of the structural and non-structural components of the house has been removed or replaced which leads to the conclusion that the work done in the house amounts to substantial renovation of the house and therefore the creation of a new residential premises. The extension to the house forms part of the new residential premises. Accordingly, this condition is satisfied.

The renovations to the house are substantial renovations The renovated house is therefore new residential premises under paragraph 40-75(1)(b) of the GST Act.

Question 2

Summary

The sale of the renovated house will be a taxable supply under section 9-5 of the GST Act

Detailed reasoning

GST is payable on a taxable supply. You make a taxable supply under section 9-5 of the GST Act if:

a)    you make the supply for consideration; and

b)    the supply is made in the course or furtherance of an enterprise that you carry on; and

c)    the supply is connected with Australia; and

d)    you are registered or required to be registered for GST.

However, the supply is not a taxable supply to the extent that it is GST-free or input taxed.

All of the above requirements must be satisfied for a supply to be a taxable supply under section 9-5 of the GST Act.

From the information received, you will satisfy paragraphs 9-5(a) to 9-5(d) of the GST Act when you sell the house as:

a)    you will make the supply for consideration; and

b)    the supply will be made in the course of the property business that you carry on; and

c)    the supply will be connected with Australia as the house is located in Australia; and

d)    you are registered for GST.

However your supply will not be a taxable supply to the extent that it was GST-free or input taxed.

GST-free supply

From the information received, the sale of the house will not be GST-free under the GST Act.

Input taxed supply

Under subsection 40-65(1) of the GST Act, 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).

However, under subsection 40-65(2) of the GST Act, 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.

As discussed in question 1, the renovated house is new residential premises under paragraph 40-75(1)(b) of the GST Act. Accordingly, the sale of the house will not be input taxed under subsection 40-65(2) of the GST Act.

The sale of the renovated house will be a taxable supply as all the requirements in section 9-5 of the GST Act will be satisfied.

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