Edited version of private advice

Authorisation Number: 1051827520624

Date of advice: 23 April 2021

Ruling

Subject: GST and sale of real property

Question

Is the sale by you in 20XX of your property in Australia an input taxed supply of residential premises for goods and services tax (GST) purposes?

Answer

No.

This ruling applies for the following period:

23 April 20XX to 22 April 20XX

Relevant facts and circumstances

You are registered for goods and services tax (GST). You are also registered as a charity with the Australian Charities and Not-for-profits Commission (ACNC) and endorsed as a charity for GST purposes.

In 20XX, you sold your property (the property) at market value to an individual who intended to use the property for residential purposes.

When you inherited the property many years ago, there was a small house on the land that was rented to a local resident.

Sometime around 19XX you removed the house from the property and decided to replace it with another building (a hall).

In 19XX, a small hall was built on the site as a meeting room. Apart from a small tin shed, the only building on the property at the time of sale by you in 20XX was the small hall.

During the period that you owned the property, you used the abovementioned small hall as a 'clubhouse' and for community activities. You also hired out the hall at various times to other local community organisations.

You never used the small hall for residential purposes during your period of ownership of the property.

Under the current zoning however, if someone wanted to live in the existing small hall on the property (in the condition that it was in at the time of sale by you), then this would have been permissible.

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

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

Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that you make a taxable supply if:

(a)  you make a supply for consideration;

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

(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.

Given the circumstances surrounding the supply, none of the provisions in the GST Act would operate to make the supply GST-free.

However, section 40-65 of the 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 and to the extent that the residential premises are not commercial residential premises or new residential premises other than those used for residential accommodation (regardless of the term of occupation) before 2 December 1998.

Section 195-1 of the GST Act provides that the term 'real property' includes any interest in or right over land, which would include your ownership of the property prior to its sale.

The term 'residential premises' is also defined in section 195-1 of the GST Act, which provides that the term 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.

The term 'commercial residential premises' is defined in section 195-1 of the GST Act as well. 'Commercial residential premises' are premises such as a hotel, motel, inn, hostel or boarding house, etc., or anything similar to those. Your premises clearly are not 'commercial residential premises'.

Goods and Services Tax Ruling GSTR 2012/5 Goods and services tax: residential premises (GSTR 2012/5) discusses the definition of residential premises in the following paragraphs:

Definition of residential premises

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.

7. Premises, comprising land or a building, are also residential premises under paragraph (b) of the definition of residential premises if the premises are intended to be occupied, and are capable of being occupied, as a residence or for residential accommodation, regardless of the term of the intended occupation. This limb of the definition refers to premises that are designed, built or modified so as to be suitable to be occupied, and capable of being occupied, as a residence or for residential accommodation. This is demonstrated through the physical characteristics of the premises.

8. A supply of residential premises may consist of a single room or apartment, or a larger complex consisting of rooms or apartments.

Further, paragraph 9 of GSTR 2012/5 provides that the requirement in section 40-65 of the GST Act that premises be 'residential premises to be used predominantly for residential accommodation' 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.

An examination of the subjective intention of, or use by, any particular person is not required. 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 (refer to paragraph 10 of GSTR 2012/5).

On the other hand, premises that do not display physical characteristics demonstrating that they are suitable for, and capable of, being occupied as a residence or for residential accommodation are not residential premises to be used predominantly for residential accommodation, even if the premises are actually occupied as a residence or for residential accommodation; for example, where a squatter resides in a disused factory. Although the premises may satisfy paragraph (a) of the definition of residential premises in section 195-1 of the GST Act, the premises are not residential premises to be used predominantly for residential accommodation (refer to paragraph 11 of GSTR 2012/5).

Paragraph 15 of GSTR 2012/5 provides that to satisfy the definition of residential premises, premises must provide shelter and basic living facilities. Premises that do not have the physical characteristics to provide these are not residential premises to be used predominantly for residential accommodation.

Premises must be fit for human habitation in order to be suitable for, and capable of, being occupied as a residence or for residential accommodation. An objective consideration of the relevant facts and circumstances determines whether residential premises are fit for human habitation. Residential premises are not fit for human habitation when they are in a dilapidated condition which prevents them being occupied for residential accommodation (refer to paragraph 20 of GSTR 2012/5).

Further, paragraph 25 of GSTR 2012/5 provides as follows in relation to 'other premises':

Other premises

25. Not all premises that possess basic living facilities are residential premises to be used predominantly for residential accommodation. If it is clear from the physical characteristics of the premises that their suitability for living accommodation is ancillary to the premises' prevailing function, the premises are not residential premises to be used predominantly for residential accommodation.

Examples 4 and 7 from GSTR 2012/5 are relevant to your situation, and provide as follows:

Example 4 - office building

26. Commercial Place is a five storey building. The ground floor has a foyer and reception area. All floors have been constructed with large open spaces for staff cubicles and desks, smaller office spaces, meeting rooms and areas for storage of documents. Each floor also contains a kitchen, amenities area and toilets. The ground floor also has showers provided with the toilet facilities.

27. While the office building provides shelter and basic living facilities including kitchens, toilets and shower facilities, the physical characteristics of the premises indicate that they are not residential premises to be used predominantly for residential accommodation. The physical characteristics indicate that the premises are a place for office workers to undertake tasks associated with a business. A supply of the premises would not be input taxed under Division 40.

Example 7 - shop

36. Julian leases a building from its owner. It consists of a display area, a storage area, an office, a kitchenette and a toilet. The premises were designed as a shop which is evidenced by the architectural plans held by the lessor. Julian furnishes the premises in order to use it as his residence, but makes no structural changes to it.

37. The building provides shelter and basic living facilities. Although the physical characteristics of the building may be considered similar to characteristics found in a house or apartment, the physical characteristics of the building together with the design plans objectively show that the premises are not residential premises to be used predominantly for residential accommodation. Rather, the characteristics and design plans show that the building is a shop designed to facilitate a retail business.

38. Although Julian's occupation of the shop as a residence means the shop satisfies paragraph (a) of the definition of residential premises in section 195-1, the shop is not residential premises to be used predominantly for residential accommodation. The supply is not an input taxed supply under Division 40 and is a taxable supply under section 9-5.

39. The outcome of this example would differ if Julian had made modifications to the building that changed the physical character of the building from a shop to residential premises to be used predominately for residential accommodation.

Paragraphs 84 to 86 at Appendix 1 - Explanation of GSTR 2012/5 clarify the above points further, as follows:

Other premises

84. A variety of buildings may include basic living facilities, such as office buildings and hospitals. However, it does not follow that all premises that have these facilities are necessarily residential premises to be used predominantly for residential accommodation.

85. Although these premises have, in part, physical characteristics common to premises that provide living accommodation, they also have physical characteristics which reflect their suitability for another purpose. Where premises' suitability for the provision of living accommodation is ancillary to the premises' prevailing function, they are not residential premises to be used predominantly for residential accommodation.

86. Even if an office worker eats and sleeps overnight in an office building for a period, it does not follow that the premises are residential premises to be used predominantly for residential accommodation. Rather, the physical characteristics of the premises reveal that the building is an office. Similarly, a squatter might eat and sleep in an otherwise vacant factory or warehouse but this does not make it residential premises to be used predominantly for residential accommodation.

How this applies in your case

The building that was on the land when you sold your property in 20XX, had been built by you in 19XX as a meeting room, after you had removed the existing residence from the property.

You used the building as your 'clubhouse' and for community activities, as well as hiring it out at various times to other local organisations. The building was never used for residential purposes while you owned it.

While the building has, in part, physical characteristics common to premises that provide living accommodation (such as a shower, toilet and kitchen), the building also has physical characteristics which reflect its suitability for another purpose, being as a meeting room/'clubhouse' (which is the purpose for which it was built).

The building does not have a bedroom as such, and the internal layout is different to that of typical houses (in particular, how the wet area is arranged).

Although the zoning at the time of sale allowed for 'single dwelling' residential use, and although you advised that this is what the new owner is using the building for, this does not change the fact that the physical characteristics of the building at the time of sale by you are that of a hall/'clubhouse' rather than that of a house.

Based on the above, we consider that the building's suitability for the provision of living accommodation is ancillary to the building's prevailing function at the time of sale by you. Therefore, the building is not residential premises for the purposes of the GST Act.

As such, the sale of the property by you is not an input taxed supply, but rather a taxable supply (since you meet all of the requirements of section 9-5 of the GST Act and the supply is neither GST-free nor input taxed).

For completeness, even if the building was considered to be residential premises to be used predominantly for residential accommodation (which it is not), then due to the fact that the building was built new by you to replace the existing residence on the property, and the new building was never used for residential accommodation before 2 December 1998, the supply (the sale) in such a scenario would in any case still not be an input taxed supply of residential premises.

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