Edited version of private advice

Authorisation Number: 1051827966700

Date of advice: 21 April 2021

Ruling

Subject: GST - residential premises

Question

Will the sale of residential premises and land located at <address>, by you <name> be an input taxed supply of a residential premises pursuant to section 40-65(1) of the A New Tax System (Goods and Services Tax) Act 1999 (the GST Act)?

Answer

Yes.

Relevant facts and circumstances

You, <name> operate a business engaged in leasing residential properties and land development. You are registered for GST.

In <mmyyyy> you purchased a property located at <address> (the Property) for $<number> and settlement took place in <mmyyyy>. No GST was claimed on the acquisition as it was purchased as an existing residential premise.

The Property has the following attributes:

•         The Property is described as Lot <number> in Deposited Plan <number> being Folio Identifier <number>.

•         The Property has, and had at the time you purchased it, an established premises.

•         No physical works have been done to the Property by you since your purchase.

•         It is a <number> storey <number> bedroom house located on a block measuring <number> hectares in size.

You provided an aerial photograph and a floor plan of the Property.

Following the purchase of the Property you leased it back to the previous owner for <number> months for $<number> per week by way of reduced payment on settlement. No further rents have been derived from the Property. Looters came onto the Property and caused some damage. The resultant physical damage and safety concerns have created difficulties in regular opening inspections and hence the ability to generate further rental income.

Your intention at the time of purchase of the Property was to either:

A. To rent the Property out

B. Subdivide and re-develop the Property into multiple new residential Lots or

C. Sell the Property in as is condition with the house still on the Property.

Soon after the purchase of the Property you decided to apply for approval to subdivide and develop the Property. You lodged a development application for approval to subdivide and develop the Property into <number> residential lots with <council name> (the Council).

On <ddmmyyyy> the Council approved this development application (Council reference number: <number>) (the Development Approval).

You have incurred $<number> (inclusive of GST) in consulting, designing, engineering and surveying expenses in relation to developing the Property. You have claimed the GST included in these expenses as input tax credits, and you acknowledge the credits must be paid back to the ATO as an adjustment if the Property is sold.

You have decided to sell the Property in 'as is condition' with the existing residential premises and the Development Approval. You have decided to sell the Property through a private treaty and have asked local real estate agents to make contact with their existing customers who bought in nearby suburbs previously or have registered interest in other similar properties' inspections. A few inspections of the Property have been completed with potential buyers.

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 195-1

Reasons for decision

In this reasoning, please note:

•         unless otherwise stated, all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)

•         all legislative terms of the GST Act marked with an asterisk are defined in section 195-1 of the GST Act

•         all reference materials, published by the Australian Taxation Office (ATO), that are referred to are available on the ATO's website ato.gov.au

Section 9-5 of the GST Act provides that 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 (Australia)

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.

In this case, if you decide to sell the Property, it will be a supply for consideration as you will receive the purchase price for the Property when sold. The sale will be made in the course or furtherance of your enterprise of leasing residential properties and land development. The sale will be connected to Australia because the Property is located in Australia. You are also registered for GST. The sale would not be GST-free, so it remains to be determined whether the sale would be input taxed.

Section 40-65 of the GST Act provides that the 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 the sale will not be input taxed to the extent the residential premises are commercial residential premise or new residential premise.

In this case the premises do not meet the definition of new or commercial residential premises.

Section 195-1 of the GST Act defines 'residential premises' to mean 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.

Your factual scenario and the GST implications from those facts are addressed in the public ruling Goods and Services Tax Ruling GSTR 2012/5 Goods and services tax: residential premises(GSTR 2012/5).

Paragraphs 6-7provide that

6. Premises1, 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.

Paragraphs 9-10 of GSTR 2012/5 state that

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.2

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).

Fit for human habitation

20. 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.

21. Residential premises that are either:

• in a minor state of disrepair; or

• subject to a temporary legal prohibition for occupation pending minor repairs;

are still suitable for, and capable of, being occupied as a residence or for residential accommodation.

In addition paragraph 46 provides the Commissioner's view on land supplied with a building

46. There is no specific restriction, in the definition of residential premises, on the area of land that can be included with a building. The extent to which land forms part of residential premises to be used predominantly for residential accommodation is a question of fact and degree in each case. A relevant factor in determining this is the extent to which the physical characteristics of the land and building as a whole indicate that the land is to be enjoyed in conjunction with the residential building. The use of the land is not a determining factor in deciding if the land forms part of the residential premises.

We consider that

1. The premises have been occupied as a residence and has the design features that show that it is intended to be occupied, and is capable of being occupied, as a residence or used for residential accommodation;
2. In addition, the land surrounding the house is considered to form part of the residential premises as it is land that is to be enjoyed in conjunction with the house; and
3. That although there has been some damage done to the Property we do not consider that the damage as described stops the Property being residential premises for the purposes of the GST Act.

Therefore for the reasons stated above, we consider that the sale of the Property in the condition as described in the facts would be input taxed under subsection 40-65(1) of the GST Act.

The Development Approval

In your application you have advised that the sale of the Property will include the Development Approval.

The GST treatment of development approvals that are sold together with a residential premises is dealt with in ATO Interpretative Decision ATO ID 2004/303 Goods and Services Tax: GST and supply of residential premises together with assignment of development consent (ATO ID 2004/303).

ATO ID 2004/303 provides that a development consent is attached to the land belonging to the residential premises and runs with that land. Upon the sale of the residential premises, the development approval is automatically transferred to the purchaser as a natural consequence of the sale. This transfer takes place regardless of any formal assignment in a sale contract. Assignment of a development consent does not result in anything being transferred to the purchaser that would not result naturally from the transfer of the land itself.

Therefore if you sell the Property you will not be supplying anything more than the residential premises. Even a formal assignment of the Development Approval will not amount to a separate supply because it will not affect the transfer of anything that will not already be transferred to the purchaser as a direct and natural consequence of the sale of the Property.

As such, you will not be making a separate taxable supply of the Development Approval under section 9-5 of the GST Act when you sell the Property with the Development Approval. The sale will be a single input taxed supply of the Property (a residential premises), which includes the Development Approval.

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