Edited version of private advice

Authorisation Number: 1052083547173

Date of advice: 15 February 2023

Ruling

Subject: GST and sale of real property

Question 1

Is the sale of real property an input taxed sale of a residential premises pursuant to section 40-65 of A New Tax System (Goods and services Tax Act) 1999 (GST Act)?

Answer 1

Yes. The sale of the property is an input taxed supply of residential premises under section 40-65 of the GST Act.

Question 2

If the property is residential premises, can the quarterly activity statement be amended to remove the GST reported on the sale of the property and GST credits claimed for related expenses.

Answer 2

You will not be able to amend the activity statement to remove the GST remitted in relation to the property unless, in accordance with section 142-10 of the GST Act, you reimburse the purchaser of the property the amount of GST charged. However, you must amend any activity statements to remove any input tax credits claimed in relation to this property.

This ruling applies for the following periods:

Year ending 30 June 20YY

Year ending 30 June 20YY

The scheme commences on:

DD MM YYYY

Relevant facts and circumstances

You are registered for GST.

In YYYY, you purchased a property located on large block of approx. XXXX sqm containing existing residential premises (house).

Your intention was to subdivide off x residential blocks from the original block and to keep the residential property (containing the house) and remaining land as a long term rental property.

The subdivision works were carried out and the x newly created blocks were sold to external parties.

You performed some initial investigation on the cost of further subdividing the remaining residential home block (XXXX sqm), but the costs were too prohibitive to proceed, so it was kept as a large block for the home.

You made some initial repairs on the residential property, which you rented out continuously from MM YYYY to date of sale.

A decision was made to sell the property.

You entered into a contract with the Purchasers for the sale of the residential property

Settlement occurred and the purchasers remitted to the ATO a GST withholding amount.

The contract of sale under GST (general conditions 19), shows the price includes GST and the box has been ticked showing the margin scheme will be used to calculate the GST.

As a property development entity, you are unsure if the whole property became treated as new residential upon subdivision or whether only the new subdivided blocks became new property.

You believe that the original residential building remained intact with only minimal repairs after purchase so it hasn't changed its character as an existing residential building. Merely, it's just lost some of its yard.

The BAS has been prepared on the basis that the sale of the rental property was a new residential property and GST has been declared using the margin scheme.

You reported GST at Label 1A on the sale of the property in your quarterly activity statement.

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 11-15(2)

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 subsection 40-75(2AA)

A New Tax System (Goods and Services Tax) Act 1999 Division 142

A New Tax System (Goods and Services Tax) Act 1999 section 142-5

A New Tax System (Goods and Services Tax) Act 1999 section 142-10

A New Tax System (Goods and Services Tax) Act 1999 section 142-15

A New Tax System (Goods and Services tax) Act 1999 subsection 142-15(4)

Reasons for decision

Section 9-5 of the GST Actprovides 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 (essentially 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.

There are no provisions of the GST Act under which your sale of the property in question is GST-free.

A sale of residential premises may be input taxed under section 40-65 of the GST Act, which states:

(1)          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).

(2)          However, 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.

The Goods and Services Tax Ruling Goods and services tax: residential premises (GSTR 2012/5) provides the Australian Tax Office's view of the factors to consider and the characteristics of residential premises.

Paragraphs 9 and 10 of GSTR 2012/5 explain that 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. The test 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).

To satisfy the definition of residential premises, premises must provide shelter and basic living facilities. The premises contain kitchens, bathrooms and bedrooms. Therefore, they have the elements of shelter and basic living facilities required to be residential premises.

The property contained an existing building (house) which includes X bedrooms, X bathrooms, a large living room, large dining room, family room and a studio. The building on the property satisfies the definition of a residential premises as provided in subsection 40-65(1) of the GST Act.

The term 'new residential premises' is defined under subsection 40-75(1) of the GST Act, and provides that residential premises are new residential premises if they:

(a)          have not previously been sold as residential premises (other than commercial residential premises) and have not previously been the subject of a long term lease or

(b)          have been created through substantial renovations of a building or

(c)           have been built, or contain a building that has been built, to replace demolished premises on the same land.

You purchased the property in YYYY which contained an existing residential premises (house). The subdivision of the property did not create new residential premises. Additionally, the residential premises have not been substantially renovated and they were not built, and do not contain a building that was built, to replace demolished premises on the same land.

On this basis, the property is not new residential premises in accordance with the meaning of section 40-75 as it has been previously sold as residential premises, satisfying paragraph 40-75(1)(a). This supply is not disregarded as a sale or supply for the purposes of applying paragraph 40-75(1)(a).

Subsection 40-75(2AA) provides that a subdivision of property may not result in new residential premises:

(2AA)Despite subsection (1), the *residential premises are not new residential premises if:

(a)          they are created from residential premises that became the subject of a *property subdivision plan; and

(b)          the residential premises referred to in paragraph (a) were not new residential premises immediately before they become the subject of that plan.

This subsection has effect subject to paragraphs (1)(b) and (c).

Pursuant to subsection 40-75(2AA), your subdivision of the Property does not result in new residential premises as the Property was not new residential premises immediately before it became the subject of the property subdivision plan.

As the Property is residential premises to be used predominately for residential accommodation and is not excluded from being residential premises from paragraphs 40-65(2)(a) or (b), the supply of the property is input taxed.

As a supply is not a taxable supply to the extent that it is input taxed, it is not necessary to consider whether the requirements of section 9-5 have been satisfied.

Therefore, the sale is a supply of residential premises that is input taxed pursuant to section 40-65 of the GST Act.

Question 2

Refunding the amount of excess GST and Division 142 of the GST Act

Division 142 of the GST Act generally restricts refunds when you make an overpayment of GST to the Australian Taxation Office (ATO) because a refund may result in a windfall gain.

Excess GST is defined in subsection 142-5(1) of the GST Act as an amount that been taken into account in an assessed net amount but is not in fact payable. Under section 142-10 of the GST Act, where the excess GST has been passed on to another entity, that excess GST is taken to have always been payable until the passed-on GST is reimbursed to the other entity.

However, if the excess GST has not been passed on, section 142-10 does not apply and the supplier may request an amendment to their assessment for the relevant tax period to reduce the amount of GST attribute to that period. Any resulting refunds are then to be paid or applied in accordance with Division 3 and 3A of Part IIB of the TAA.

Goods and Services Tax Ruling GSTR 2015/1 Goods and Service Tax: meaning of the terms 'passed on' and 'reimburse' for the purposes of Division 142 of the A New Tax System (Goods and Services Tax) Act 1999 (GSTR 2015/1) notes that whether the excess has been passed on is a question of fact and must be determined on a case by case basis taking into account the particular circumstances of each case.

Paragraphs 24-27 of GSTR 2015/1 states:

24. The Explanatory Memorandum to the Tax Laws Amendment (2014 Measures No 1) Bill 2014 states that the GST Act envisages that the supplier 'passes on' the GST to the recipient of the supply. This simply reflects the design of the GST as an indirect tax which is generally expected to be passed on to the customer when a supply is treated as a taxable supply.

25. If excess GST is included on a tax invoice, this is prima facie evidence that the excess GST has been passed on.

26. However, while there is a general expectation that, in ordinary circumstances, excess GST has been passed on, particular facts and circumstances of an individual case may demonstrate that excess GST has not been passed on.

27. A supplier claiming a refund, because it considers that the excess GST has not been passed on, will need to clearly substantiate the grounds on which it claims the refund. In any dispute, the taxpayer would have the onus of proving that its circumstances are outside the ordinary and that it did not pass on the excess GST.

As outlined in paragraph 24 of GSTR 2015/1 the GST Act envisages that the supplier 'passes on' the GST to the recipient.

In paragraph 28 of GSTR 2015/1 the Commissioner considers that the matters relevant to whether GST has been passed on include:

(i)            the manner in which the excess GST arose

(ii)           the supplier's pricing policy and practice

(iii)          the documentary evidence surrounding the transaction, and

(iv)          any other relevant circumstances

The question of passing on is one of fact and not of fairness - considerations of fairness may be relevant in deciding whether the Commissioner exercises the discretion under subsection 142-15(1) but are not relevant to whether excess GST has been passed on or not.

The manner in which the excess GST arose

The manner in which an amount of excess GST arises is relevant in considering whether or not the excess GST was passed on. GSTR 2015/1 at paragraph 31 considers four common circumstances:

•                     incorrectly treating something which is not a supply as a taxable supply

•                     miscalculating a GST liability under the GST law

•                     incorrectly reporting an amount of GST on a GST return, and

•                     incorrectly treating a GST-free or input taxed supply as a taxable supply (including incorrectly apportioning the taxable and non-taxable components of a mixed supply).

The Commissioner at paragraph 33 of GSTR 2015/1 is of the view that where the excess GST arises as a result of an error made before setting the price (for example where a supplier incorrectly treats a GST-free or input taxed supply as a taxable supply) this error will generally flow through to the sale price paid by the recipient and is likely to point towards a finding that excess GST has been passed on.

However, also relevant in determining whether or not the GST has been passed on is the documentary evidence surrounding the overpayment. Paragraph 57 of GSTR 2015/1 provides that whether GST is included in the price of a supply or not may be demonstrated by the documents surrounding the transaction. For example, the invoices or statements issued, a contract or other correspondence between the parties may indicate that GST was included in the price.

In your case, we have determined that you have incorrectly treated your input taxed supply of residential premises as a taxable supply. This is confirmed by the Contract of Sale which clearly states that the price includes GST, and the margin scheme will be used to calculate the GST.

Section 142-10 of the GST Act

Paragraph 17 of GSTR 2015/1 describes when section 142-10 of the GST applies:

17. If the excess GST has been passed on to the recipient, section 142-10 applies to treat the excess GST as always having been payable, and payable on a taxable supply, until the excess GST has been reimbursed to the recipient. Once section 142-10 ceases to apply, the supplier can claim a refund of the excess GST.

As there is excess GST and it has been passed on by you, under section 142-10 of the GST Act the excess GST is treated as having always been payable on a taxable supply until you reimburse the excess GST to your recipients.

Paragraph 69 to 71 of GSTR 2015/1 provides guidance on what the Commissioner considers to be reimbursement for the purposes of division 142 of the GST Act.

Paragraph 70 of GSTR 2015/1 states:

70. For the purposes of section 142-10, a supplier has reimbursed the recipient for the passed-on excess GST where:

•                     reimbursement takes the form of a payment in money, the setting off of mutual liabilities, or the issuing of a voucher, the recipient must be able to choose the form in which reimbursement is made

•                     the amount of the reimbursement corresponds to the amount of excess GST passed on to the recipient and the method of reimbursement ensures this is achieved, and

•                     the reimbursement or journal entry under an agreement to set-off the liabilities between the parties has actually been made and is not merely planned to be made.

Once section 142-10 of the GST Act ceases to apply because you have reimbursed the excess GST to the recipient, you can claim a refund of the excess GST by making a decreasing adjustment which is attributable to the tax period in which the reimbursement is made to the recipient.

Claiming of input tax credits

Section 11-5 of the GST act states:

You make a creditable acquisition if:

(a)          you acquire anything solely or partly for a creditable purpose; and

(b)          the supply of the thing to you is a taxable supply; and

(c)          you provide, or are able to provide, consideration for the supply; and

(d)          you are registered or required to be registered.

Section 11-15 provides the meaning of creditable purpose:

1)            You acquire a thing for a creditable purpose to the extent that you acquire it in carrying on your enterprise.

2)            However, you do not acquire the thing for a creditable purpose to the extent that:

a.            the acquisition relates to making supplies that would be input taxed; or

b.            the acquisition is of a private or domestic nature.

In this case, you have made an input taxed supply of residential premises when you sold the property. Therefore, any acquisitions made in relation to this property, including repairs, maintenance, selling costs etc are not creditable acquisitions as they relate to the making of an input taxed supply.

Although Division 142 of the GST Act deems an amount of overpaid GST to be payable as if it was a taxable supply, section 142-10 of the GST Act does not apply for the purposes of applying subsection 11-15(2) (about creditable purpose) to you.

What this means is that although the excess GST remains payable, there is not entitlement to claim input tax credits that relate to the sale of an input taxed supply.

As a result, you are not entitled to claim any input tax credits for these acquisitions. Where claims have been made, you are required to make the relevant amendments.

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