Edited version of private advice

Authorisation Number: 1052102657052

Date of advice: 29 March 2023

Ruling

Subject: GST - sale of residential premises

Question

Will you, Entity AB, be making a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (the GST Act) when you sell your residential property situated at X Address (X Property)?

Answer

Yes, but only to the extent that X Property is not residential premises to be used predominantly for residential accommodation. You can use any reasonable method to calculate the value of the taxable component of the supply.

This ruling applies for the followingperiods:

DDMMYYYY

The scheme commenced on:

DDMMYYYY

Relevant facts and circumstances

Entity AB (You) purchased a property situated at X Address (X Property) in MMYYYY.

The total area of X Property is measured at <number> square metres.

You have resided at X Property since you acquired it, and also since MMYYYY you have licensed a portion of the Property to Entity CD, a company which you are the sole directors of, for the operation of a retail business on that portion of X Property. The license is not set out in writing. Entity CD does not have exclusive possession over the portion of X Property it uses to operate the retail business. Entity CD employs staff on a casual and part-time basis to run the retail business.

You are registered for GST since DDMMYYYY as a partnership (Entity EF). You established Entity EF in MMYYYY for the purposes of operating a wholesale business. Entity EF operates out of a separate property situated at Y Address. The wholesale business operated by Entity EF is separate to the retail business operated by Entity CD. X Property is not included as an asset in the accounts of Entity EF.

Entity EF is paid a fee of approximately $<number> per year by Entity CD for their occupation of the portion of X Property where the retail business is being carried on. That occupation fee is included in the accounts of Entity EF. The occupation fee is inclusive of GST and is included in the income tax returns of Entity EF.

Expenses are recorded in the accounts of the Entity EF as Entity EF runs other businesses.

X Property is not recorded as an asset in the accounts of Entity EF as it is a private house owned by you.

X Property is notionally divided into three sections - namely:

•         a section containing a residential premises and surrounding curtilage that is used as your main residence (the Residential Section)

•         a section dedicated for use by Entity CD as a retail business (the Retail Section)

•         a section that is vacant and contains no fixtures (the Vacant Section).

You have provided a copy of the Google Maps satellite capture of X Property and have drawn a rough overlay of the boundaries of each of the three sections of X Property.

The Vacant Section of the Property:

•         Contains an area (approximately 40 x 10 metre in size) at the rear of the property that is a dedicated creek line corridor. The council has requested for you to maintain this area.

•         The remainder of the space has been used as a storage space for your family over the years. It has not been used for anything nor were there any plans or intentions to use it for anything else in the future.

The Residential Section represents approximately 25% of the total area of X Property.

Description of the Residential Section

The Residential Section contains a house which You use as your main residence. The house consists of, among other things, bedrooms, bathrooms, lounge spaces, carports, a tennis court, a pool, outdoor entertainment facilities, a vegetable garden, and a yard.

Description of the Retail Section

The Retail Section contains several sheds to display products for sale to the general public. Each shed can be dismantled without damaging the land and are not intended to be permanent fixtures to the Property.

Intentions to sell the Property

In June 20XX, you signed a 'Deed of Put and Call Option' (the Deed) with a prospective purchaser, Entity XY (the Purchaser) that has an expiry date of x years. The Call Option gives the Purchaser the right to purchase X Property from you, and the Put Option gives you the right to sell X Property to the Purchaser, as per the terms and conditions set out in the Deed.

Proposed Sale Contract

The Deed contains a Proposed Sale Contract that is to be executed if either the put or call option under the Deed is exercised. As per Clause x of the Proposed Sale Contract, you must give the prospective purchaser vacant possession of X Property upon completion of the sale. This is to enable the prospective purchaser to construct an apartment block.

All existing structures (including the sheds in the Retail Section) will be demolished prior to settlement if the call option is exercised and X Property is sold.

You are considering whether to wind up the retail business being conducted on the Retail Section or relocate it to another property when the Call Option under the Deed is exercised and X Property is sold.

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 9-20

A New Tax System (Goods and Services Tax) Act 1999 Section 9-40

A New Tax System (Goods and Services Tax) Act 1999 Section9-80

A New Tax System (Goods and Services Tax) Act 1999 Section40-65

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

Reasons for decision

Section 9-40 provides that you are liable for GST on any taxable supplies that you make.

Under section 9-5, an entity makes a 'taxable supply' where the supply is:

(a)  made for consideration;

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

(c)   connected with the indirect tax zone; and

(d)  made by a supplier who is 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.

In your case, the sale of X Property will be made for consideration, being the sale price stated in the Proposed Sale Contract, X Property is located in Australia and so connected to the indirect tax zone. You are registered for GST as a partnership. The sale of X Property will not be GST-free.

It remains to be determined whether the sale of X Property is in the course or furtherance of an enterprise you carry on and, if so, to what extent (if any) would the sale of the Property be input taxed.

Would the sale of the Property be in the course or furtherance of an enterprise you carry on?

Paragraphs 9-20(1)(a), 9-20(1)(b), and 9-20(1)(c) provide that an enterprise is an activity, or series of activities, done:

(a)  in the form of a business; or

(b)  in the form of an adventure or concern in the nature of trade; or

(c)   on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property.

Miscellaneous Taxation Ruling MT 2006/1 The New Tax System: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian business number (MT 2006/1) contains the Commissioner's view on what constitutes an enterprise for the purpose of eligibility for an Australian business number. Goods and Services Tax Determination GSTD 2006/6 Goods and services tax: does MT 2006/1 have equal application to the meaning of 'entity' and 'enterprise' for the purposes of the A New Tax System (Goods and Services Tax) Act 1999 (GSTD 2006/6)extends the application of MT 2006/1 to the GST Act. The principles in MT 2006/1 apply equally to the term enterprise and can be relied upon for GST purposes.

Paragraphs 159-160 and 234 of MT 2006/1 provides the following guidance on what constitutes an enterprise:

159. Whether or not an activity, or series of activities, amounts to an enterprise is a question of fact and degree having regard to all of the circumstances of the case.

160. It is important that the relevant activity or series of activities are identified in order to determine whether an enterprise is being carried on. This is because one activity may not amount to an enterprise but that activity taken into account with other activities may form an enterprise. All activities need to be taken into account including activities from the commencement to the termination of the enterprise. ...

234. Ordinarily, the term 'business' would encompass trade engaged in, on a regular or continuous basis. However, an adventure or concern in the nature of trade may be an isolated or one-off transaction that does not amount to a business but which has the characteristics of a business deal.

In your case, you are permitting Entity CD to occupy the Retail Section of X Property to conduct a nursery business, and in exchange you are paid a fee of approximately $<number> per year for this occupation. We consider that this arrangement constitutes a licence of the Retail Section of X Property to Entity CD. Therefore, your activities of licensing the Retail Section of X Property will constitute a licencing enterprise within the means of paragraph 9-20(1)(c).

For the sale of X Property to meet the requirements of paragraph 9-5(b), the sale must be in the course or furtherance of the identified enterprise (namely, the licensing enterprise mentioned above).

The definition of 'carrying on' an enterprise under section 195-1 includesdoing anything in the course of the commencement or termination of an enterprise. This is further elaborated in paragraph 140 of MT 2006/1:

Termination of an enterprise

140. Carrying on an enterprise includes doing anything in the course of the termination of the enterprise. An enterprise terminates when the activities related to that enterprise cease. Ordinarily, that occurs when all assets are disposed of or converted to another purpose or use and all obligations are satisfied. Disposal of assets may include the sale, scrapping, or other disposal of the assets.

In your case, the sale of X Property would constitute the termination of the licensing enterprise, as the Proposed Sale Contract will require X Property to be sold subject to vacant possession and the structures contained on the Retail Section will be dismantled. While X Property is not only used to conduct the licensing enterprise, that does not change the fact that the sale of X Property in its entirety will result in the termination of the licensing enterprise as you will no longer have X Property to license after settlement. The sale, therefore, will constitute a supply in the course or furtherance of the licensing enterprise you have been carrying on X Property and paragraph 9-5(b) is satisfied.

Therefore, the sale of X Property will be a taxable supply except to the extent that it is input taxed. It now needs to be determined to what extent, if any, the sale of X Property would be input taxed.

To what extent would the sale of the Property be input taxed?

Section 40-65 provides that the sale of real property is input taxed to the extent that the property is residential premises to be used predominantly for residential accommodation. However, the sale will not be input taxed to the extent that the residential premises are either 'commercial residential premises' or 'new residential premises'.

In this case, X Property contains your principal place of residence since MMYYYY. X Property is therefore not 'commercial residential premises' nor 'new residential premises' as defined in the GST Act.

Goods and Services Tax Ruling GSTR 2012/5 Goods and services tax: residential premises (GSTR 2012/5) provides the following commentary on residential premises at paragraphs 10 and 11:

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).

11. 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, someone might occupy premises that lack the physical characteristics of premises suitable for, or capable of, residential accommodation (such as a squatter residing in a disused factory). Although the premises may satisfy paragraph (a) of the definition of residential premises in section 195-1, the premises are not residential premises to be used predominantly for residential accommodation.

It also provides the following commentary in relation to land included with a building in paragraphs 46-47 and 91-92:

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.

Vacant land

47. Vacant land is not capable of being occupied as a residence or for residential accommodation as it does not provide shelter and basic living facilities. Vacant land is not residential premises.

...

Land supplied with a building

91. The GST Act does not restrict the area of land that can be included in residential premises. 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 enjoyed in conjunction with the residential building. Just because land is used privately does not mean that the land necessarily has the physical characteristics to indicate that the land is to be enjoyed in conjunction with the residential building.

Vacant land

92. Vacant land cannot be residential premises. In Vidler v. Federal Commissioner of Taxation, Sundberg, Bennett and Nicholas JJ stated that 'vacant land is not land that is capable of being occupied as a residence or for residential accommodation'. This is because vacant land, of itself, does not provide shelter and basic living facilities, and cannot, therefore, be occupied as a residence or for residential accommodation.

Based on the description in the facts of the house situated in the Residential Section, the house satisfies the definition of residential premises. The portion of the land that can be enjoyed in conjunction with the house, that is, associated car spaces, tennis court, entertainment areas and yard that surrounds the house will also form part of the residential premises. Therefore, we accept that the supply of the Residential Section portion of X Property would constitute an input taxed supply of residential premises for the purposes of section 40-65.

However, the Retail Section of X Property does not satisfy the definition of residential premises as set out above.

We consider the Retail Section is not an extension of the curtilage that surrounds the home situated in the Residential Section. While there are no physical barriers (whether natural or man-made) that divide X Property into these two sections, it is clearly evident that based on the physical design and layout of the Residential Section that there is a point where the function of X Property as a place of residence and of private recreation ends. X Property therefore loses its character as residential premises to be used predominantly for residential accommodation beyond this point.

The portion of X Property comprising of the Retail Section consists of a number of structures intended to be used as part of the nursery business being carried on by Entity CD. It is noted that all of these structures are removable and do not constitute permanent fixtures, and they will be removed when X Property is sold. Even so, these structures show that the character of the land that makes up the Retail Section of X Property does not form part of the residential premises to be used predominantly for residential accommodation in the Residential Section. The facts indicate that the land making up the Retail Section does not have the character of private recreational use to be enjoyed with a residential premises, as demonstrated by the fact that a sophisticated business is being carried on there by a separate entity, and there are already recreational areas within the Residential Section. Even considering the removal of the structures, the land making up the Retail Section would be vacant and still not have the character of land to be enjoyed for private recreational use as part of the residential premises situated in the Residential Section.

The Vacant Section of X Property shows it has been partly used for private storage purposes. Paragraph 16 of GSTR 2012/5 explains the treatment of the supply of storage areas as part of the sale of residential premises:

16. A supply of a residential apartment in a building may include a garage, car-parking space, or storage area located within the building complex. The garage, car-parking space, or storage area is ancillary or incidental to the dominant component of the supply being the residential apartment. It can be reasonably concluded that the garage, car-parking space, or storage area are to be used for the better enjoyment of the residential apartment. They do not form a dominant part of the supply. The supply is therefore a composite supply of residential premises to be used predominantly for residential accommodation. This is still the outcome where the garage, car-parking space, or storage space is separately titled from the residential apartment, but is physically located within the same building complex.

Based on the principles above in paragraph 16 of GSTR 2012/5, we consider the Vacant Section would form part of the supply of the residential premises to be used predominantly for residential accommodation when X Property is sold, to the extent that the Vacant Section functions as a private storage area. The area of the Vacant Section comprising the creek line corridor is vacant land, and would not form part of the residential premises.

Therefore, the sale of X Property will be input taxed only to the extent that it is residential premises to be used predominantly for residential accommodation, including the surrounding curtilage to be enjoyed in conjunction with the residential premises situated in the Residential Section, and the private storage area situated in the Vacant Section. The remainder of X Property does not form part of the input taxed supply of residential premises and will constitute a taxable supply when sold and be subject to GST.

Apportionment

Section 9-80 provides that, where a supply is partly taxable and partly input taxed, the value of the supply is to be apportioned between the taxable and non-taxable (that is, input taxed) parts of the supply.

A supply which contains both taxable and non-taxable parts is referred to as a mixed supply.

Paragraphs 40-43 and 89-90 of GSTR 2012/5 apply the concept of apportionment to sales of real property that includes a residential premises.

Supplies requiring apportionment

40. The value of a supply of premises that includes residential premises to be used predominantly for residential accommodation needs to be apportioned to the extent that part of the premises is not residential premises to be used predominantly for residential accommodation.

Example 8 - residential premises partly converted for business use

41. Shannon decides to partly modify her house to use in her profession as a doctor. She modifies an area of the house to provide office and consulting room space, an operating theatre, a waiting room and storage for the business. A sealed car park is also added to the property. Significant physical modifications are made to these areas, including the removal and alteration of walls, and the addition of lighting, hygiene facilities and security to meet industry standards. The existing lounge room is used as the patients' waiting room. An existing bedroom is used for storage. No physical modifications are made to the lounge room or bedroom.

42. The modifications result in the part of the premises consisting of the office, consulting room, operating theatre and car park no longer being residential premises to be used predominantly for residential accommodation. Objectively, part of the premises is still designed predominantly for residential accommodation, comprising bedrooms (including the bedroom used for storage), bathroom, kitchen, living room, lounge room and gardens.

43. If Shannon later sells or leases the premises, she will need to apportion the value of the supply between the taxable and input taxed parts of the supply.

...

89. In some circumstances, premises consist of two or more parts: one part residential premises to be used predominantly for residential accommodation, and the other part premises of another kind. As paragraph 40-35(2)(a), subsection 40-65(1), and paragraph 40-70(1)(a) refer to the extent that the premises or property are to be used predominantly for residential accommodation, it is necessary that the value of the supply of such premises be apportioned.

90. This means that, if there is a single supply of the premises but only part of premises is residential premises to be used predominantly for residential accommodation, the supply is input taxed to the extent of that part. For example, if residential premises are designed, built or modified so that part of the premises is a house and part is for commercial purposes, such as a shop (based on its physical characteristics), a supply of the premises is a taxable supply to the extent that it relates to the shop. The supply of the premises is input taxed to the extent that it consists of the house. See Examples 8 and 9 at paragraphs 41 to 45 of this Ruling.

Goods and Services Tax Ruling GSTR 2001/8 Goods and Services Tax: Apportioning the consideration for a supply that includes taxable and non-taxable parts (GSTR 2001/8) details methods and examples that you may use to help you work out how to apportion the consideration for a supply that contains separately identifiable taxable and non-taxable parts. Paragraphs 25, 26, 27 and 97 are particularly relevant to your situation:

25. GST is payable on a mixed supply that you make, but only to the extent that the supply is taxable. You need to apportion the consideration for a mixed supply between the taxable and non-taxable parts to find the consideration for the taxable part.

26. Apportionment must be undertaken as a matter of practical common sense. You can use any reasonable basis to apportion the consideration. Depending on the facts and circumstances of the supply, a direct or indirect method may be an appropriate basis upon which to apportion the consideration and ascertain the value of the taxable part of the supply. The basis you choose must be supportable in the particular circumstances.

27. You should keep records that explain the basis used to apportion the consideration between the taxable and non-taxable parts of a supply.

Direct methods

97. Direct methods use relevant variables that measure the connection between what is supplied (the taxable and non-taxable parts) and the consideration for the actual supply. A direct method usually gives you the most accurate measure of the consideration for (and therefore, the calculation of the value of) the taxable part of the supply you make (that is, the value of the taxable supply). Such methods may include:

•         the price allocation as agreed between the parties to the supply (see paragraphs 97A to 97M of this Ruling);

•         the comparative price of each part if it were supplied on its own, relative to the whole payment received (see paragraphs 98 to 103D of this Ruling);

•         the relative amounts of rental consideration (see paragraph 103E to 103F of this Ruling);

•         the relative amount of time required to perform the supply (see paragraphs 104 to 105 of this Ruling); and

•         the relative floor area in a supply of property (see paragraphs 106 to 108 of this Ruling).

Paragraphs 106 to 108A of GSTR 2001/8 consider apportionment methods in relation to the sale of real property and are reproduced below for your convenience:

Relative floor area in a supply of property

106. In some cases, it is reasonable for you to allocate the consideration for a mixed supply by reference to the relative floor area of the property being supplied. To make an allocation on this basis, you also need to consider the relative price of different types of floor space (for example, floor space in residential, retail and industrial property are often priced differently). That is, you may simply work out the proportionate floor area if the value per square metre does not vary. However, if the value per square metre is variable, then you can reasonably apportion on a basis of each area and its relative value. You may also need to take into account external features, such as the value of recreational areas.

Example 17 - commercial and residential premises

107. Warren rents out a property to Josef for $2,000 per month. The property is comprised of residential and commercial premises. The floor area of the residential part is 160 square metres and the commercial part is 80 square metres. In the locality, the rental of commercial space is worth twice as much as residential space.

108. It would be reasonable for Warren to base the taxable portion of the supply on the floor area of the commercial part as a proportion of the combined floor area of the commercial and residential parts. However, he also needs to take into account the difference in the relative value of the commercial and residential floor space. Warren may reasonably apportion the consideration equally between the commercial and the residential parts.

108A. The taxable portion is therefore 50%. Applying the formula in section, the taxable value of the actual supply is calculated as ($2000 x 10)/(10 + 0.5). The value of the taxable part is $952.38 and the GST payable is $95.23.

Any reasonable basis to apportion the consideration for the sale of X Property that is agreeable to the parties to the sale can be used, including the direct methods outlined in paragraph 97 of GSTR 2001/8 above. The parties should retain records that explain the basis used to apportion the consideration between the taxable and non-taxable portions of the sale of X Property.

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