Edited version of private advice

Authorisation Number: 1052106773735

Date of advice: 12 April 2023

Ruling

Subject: GST - residential premises

Question

Was the sale of Property an input taxed supply of residential premises under section 40-65 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes, the sale of the Property was an input taxed supply of residential premises under section 40-65 of the GST Act.

This ruling applies for the following period:

11 November 20XX to 10 November 20XX

The scheme commenced on:

15 February 20XX

Relevant facts and circumstances

Entity A (you) is a public benevolent institution charity for advancing health and advancing social or public welfare and is an endorsed income tax exempt charity, an endorsed deductible gift recipient and has GST concession endorsement.

You are registered for GST, effective from DD MM YY.

Property located at XXX(the Property) was owned by Entity B as bare trustee for you, pursuant to trust acknowledgement dated DD MM YY, prior to the Property being sold in YY.

The Property was purchased by Entity B as bare trustee for you on DD MM YY for the purpose of providing low cost residential accommodation (social housing). At the time of purchase, the Property comprised vacant land on a single title, with the size of the site being X square metres.

You constructed four apartment buildings/blocks (three being two levels - ground level plus one other level, and one being single storey) on the site, which has a general residential zoning (GRZ2). The XX apartment buildings/blocks were completed in MM YY.

Of the XX apartment buildings/blocks on the Property, XX had XX units/apartments in each of them and the single storey had XX units/apartments in it. In total, over the XX buildings, there were XX individual living units/apartments, with each unit/apartment having one bedroom, one bathroom/toilet, a combined living room/dining area and a kitchen, but no attached car parking (if any parking was provided on site for tenants, it was only in approved spaces).

There was also a common laundry room on the Property, which was available for all residents to use (refer further below).

The Property was at all times during the relevant period of your ownership (i.e., Entity B as bare trustee for you) used as low cost residential accommodation (social housing). The site was developed for this purpose.

Each of the XX units/apartments were continuously leased/available for lease from the time when construction was completed up until the time when the residents were moved out of the Property (refer below regarding the latter). The only exception to this being the various periods when, in the usual course of providing such accommodation, units/apartments may have been unavailable due to repairs and maintenance having to be undertaken.

As the units/apartments were used by you for the purposes of providing low cost residential accommodation, occupation levels were high; with demand exceeding availability. Most tenants were medium to long term, although no records are available for the period prior to YY.

The original development of the Property is set out in the Site Survey for the Property dated DD MM YY (extracted from the Contract of sale). The Site Survey shows the following:

•         four rectangular buildings, three of which are double storey and one of which is single storey,

•         small garden areas and concrete paths between and around the four buildings,

•         a concrete ramp on one end of the Property,

•         several brick walls/concrete kerbs located on the grounds of the Property, as well as a substation and small shed,

•         picket and paling fencing on some boundaries of the Property.

You had intended to redevelop the Property into XX low cost accommodation (social housing) units according to the Planning Extracts (extracted from the Contract of Sale). Your intention had been to rebuild the XX apartments (over four buildings) into XX apartments (all to be over a single building).

From MM YY to MM YY, the then residents of the Property were progressively decant/relocated to alternate low cost residential accommodation within your properties (including a new site acquired in XX), pending determination regarding upgrading the Property. From MM YY, all residents had been decanted from the site.

The proposed single XX apartment building that you applied for in its planning permit application (and for which a planning permit/amended planning permit was issued on DD MM YY/ DD MM YY) did not progress. It was not considered cost effective to make those improvements or to redevelop the Property for improved low cost accommodation (social housing).

On DD MM YY, redevelopment of the site was abandoned, and you decided to sell the site.

Apart from the building permit issued for the 'demolition of three double storey apartment buildings & single storey detached dwellings' on DD MM YY (extracted from the Contract of Sale) which was not finalised (there is no record of final approval date), no building permits were granted for the Property during your ownership period, except for the one which would have been granted in relation to the construction of the four buildings completed in MM YY. Apart from when the original development was applied for and later when the abovementioned proposed single XX apartment building was applied for, no development plans or approvals were sought by you in relation to the Property.

Entity B as bare trustee for you entered into a Contract of Sale for the Property on DD MM YY (for the sale price as stated in the contract), with settlement occurring on DD MM YY. At the time of sale, the Property had the benefit of a town planning permit for a three level retirement living development comprising XX units in total. The 'sales information memorandum' describes the Property as a 'former independent living unit complex' suitable for a variety of development outcomes (subject to council approval), including townhouse, apartment, childcare or retirement living.

At the time of supply of the Property by you to the purchaser (Entity C), no substantial renovations/alterations had been made to the Property; it remained essentially the same as it had been when you built the four apartment buildings/blocks. The Property had however been refurbished and maintained by you during its period of ownership, but any improvements made to it were purely maintenance related or cosmetic in nature only.

The XX individual units/apartments were fit for human habitation and liveable at all relevant times during your period of ownership of the Property, including on the date of settlement of the Contract of Sale for the Property. The four apartment buildings/blocks and the XX individual units/apartments were not dilapidated. The units/apartments required cleaning and maintenance, as well as some improvements in the bathrooms and kitchens (including cosmetic and minor structural alterations).

The Property was also 'standard and compliant' to the 'code' during your period of ownership, and suitable for strata type accommodation. The four apartment buildings/blocks were not designed for health, medical or related care uses.

The XX apartments were used for low cost accommodation and the Property was first registered as a retirement village under the Retirement Villages Act 1986 (Vic) (RVAV 1986) when the Property was acquired by Entity B as bare trustee for you in YY. During your ownership period of the Property, there were no other uses or registration for aged care, nursing facilities, etc. in respect of the Property. The tenants have always used the premises as residential accommodation and no in-house care was ever provided to the tenants.

Your primary use of the Property has at all times been to provide low cost accommodation (social housing/low cost affordable housing). Any other use of the Property (such as utilities, sub-station, storage shed, garden, etc. - refer below) has been ancillary and collateral to its primary use.

The common areas of the Property during your period of ownership consisted of the following:

•         staircases and hallways in each building,

•         a communal laundry room and clothes drying area,

•         garden (the garden did not have any facilities or structures),

•         a small garden shed (used to keep landscaping equipment such as a rake, plant shears, etc.),

•         a substation (located on an easement and belonging to United Energy as part of the neighbourhood electrical grid),

•         common access externally (lobby/entrance).

The apartments were designed with a common laundry room (which was in the second back building on the ground floor). The common laundry room contained a sink with water, as well as a washer/dryer that was coin-operated and run by you (refer below). It was however possible for residents to install a washing machine/dryer in their own unit/apartment if they wished.

There were also outside clotheslines in the grounds of the Property.

Apart from a coin-operated washer/dryer in the communal laundry room, no commercial type activities were conducted on the Property during your ownership period.

You operated the leasing activities in relation to the Property. You had individual agreements with tenants who occupied their apartments under a RVAV 1986 agreement (licence agreement) rather than under the relevant 'residential tenancies act'. You provided a representative copy of such licence agreement. No freehold was ever granted to a tenant, but tenants had quiet enjoyment to occupy their unit without any interruption from you.

The average tenancy period was greater than one year. Tenants paid an ingoing contribution, which was to be refunded upon exit. The amount of the ingoing contribution was calculated based on the formula within the licence agreement.

The tenants were responsible for their own meals, laundry and for the utilities for their individual units/apartments (i.e., electricity, gas, telephone, etc.). Tenants were also responsible for the cleaning and maintenance inside their own units/apartments. However, you paid for general maintenance and repair over the common property, which was partly funded by the maintenance charge paid by the tenants.

No services apart from those detailed above were provided to tenants, and there were no additional charges required outside of the rent and maintenance charges as set out in the licence agreement.

There was no community centre on the Property/site; the licence agreement was generic and made representation to functional areas that were not relevant in your particular case.

Apart from the licence agreement with the tenant, no other agreements were entered into with the tenants.

At all times prior to DD MM YY, the Property has been registered as a retirement village under the RC/licence agreement.

Special Condition 17 of the Contract of Sale for the Property required the encumbrance and notice under the RC/licence agreement to be removed as a condition to settlement, so that 'free title' would be provided. On DD MM YY, the encumbrance and notice under the RC/licence agreement were removed from the Property title.

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 9-30(4)

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

A New Tax System (Goods and Services Tax) Act 1999 paragraph 40-35(1)(a)

A New Tax System (Goods and Services Tax) Act 1999 section 40-65

A New Tax System (Goods and Services Tax) Act 1999 subsection 40-65(1)

A New Tax System (Goods and Services Tax) Act 1999 subsection 40-65(2)

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(1)

A New Tax System (Goods and Services Tax) Act 1999 subsection 40-75(2)

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

Reasons for decision

Section 9-40 provides that you must pay the GST payable on any taxable supply that you make.

Under section 9-5, you make a taxable supply 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 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.

In this case, the registered owner of the Property is Entity B. However, Entity B purchased the Property as bare trustee for you.

Goods and Services Tax Ruling GSTR 2008/3 Goods and services tax: dealings in real property by bare trusts (GSTR 2008/3) discusses the role of a bare trustee in a bare trust arrangement. Paragraph 30 provides that in applying the GST Law to a dealing in real property held on bare trust, the question arises as to which entity makes the relevant taxable supply, the trustee or the beneficiary.

The activities of a bare trustee are essentially passive in nature. A trustee of a bare trust has either no active

duties to perform or only minor active duties. A bare trust does not carry on an enterprise for GST purposes by virtue of its dealings in the trust property (paragraph 37 of GSTR 2008/3).

On the other hand, a beneficiary of a bare trust may carry on an enterprise involving an asset held on trust for the beneficiary by the bare trustee (paragraph 38 of GSTR 2008/3).

In this case, Entity B holds the Property as bare trustee. Consequently, in relation to the Property, it is your activities as the beneficiary that must be examined.

Under section 9-5, a supply is not a taxable supply to the extent it is input taxed.

When a supply of property is an input taxed supply of residential premises

Subsection 40-65(1) 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.

Subsection 40-65(2) provides exceptions to the sale of real property being input taxed. The sale is not input taxed to the extent that the residential premises are commercial residential premises or new residential premises other than those used for residential accommodation (regardless of the term of occupation) before 2 December 1998.

Real property

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

Residential premises

The term 'residential premises' is also defined in section 195-1, 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.

Paragraph 9 of Goods and Services Tax Ruling 2012/5 Goods and services tax: residential premises (GSTR 2012/5) provides that the requirement in section 40-65 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).

Whereas 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 (refer to paragraph 11 of GSTR 2012/5).

Premises must also 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).

However, paragraph 21 of GSTR 2012/5 provides that 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.

Commercial residential premises

Section 195-1 also contains the definition of 'commercial residential premises'. That term is relevantly defined to mean a hotel, motel, inn, hostel or boarding house (in paragraph (a) of the definition), or anything similar to a hotel, motel, inn, hostel or boarding house, etc. (in paragraph (f) of the definition).

While paragraph (f) extends the scope of the definition, its operation is limited to premises that have some or all of the characteristics of both residential premises and one of the classes of premises listed in paragraphs (a) to (e) of the definition.

The ATO's view on the meaning of commercial residential premises is set out in Goods and Services Tax Ruling 2012/6 Goods and services tax: commercial residential premises (GSTR 2012/6). Paragraph 9 of GSTR 2012/6 provides that the terms hotel, motel, inn, hostel or boarding house in paragraph (a) of the definition are not defined in the GST Act and take their ordinary meanings in context. Paragraph 12 of GSTR 2012/6 sets out some common characteristics of hotels, motels, inns, hostels, boarding houses or similar premises. These are:

•           commercial intention - properties are operated on a commercial basis or in a business-like manner even if they are operated by a non-profit body.

•           multiple occupancy - premises have capacity to provide accommodation to multiple, unrelated guests or residents at once in separate rooms, or in a dormitory.

•           holding out to the public - offer accommodation to the public or a segment of the public.

•           accommodation is the main purpose of the premises.

•           central management to accept reservations, allocate rooms, receive payments and perform or arrange services. This can be provided through facilities on-site or off-site.

•           management offers accommodation in its own right rather than as agent.

•           provision of, or arrangement for services and facilities.

•           occupants have status as guests - occupants do not usually enjoy an exclusive right to occupy any particular part of the premises in the same way as a tenant.

New residential premises

When defining new residential premises, section 195-1 defines the term by reference to the meaning given for the term in section 40-75.

Subsection 40-75(1) 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.

Paragraphs (b) and (c) have effect subject to paragraph (a).

However, in accordance with subsection 40-75(2), the residential premises are not new residential premises if, for the period of at least five years since:

a)    if paragraph (1)(a) applies (and neither paragraph (1)(b) nor paragraph (1)(c) applies) - the premises

first became residential premises; or

b)    if paragraph (1)(b) applies - the premises were last substantially renovated; or

c)    if paragraph (1)(c) applies - the premises were last built;

the premises have only been used for making supplies that are input taxed because of paragraph 40-35(1)(a).

Paragraph 40-35(1)(a) provides that a supply of premises that is by way of lease, hire or licence (including a renewal or extension of a lease, hire or licence) is input taxed if the supply is of residential premises (other than a supply of commercial residential premises or a supply of accommodation in commercial residential premises provided to an individual by the entity that owns or controls the commercial residential premises).

Supply of things used solely in connection with making supplies that are input taxed but not financial supplies

Further to the above, subsection 9-30(4) provides that a supply is taken to be a supply that is input taxed if it is a supply of anything (other than new residential premises) that you have used solely in connection with your supplies that are input taxed but are not financial supplies.

How this applies in your case

The XX units/apartments that you leased as a part of its enterprise and then sold as part of the Property sale clearly had the indicators of residential accommodation. They had the necessary physical characteristics to provide shelter and basic living facilities (bedroom, bathroom/toilet, kitchen) and the Property had a general residential zoning.

It is also noted that the XX units/apartments were continuously rented by you after their construction was completed in MM YY, right up to when the residents were progressively moved out between MM YY and MM YY. More importantly, when you sold the Property (the sale of which settled in MM YY), the XX units/apartments were all fit for human habitation and were not delipidated, this being despite the Property having sat vacant for some time prior to its sale.

In addition to the above, the four residential apartment complexes/buildings that were on the Property at the time of its supply by you in MM YY, were not new residential premises as that term is defined in the GST Act.

It is also not considered that the apartments were commercial residential premises, as they didn't meet the definition under section 195-1. The accommodation that you provided did not have enough of the characteristics of commercial residential premises.

We also note subsection 9-30(4), which provides that a supply is taken to be a supply that is input taxed if it is a supply of anything (other than new residential premises) that you have used solely in connection with your supplies that are input taxed but are not financial supplies; which was the case in relation to the communal laundry and garden shed for the entire period during which you leased the XX units/apartments to residents.

In conclusion, your sale of the Property as a whole is a composite supply of residential premises to be used predominantly for residential accommodation and is input taxed under section 40-65.

Consequently, your supply of the Property is not a 'taxable supply'' and you are not liable for GST pursuant to section 9-40.

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