Edited version of private ruling

Authorisation Number: 1011487303685

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Ruling

Subject: GST & SALE OF PROPERTY

Question 1

Is the sale of Property 1 by Company A to Company B, a taxable supply, input taxed supply or a mixed supply?

Answer

The sale of Property 1 by Company A to Company B is an input taxed supply.

Question 2

Is the sale of Property 2 by Company C to Company B a taxable supply, input taxed supply or mixed supply?

Answer

The sale of Property 2 by Company C to Company B is an input taxed supply.

Question 3

Is the sale of Property 3 by Company A to Company B a taxable supply, input taxed supply or mixed supply?

Answer

The sale of Property 3 by Company A to Company B is an input taxed supply.

Relevant facts and circumstances

· Company C and Company A have entered into the contract for the sale to Company B of real estate assets.

· An associate of Company B, namely Company D has entered into a contract for the purchase of the business which operates on these premises from Company C.

· There are four parcels of real estate involved in these sales and the questions relate to three of those parcels.

· The second, third and fourth parcels of real estate were originally constructed as residential property.

· One is now used solely for commercial purposes associated with the business. The second and third are each used partially for commercial purposes and partially for residential use.

· Each of these properties is zoned Residential and each does not have development approval for its current commercial use.

· Company B intends continuing with the current use after completion of the transactions for a year or more, but in time, which will be at least 1 year but probably later, Company B intends redeveloping the whole site.

· Three of the four lots involved in these sales currently have the benefit of a development approval which allows for the redevelopment of these sites but Company B may or may not develop the property pursuant to that development approval and may in the alternative apply to the Council for approval of a different proposal. The existing development approval is being assigned to the purchaser as part of the property sold by Company A and Company C to Company B.

· Each of the contracts is agreed to be interdependent with the others and with the sale of the main commercial real estate which is the main body of the business and the sale contract for the sale of the business assets.

· A more specific description of the current use of the properties is as follows:

Property 2

o Owned by Company C.

o This property was originally approved by Council and built for residential use. You have advised that the property was purchased by Company C as an existing residential property but until recently the buildings were used without development approval for offices associated with the business.

Property 3

o Owned by Company A.

o This property was originally approved by Council and built for residential use. You have advised that the property was purchased by Company A as an existing residential property. Part continues to be used for residential purposes but has been used for commercial purposes.

o The percentage of floor space is mostly commercial.

Property 1

o Owned by Company A.

o This property was originally approved by Council and built for residential use. You have advised that the property was purchased by Company A as an existing residential property but currently has split use.

o The property is occupied for commercial and for residential purposes.

Property 2

o This property has not been structurally modified. It was initially used as 'overflow' office space but has since reverted to residential use and is currently tenanted.

Property1

o The majority of this property is for residential use. a residential tenant could move into the property without any modifications taking place. No prefabricated walls have been erected.

Property 3

o The upstairs section of this property has not been structurally modified. The kitchen would probably need to be modified prior to a residential tenancy. The majority of the cupboards have been removed as well as the stove. The connection for the stove is still available. However, the remainder of the property has not been modified structurally. The property could be occupied by a residential tenant without any modifications being made to the property with the exception of reinstating the cupboards, workbenches, stove and fridge in the kitchen. There is currently a microwave in the kitchen. No prefabricated walls have been erected.

Reasons for decision

An entity is liable for GST on any taxable supply that it makes.

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 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.

Input taxed supply of residential premises by way of sale

Subsection 40-65(1) of the A New Tax System (Goods and Services Tax) Act 1999 (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 (regardless of the term of occupation).

However, subsection 40-65(2) of the GST Act provides that 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 used for residential accommodation (regardless of the term of occupation) before 2 December 1998.

The term residential premises is defined in section 195-1 of the GST Act to mean 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.

Goods and Services Tax Ruling GSTR 2000/20 includes guidance on the meaning of residential premises. Paragraphs 16 to 36 of GSTR 2000/20 are particularly relevant in this case.

GSTR 2000/20 explains that to understand the use of the terms 'residential premises', 'residence' and 'to be used predominantly for residential accommodation', it is necessary to view their context in the definitions and structure of the GST Act. Relevantly, paragraphs 19 to 20 state:

19. Further, the requirement in paragraph 40-35(2)(a) and subsection 40-65(1) that input taxing only applies to the extent that the premises are to be used predominantly for residential accommodation indicates that premises that are residential premises are capable of use for purposes other than residential accommodation. It is their physical characteristics that mark them out as a residence. In turn, these characteristics determine when the use or proposed use is for residential accommodation.

20. To be used for residential accommodation or to be occupied as a residence, premises do not have to be a home or a permanent place of abode. To be residential premises as defined, a place need only provide sleeping accommodation and the basic facilities for daily living, even if for a short term…

 Paragraphs 22 to 23 further explain:

22. The function of paragraph 40-35(2)(a) and subsection 40-65(1) is to differentiate the GST treatment of any portions of residential premises that are commercial. This would apply, for example, to a house that has been partly converted for use as a doctor's surgery. Several parts of the house may still be used predominantly for residential accommodation, such as bedrooms, bathroom, kitchen, living rooms and the gardens, while other areas are not, being turned over to office and consulting room space, and storage for the surgery. In this case paragraph 40-35(2)(a) and subsection 40-65(1) operate to exclude these commercial parts from the input taxed treatment of the rest of the property.

23. Whether or not a particular room or part of a house or apartment is to be used predominantly for residential accommodation, as opposed to commercial purposes, is a question of fact and degree…

The physical characteristics that are common to residential premises that provide accommodation are:

(i) The premises provide the occupants with sleeping accommodation and at least some basic facilities for day to day living.

(ii) The premises may be in any form, including detached buildings, semidetached buildings, strata-title apartments, single rooms or suites of rooms within larger premises.

In addition to the physical characteristics, the following factors may also be present in residential premises to be used predominantly for residential accommodation:

(i) The purpose or context of the premises is for personal accommodation, rather than for another purpose, such as for a business.

(ii) The tasks of day to day living, such as preparing food, cleaning and laundering are performed by the occupant, or by others under private arrangements.

(iii) The status of the occupant is most commonly that of owner, tenant or lessee.

(iv) The premises will be in an area zoned by Council or Shire regulations as suitable for human habitation.

Paragraph 31 of GSTR 2000/20 explains that the purpose for which premises are to be used will be evident from their form or fit out. This is most clearly the case where premises have been fabricated, or altered, to accommodate commercial or professional activities.

With respect to characteristic (ii) the salient factor is that these things are not arranged externally by the owner or manager of the premises, but privately by the occupant.

With respect to characteristic (iii) typically residential premises are owner occupied, or supplied under a residential tenancy agreement. Under these agreements, the tenant is entitled to quiet enjoyment of the premises.

With respect to characteristic (iv), paragraph 36 of GSTR 2000/20 explains that for premises to be residential, it must be legal for them to be used for accommodation. As the concepts of residential are given a broad treatment under GST, it is only necessary that the land on which premises stand is zoned by Council or Shire in a way that contemplates human habitation or accommodation, even if only for short term occupancy. However, a certain zoning, or a change of zoning cannot, by itself, alter the character of premises.

Applying the above principles to this case, we comment on each property as follows:

Property 2

You have advised that this property was originally approved by Council and built for residential use. It is zoned for residential use. No modifications were made to the property. This is clear from the floor plan provided and the information provided by Company C. The property is currently occupied by a residential tenant. This tenancy is disclosed in the Tenancy Schedule attached to the Contract for sale of land.

The property has the physical characteristics of a house which provides the occupants with sleeping accommodation and the basic facilities for day to day living. The purpose of the premises is for residential accommodation. The tasks of day to day living are undertaken by the occupants, or by others under private arrangements. The occupants are tenants who have a right of quiet enjoyment of the property, and the premises are zoned as suitable for human habitation. Consequently, we consider that the property is clearly residential premises to be used predominantly for residential accommodation

Further, you have advised that the property was purchased by Company C as an existing residential property. Therefore, the premises are not new residential premises under paragraphs 40-65(2)(b) of the GST Act.

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

The fact that the purchaser has an intention to use the property for commercial purposes rather than residential purposes at some time in the future, does not impact on the outcome of the decision in this matter.

Property 3

You have advised that this property was originally approved by Council and built for residential use. It is zoned for residential use.

Part of the property continues to be used for residential purposes but has also been used for commercial purposes.

You have further advised that the commercial part of the property was substantially modified. You have not been able to obtain any plans of the property before the modifications were made but you advise that it must be assumed that it was a residential layout.

You have provided a floor plan which indicates the nature and purpose for which the property is being used.

Company C has further clarified the position with regard to the modifications made to the property. They have advised that no structural changes were made to the upstairs section of the property. As regards the downstairs area, the kitchen would require modification for residential purposes. The extent of this modification would be the reinstatement of the cupboards, workbenches, stove and fridge. The stove connection is, however, still in existence. No prefabricated walls have been erected and Company C advises that the property could be occupied by a residential tenant without modifications to the property.

Based on the form and fit-out of the property and the information received, we consider that the property is clearly residential premises to be used predominantly for residential accommodation. The minor modifications made to the property do not alter the principle physical characteristics of the property which are of a house which provides the occupants with sleeping accommodation and the basic facilities for day to day living. The purpose of the premises is for residential accommodation.

Further, you have advised that the property was purchased by Company A as an existing residential property. Therefore, the premises are not new residential premises under paragraphs 40-65(2)(b) of the GST Act.

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

Property 1

You have advised that this property was originally approved by Council and built for residential use.

This property is currently occupied for commercial and residential purposes. Company C has advised that there is a downstairs room at the back of the property which is used for commercial purposes and has a freestanding fridge and work bench. Further, a number of rooms upstairs have been used as office accommodation. 15% of the property is used for commercial purposes. The remaining 85% is residential accommodation.

No significant modifications have been made to the property. The floor plans provided confirm this view. Further, no prefabricated walls have been erected and a residential tenant could occupy the property without any modifications taking place to the property.

Consequently, we consider that Property 1 is clearly residential premises to be used predominantly for residential accommodation. The minor modifications made to the rear of the property do not alter the principle physical characteristics of the property which are of a house which provides the occupants with sleeping accommodation and the basic facilities for day to day living. The purpose of the premises is for residential accommodation.

Further, you have advised that the property was purchased by Company A as an existing residential property. Therefore, the premises are not new residential premises under paragraphs 40-65(2)(b) of the GST Act.

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