Edited version of private ruling

Authorisation Number: 1011646293604

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Ruling

Subject: GST and acquisition of real property

Question 1

Whether the properties are residential premises pursuant to section 195-1 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

The properties 1 and 2 are residential premises.

The property 3 is not residential premises.

Question 2

Whether the supply of the properties to you is input taxed pursuant to section 40-65 of the GST Act?

Answer

The supply of the properties 1 and 2 is input taxed.

The supply of the property 3 is not input taxed.

Question 3

Whether you have made creditable acquisitions in relation to the purchases of the properties?

Answer

Yes, you have made a creditable acquisition in relation to the purchase of property 3.

No, you have not made creditable acquisitions in relation to the purchase of properties 1 and 2

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You are registered for goods and services tax (GST).

You entered into contract of sale (Contract) to acquire three properties located in Australia.

The Contract was subject to and conditional upon you contemporaneously completing concurrent contracts for the three properties.

The vendors are also registered for GST.

The three properties were advertised jointly as a redevelopment site. No development plan was provided with the sale of the properties.

You have described the properties 1 and 2 as in poor condition.

In the telephone conversation between the case officer and your tax agent it was advised that properties 1 and 2 were not condemned by the Council.

A contract has been signed for the demolition/removal of properties 1 and 2.

Property 1

· The property consists of a residential house in poor condition and contains basic kitchen, bathroom, living and bedroom facilities.

· The property was rented to an individual from the date of acquisition for more than 10 years and then it was used as storage until sold.

· The property was vacant at the time of supply as it was used for storage.

· The property has previously been occupied as a residence and the contract stipulates that the present use of the property is a residential dwelling.

· The property is zoned for residential use by the local Council.

· The property is connected to, or has access at the boundary to utilities such as sewerage, water, electricity and communications.

· The vendors have used the property for making taxable supplies (storage of equipment) to a related entity. The equipment was stored in the lounge room and underneath the house. The remainder of the property was vacant and not used for any purpose.

· There was no formal lease agreement between the vendors and the related entity.

· The vendors made no structural changes to the property to accommodate the business activities.

Property 2

· The property consists of a residential house in poor condition and contains basic kitchen, bathroom, living and bedroom facilities.

· The property is adjacent to property 1.

· The property was vacant from the date of acquisition to the time of supply by choice of the vendors.

· The property was acquired by the vendors several years ago.

· The property has previously been occupied as a residence and the Contract stipulates that the present use of the property is a residential dwelling.

· The property is zoned for commercial use by the local Council but permits occupation of the property as residence.

· The property is connected to, or has access at the boundary to utilities such as sewerage, water, electricity and communications.

· Property 2 has not been used for making any taxable supplies to any entity.

Property 3

· Property 3 consists of a vacant block of land and a shed.

· The Contract for Property 3 stipulates that the present use of the property is a shed and car storage shed.

· Property 3 is in the vicinity of the other two premises.

· Property 3 has been used for making taxable supplies (storage to a third party).

Reasons for decisions

Question 1

Summary

The properties 1 and 2 are residential premises as defined under section 195-1 of the GST Act as they can provide an occupant with shelter and basic living facilities

The property 3 can not provide an occupant with shelter and basic living facilities and therefore is not considered to be residential premises as defined under section 195-1 of the GST Act.

Detailed reasoning

The term 'residential premises' is defined in section 195-1 - Definition to mean:

residential premises 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.

*The asterisk denotes a defined term in the Act.

The ATO has issued Goods and Services tax ruling GSTR 2000/20 to provide guidance on what is considered to be residential premises.

The definition requires that land must have a building affixed to it and that the building must have the physical characteristics that enable it to be occupied or be capable of occupation as a residence or for residential accommodation.

We take the word intended in the context of the definition of residential premises to mean designed and built to be occupied. Therefore, what is supplied is determined by design and function, and not by the personal inclinations of the acquirer.

Paragraph 20 of GSTR 2000/20 provides the view of the ATO on the meaning of to be used for 'residential accommodation' or 'occupied as a residence'. It states:

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…

You have provided the following information on the properties:

Property 1

· The property consists of a residential house in poor condition and contains basic kitchen, bathroom, living and bedroom facilities.

· The property was rented to an individual from the date of acquisition for more than 10 years and then it was used as storage until sold.

· The property was vacant at the time of supply as it was used for storage.

· The property has previously been occupied as a residence and the contract stipulates that the present use of the property is a residential dwelling.

· The property is zoned for residential use by the local Council.

· The property is connected to, or has access at the boundary to utilities such as sewerage, water, electricity and communications.

· The vendors have used the property for making taxable supplies (storage of equipment) to a related entity. The equipment was stored in the lounge room and underneath the house. The remainder of the property was vacant and not used for any purpose.

· There was no formal lease agreement between the vendors and the related entity.

· The vendors made no structural changes to the property to accommodate the business activities.

Property 2

· The property consists of a residential house in poor condition and contains basic kitchen, bathroom, living and bedroom facilities.

· The property is adjacent to property 1.

· The property was vacant from the date of acquisition to the time of supply by choice of the vendors.

· The property was acquired by the vendors several years ago.

· The property has previously been occupied as a residence and the Contract stipulates that the present use of the property is a residential dwelling.

· The property is zoned for commercial use by the local Council but permits occupation of the property as residence.

· The property is connected to, or has access at the boundary to utilities such as sewerage, water, electricity and communications.

· Property 2 has not been used for making any taxable supplies to any entity.

Property 3

· Property 3 consists of a vacant block of land and a shed.

· The Contract for Property 3 stipulates that the present use of the property is a shed and car storage shed.

· Property 3 is in the vicinity of the other two premises.

· Property 3 has been used for making taxable supplies (storage to a third party).

As provided above, the properties 1 and 2 are capable of providing sleeping accommodation and the basic facilities for daily living.

You have provided that the properties above are in poor condition.

Although the poor condition would make it more difficult for a person to live in the premises comfortably, you have provided that that the premises have not been condemned by the local council. We consider that the premises were capable of being occupied as a residence, with some minor maintenance.

As such, the premises above are residential premises as defined under section 195-1 of the GST Act.

You have provided information on property 3 as follows:

· Property 3 consists of a vacant block of land and a shed.

· The Contract for Property 3 stipulates that the present use of the property is a shed and car storage shed.

· Property 3 is in the vicinity of the other two premises.

· Property 3 has been used for making taxable supplies (storage to a third party).

This property does not provide the occupant with shelter and basic living facilities and therefore is not considered to be residential premises as defined under section 195-1 of the GST Act.

Question 2

Summary

The supply of the properties 1 and 2 is input taxed.

The supply of the property 3 is not input taxed.

Detailed reasoning

Subsection 40-65(1) of the GST Act states 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).

Therefore, the supply of the premises is input taxed if both of the following requirements are met:

· the real property is a residential premises, and

· it is to be used predominantly for residential accommodation

The question of whether the properties are residential premises has been addressed above. Property 3 is not a residential premises and therefore, the GST treatment under section 40-65 of the GST does not apply to make the supply input taxed. We will consider whether you (the purchaser) acquired this property for a creditable purpose in question 3.

To be used predominantly for residential accommodation

Paragraph 19 of GSTR 2000/20 explains the meaning of the term 'to be used predominantly for residential accommodation':

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.

Paragraph 26 of GSTR 2000/20 provides an explanation of the term 'physical characteristics of residential premises': It states:

The physical characteristics 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.

We noted that property 1 had been used as storage for used equipment by a related entity.

Paragraphs 22 and 23 of GSTR 2000/20 provide the view of the ATO where a house is used for different purposes:

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 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. A home office in a house will not generally be sufficiently separate from the rest of the residential premises to distinguish its use and its predominant use will still be residential accommodation.

The supply occurs when settlement for the real property is completed. The definition of residential premises is applied to whatever is supplied at settlement. It will be the "physical characteristics" that will determine that enable the premises in question to be occupied as a residence.

The character of what is supplied is determined by all of the facts and circumstances surrounding the supply, primarily as reflected in the contractual arrangements between the supplier and the recipient.

There are a number of factors that can be taken into account when determining whether the premises have commercial characteristics:

· whether the area is clearly identifiable as a place of business

· whether the are is not readily suitable or adaptable for use for private or domestic purposes in association with the house generally

· whether the area is used exclusively or almost exclusively for business purposes

· whether the are is used regularly for visits by clients or customers

· current zoning of the property, and

· whether there are separate facilities available for toilets, parking etc and the business does not rely on the use of any areas of the residential premises.

In your circumstances:

· the property 1 has not been converted into commercial property in any part. You have provided that apart from storage of used equipment, no other portion of the premises has been utilised for the purposes of the business activities of the vendors.

· the vendors made no material structural changes to the property 1 in order to accommodate their business activities and therefore will need no renovation to convert the current use of the storage area to residential use purposes.

In your circumstances the properties 1 and 2 have all the physical characteristics that enable them to be used for residential accommodation. Although some areas of the premises were used as storage areas, this does not give the areas a character different from the rest of the property.

Therefore, it is considered that the premises were used predominantly for residential accommodation and accordingly the supply of the properties 1 and 2 is input taxed supply under section 40-65 of the GST Act.

Question 3

Summary

You have made creditable acquisition in relation to the purchase of property 3 as all of the requirements under section 11-5 of the GST Act are met.

You have not made creditable acquisitions in relation to the purchase of properties 1 and 2 as all of the requirements under section 11-5 of the GST Act are not met

Detailed reasoning

Section 11-5 of the GST Act states that:

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 liable to provide, *consideration for the supply; and

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

An input tax credit in respect of an acquisition is available under section 11-20 of the GST Act if the acquisition is a creditable acquisition as defined in section 11-5 of the GST Act. The definition contains four conditions which all must be met, for an acquisition to be creditable:

· the acquisition must be solely or partly for a creditable purpose (as defined in section 11-15 of the GST Act)

· the supply that was acquired must be a taxable supply (as defined in section 9-5 of the GST Act) by the supplier

· consideration must have been provided for the acquisition, and

· the entity acquiring the supply must be registered or required to be registered for GST.

The acquisitions of properties 1 and 2

In your circumstances, the supply of the properties 1 and 2 to you is input taxed supply and therefore, the acquisitions do not meet the conditions in section 11-5 of the GST Act to be creditable.

The acquisition of property 3

All of the conditions for an acquisition to be creditable are considered as follows:

Creditable purpose

One of the conditions that must be satisfied for an acquisition to be creditable is that the acquisition must be made for a creditable purpose. Section 11-15 of the GST Act states:

(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.

…

You are registered for GST. Under section 23-5 of the GST Act, you can only register for GST if you are carrying on an enterprise. You have advised that the enterprise for your GST registration is 'Non-Residential Property Operators' and you acquired the property for the specific purpose of development. Therefore, the first requirement under subsection 11-5(1) of the GST Act is met.

However, you will not acquire the property for a creditable purpose if you develop the property in order to make input taxed supplies. For example you develop the property into rental residential property which is an input taxed supply under section 40-35 of the GST Act. [Emphasis added].

Furthermore, where the development is not for residential rent, the acquisition is not made for a creditable purpose if you use the property for a private purpose.

The supply of the thing to you is a taxable supply

The supply of the property to you is a taxable supply if all of the requirements under section 9-5 of the GST Act are met. Section 9-5 of the GST Act states:

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 Australia; 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 your circumstances:

· the supply of the property to you is made for monetary consideration

· the supply is connected with Australia because the property is in Australia (subsection 9-25(4) of the GST Act)

· the supplier is registered for GST

· the supply of the property to you is not input taxed or GST-free under any Act.

You cannot ascertain whether the supply is made in the course or furtherance of an enterprise that the supplier is carrying on because you are the recipient of the supply.

However, where the supplier is registered for GST and issues the recipient with a tax invoice, and the supply is not input taxed or GST-free, prima facie we accept that the requirement under paragraph 11-5(b) of the GST Act is met.

Consideration

You have provided monetary consideration for the acquisition of the property. The requirement under paragraph 11-5(c) of the GST Act is met.

GST registration

You have provided that you are registered for GST. The requirement under paragraph 11-5(d) of the GST Act is met.

As all of the requirements under section 11-5 of the GST act are met, you made a creditable acquisition in relation to the purchase of the property 3.