Edited version of private ruling

Authorisation Number: 1011726306360

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Ruling

Subject: sale of real property

Question

Is goods and services tax (GST) applicable to the sale of a real property (Property)?

Answer: No.

Relevant facts:

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

You carry on an enterprise of retailing on the Property.

The Property is a single storey building on a block of land.

The Property has a kitchen, bathroom and bedrooms.

Currently part of the Property is being used as a retail store.

The Property has never been modified to accommodate a retail store. The fittings on the Property for the retail business are free standing and cosmetic.

Prior to 2 December 1998 the Property had been used for residential accommodation. Since then the Property has had a number of small retail shops operating out of it.

You advised that you are selling the Property as residential premises and the retail business will be transferred to another store.

Reasons for decision

The issue for us to consider is whether the Property is residential premises for GST purposes and, if so, the sale will be considered under section 40-65 of the GST Act. 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 recipient.

The Property is a single storey building on a block of land. It has a kitchen, bathroom and bedrooms. Prior to 2 December 1998 the Property was used for residential accommodation. Since then the Property has had a number of small retail shops operating out of it.

The Property has never been modified to accommodate a retail store and retains its original character. The retail business fittings are free standing and cosmetic and are removed before the sale.

Residential Premises

The term residential premises is defined in section 195-1 of the GST Act as land or a building that (a) is occupied as a residence; or (b) is intended to be occupied, and is capable of being occupied, as a residence.

Goods and Services Tax Ruling GSTR 2000/20 explains the meaning of the term residential premises for GST purposes. We enclose a copy for your reference

Paragraphs 25 to 29 of GSTR 2000/20 explain the physical characteristics of residential premises for the purposes of section 195-1 of the GST Act:

25. 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. Vacant land of itself can never have sufficient physical characteristics to mark it out as being able to be or intended to be occupied as a residence or for residential accommodation.

26. 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.

27. In addition to the physical characteristics, there are other factors which may be of use in determining whether premises are to be used for residential accommodation or accommodation of another kind. These characteristics would usually be present in residential premises that have the physical characteristics given in paragraph 26. These often, but not always, include:

(i) The purpose or context of the premises use is for personal accommodation, rather than 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. Any boarders, lodgers or guests occupy the premises by private arrangement with the owner, tenant or lessee.

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

In your case the Property is a single storey building on a block of land and it displays the physical characteristics common to residential premises such as having a kitchen, bathroom and bedrooms. The Property is capable of occupation as a residence as it was used as residential premises before 2 December 1998.

As stated above in paragraph 31 of GSTR 2000/20, the 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.

In your case although the Property has had a number of small retail shops operating out of it, the Property retains its original character and has never been modified to accommodate a retail store. The retailing business fittings free standing and cosmetic and are removed before the sale.

Therefore the Property satisfies the definition of residential premises in section 195-1 of the GST Act as it is capable of being occupied as a residence or for residential accommodation.

Sale of residential premises

Section 40-65 of the GST Act is about the sale of residential premises and will apply to the sale of the Property. Subsection 40-65(1) of the GST Act 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.

Paragraph 18 to 23 of GSTR 2000/20 outlines the ATO view on residential premises that are used as predominantly for residential accommodation. Paragraphs 19, 20, 22 and 23 of GSTR 2000/20 state:

19. 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…

22. 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 …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.

In your case, the Property has the physical characteristics that mark them out as a residence. It was used as residential premises before 2 December 1998. The fittings for the retail businesses are free standing and do not form part of the residential premises. Therefore, we consider the Property is residential premises to be used predominantly for residential accommodation.

However, subsection 40-65(2) of the GST Act provides that the sale of residential premises is not input taxed to the extent that they are:

· commercial residential premises; or

· new residential premises other than those used for residential accommodation before 2 December 1998.

We consider the exceptions in subsection 40-65(2) of the GST Act do not apply to the sale of the Property for the following reasons:

· paragraphs 62 to 109 of GSTR 2000/20 outline the meaning of commercial residential premises. Paragraph 83 in particular lists the main characteristics of commercial residential premises. The Property does not display these characteristics and is therefore not commercial residential premises.

· paragraph 40-65(2)(b) of the GST Act does not apply to sale of the Property because it was used as residential premises before 2 December 1998.

In conclusion, based on the information provided we consider the Property is residential premises to be used predominantly for residential accommodation and subsection 40-65(2) of the GST Act does not apply to the Property. The sale of Property will be an input taxed supply of residential premises under subsection 40-65(1) of the GST Act. There is no provision in the GST Act for the sale of the Property to be a GST-free supply.