Edited version of private ruling

Authorisation Number: 1011739558718

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Ruling

Subject: GST and sale of real property

Question 1

Is the sale of the property purely the sale of a residential premises (and therefore input taxed for GST purposes)?

Answer

No

Question 2

If a portion of the sale is subject to GST, what is the methodology to determine how GST is apportioned?

Answer

A reasonable method of apportionment may be used.

Relevant facts

You (a company) are negotiating the sale of your property.

You are the registered owner of the property.

You are registered for GST.

The prospective purchaser of the property is not registered for GST.

The property was purchased decades ago. A residence was constructed more recently.

No primary or non-primary production was undertaken on the property, and no income of any sort was derived from purchase until the residence was built. The land was vacant.

The residence is currently rented to a tenant for residential accommodation purposes.

The land was zoned rural, but the majority was rezoned to 'environmental protection (habitat)'. As a result no construction activity can be undertaken.

A telecommunications tower was constructed on adjoining (council) land. There was insufficient space on the council land, and so a telecommunications company sought to have ground equipment constructed on your land.

In these circumstances council approved this use of the land, and so a shed housing equipment was constructed on your land recently. The telecommunications company pays you rent per annum for the area containing the shed.

Reasons for decision

Question 1

Summary

The sale of the property is a mixed supply of residential and commercial premises. Therefore a portion of the sale will be subject to GST.

Detailed reasoning

Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that a supply is a taxable supply if:

(a) you make the supply for consideration; and

(b) you make the supply 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.

Section 40-65 of the 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.

Section 195-1 of the GST Act defines residential premises 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.

If a supply is input taxed then no GST is payable on the supply.

Goods and Services Tax Ruling GSTR 2000/20 Goods and Services Tax: 'commercial residential premises' provides guidance in determining what constitutes residential premises for the purposes of the GST Act. The nature of the premises, their current use and intended use are factors to be considered. The premises must also have the physical characteristics to enable them to be occupied as a residence, for example areas for sleeping, eating and bathing.

The house on your property is currently leased to a tenant for residential premises. Based on the information provided, the residence situated on the property is residential premises within the meaning of GST legislation. The supply of the residential premises constitutes an input taxed supply and you will not incur a GST liability on this part of the sale of your property.

However part of your property, comprising the shed housing telecommunications equipment, is subject to a commercial lease. This indicates that this part of your property is not land or a building that is or is intended or capable of being occupied as a residence. It is considered to be commercial rather than residential premises and is therefore not able to be treated as input taxed under section 40-65 of the GST Act.

Commercial leasing constitutes an enterprise because the definition of enterprise includes a series of activities done on a regular or continuous basis in the form of a lease. Following section 9-5 of the GST Act, the supply of the commercial premises will be made for consideration, in the course of an enterprise, the supply is connected with Australia and you are registered. Therefore this part of the supply will be taxable.

The separate leases identify the separate residential and commercial aspects of the property. Both of the leased parts have an aim in themselves. The commercial aspect is separately identifiable and not just ancillary or incidental to the supply. The commercial part doesn't merely contribute to or complement the use or enjoyment of the dominant part of the supply. Also, the lease is for significant value and not just a marginal proportion of the overall rental value of the property.

This means that the essential character of the supply of the real property is mixed and involves taxable and non-taxable parts. Your circumstances align with the definition of a mixed supply under GSTR 2001/8. Paragraph 70 of GSTR 2001/8 provides an example of a mixed supply of commercial and residential premises.

It is also necessary to classify the remaining parts of the property that are not clearly identified in the information provided. The classification of the remaining area of the property is dependent on the nature of the usage of that area. If, for instance, the land is used for purposes which bear a relationship to the operation of telecommunications equipment then it would be reasonable to classify the usage of that part of the land as commercial. If, however, the land is used in a manner which relates directly to the occupation of the residence then the land should be classified accordingly. This may depend on the area covered by the leases, the access rights given and so on.

You have advised that the current prospective purchaser (recipient of the supply of real property) is not registered for GST. The purchase of the commercial part of the property will therefore not be a creditable acquisition to the recipient of that supply. However, if a prospective purchaser was registered this may be a creditable acquisition or alternatively the GST 'supply of a going concern concession' may apply. A supply is a 'supply of a going concern' when all of the things necessary to continue the operation of that part of the enterprise as an independent enterprise are supplied (see paragraph 30 GSTR 2002/5 Goods and services tax: when is a 'supply of a going concern' GST-free?) If you carried out the commercial leasing enterprise until the day of the supply, all things necessary to continue this enterprise were supplied, the recipient was registered, consideration is provided and you agree in writing that the supply is a supply of a going concern, then this GST concession may apply.

Question 2

Summary

A reasonable method of apportionment may be used.

Detailed reasoning

Section 9-80 of the GST Act deals with supplies that are partly taxable and partly GST-free or input taxed. The value of the part of the actual supply that is a taxable supply is the proportion of the value of the actual supply that the taxable supply represents.

GSTR 2001/8 provides assistance in how you work out the value of the part of such a supply that is a taxable supply. Under the methodology given by GSTR 2001/8, 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. You can use any reasonable method to apportion the consideration, but the method must be supportable in the circumstances and you should keep records to explain the method that you used.

Examples of the methods you can use are detailed in paragraphs 97 to 113 of the ruling. Direct methods of apportionment such as the relative price of the rent for each component and the relative floor area may be used (see for example examples 14 and 17 in the ruling which deal with residential and commercial premises).

The ruling also provides details on how to calculate the GST payable on the taxable part of a mixed supply. The amount of GST is 10% of the value of the taxable supply, or 1/11 of the price or consideration for the taxable part.