Edited version of private ruling

Authorisation Number: 1011764473391

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Ruling

Subject: Residential premises and GST

Question

Is the proposed sale of the property by Entity A (you) a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer: No.

The proposed sale of the property will be an input taxed supply of residential premises.

Relevant facts and circumstances

Entity A (you) carry on an enterprise and are registered for GST.

You purchased a property (the Property).

At the time of purchase the Property consisted of numerous separate dwellings (cottages).

You obtained a determination providing you with development consent from the City Council which enables you to:

· Demolish one of the existing dwellings;

· Perform tree removal;

· Restore the remaining cottages (premises);

· Construct an at grade car park;

· Construct other buildings to be used as professional suites.

You subsequently demolished the existing dwelling located and the premises now contain only the remaining cottages which are to be restored.

These premises are subject to a heritage listing.

As a condition of the development consent the cottages have to be restored.

The cottages can only be used as residential accommodation due to their heritage status.

You received a Planning Certificate from City Council last year and it states the land is zoned residential 2(a).

You have erected a security fence around the land to prevent squatters using the Property.

You will not be implementing any further part of the development consent.

The cottages are in a dilapidated state however the physical characteristics of each of the cottages show that they have the features of providing basic shelter. That is, the cottages each contain a roof, windows, walls, ceilings, interior and exterior doors.

The cottages contain a kitchen, bathroom, toilet, laundry with tap fittings, and other rooms with interior doors that can be used for living or sleeping, albeit in a dilapidated state.

The cottages have not been occupied during the period of your ownership.

The cottages have electricity and water connected.

You are proposing to sell the Property under a standard land contract for consideration.

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 section 40-65

A New Tax System (Goods and Services Tax) Act 1999 section 195-5

Reasons for Decision

A sale of residential premises will be subject to GST if it constitutes a taxable supply.

Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) must be considered in order to determine if the supply is a taxable supply.

Section 9-5 of the GST Act provides that an entity makes a taxable supply if:

(a) it makes the supply for consideration

(b) the supply is made in the course or furtherance of an enterprise that it carries on

(c) the supply is connected with Australia and

(d) the entity is 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, your sale of the Property will be for consideration. The Property is located in Australia. The supply will be made in the course or furtherance of an enterprise that you carry on. You are registered for GST. Therefore, the supply will be a taxable supply unless it is GST-free or input taxed.

In this situation there is no provision in the GST Act that would make the supply of the Property GST-free, therefore what remains to be determined is if the supply will be an input taxed supply.

You submit that the sale of the Property is an input taxed supply under subsection 40-65(1) of the GST Act. This is because the Property satisfies the requirement of residential premises as it has cottages on the land, albeit in a dilapidated state. You also submit that regardless of the use of the Property or the existence of the development consent this does not change the objective characteristics of the Property from being residential premises. This is consistent with the Federal Court decision reached in Sunchen Pty Ltd v FC of T & Anor [2010] FCAFC 138 (Sunchen case).

In this case, we agree with your submission that the sale of the Property will be input taxed. Our reasons are explained as follows.

Residential Premises

Subsection 40-65(1) 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 (regardless of the term of occupation).

Section 195-1 of the GST Act defines residential premises as 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)…

Goods and Services Tax Ruling GSTR 2000/20: Commercial residential premises (GSTR 2000/20), explains the Commissioner's view on the meaning of the definition of commercial residential premises and provides guidance on the meaning of residential premises.

The paragraphs below have been reproduced from GSTR 2000/20 and state the following:

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. This follows from the definition of commercial residential premises referred to in paragraph 18.

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.

Sleeping accommodation and facilities for human habitation

28. The definition states that residential premises must be capable of occupation as a residence. To be a residence in this sense, a place normally should have the facilities required for day to day living. These characteristics are inherent in the fabrication of the structure itself. The premises should have such things as areas for sleeping, eating and bathing, but it is not necessary that these things be arranged in a similar manner to a conventional house or apartment.

Hence, the issue in this case is whether, on the facts provided, the cottages supplied by you are considered to 'facilitate human habitation' to meet the definition of residential premises in accordance with section 195-1 of the GST Act. This requires that a place normally should have the facilities for day to day living (paragraph 28 of GSTR 2000/20). This is an objective test and depends on the facts of this case. Where premises are in a temporary state of disrepair we would conclude that the premises are still residential premises.

Based on the facts in this case the Property contains numerous dilapidated cottages that can be seen to mark the premises out as residential. Further, consistent with the paragraphs 19, 20 and 26 of GSTR 2000/20 the premises hold the physical characteristic of residential accommodation, albeit in a temporary dilapidated state. That is, the dilapidated cottages exist on the property which:

· have a roof, windows, walls, ceilings, interior and exterior doors, and

· have electricity and water services connected, and

· include rooms for sleeping, eating, bathing and living.

Furthermore, consistent with paragraph 27 of GSTR 2000/20 the other factors that assist in determining the premises are to be used for residential accommodation is that the cottages:

· are heritage listed and must be restored as residential accommodation under the conditions of the development consent, and

· can only be used for residential accommodation.

Objective test and intention and future use of the residential premises

You obtained the necessary development consent from the City Council which allows you to restore the cottages. Further the cottages can only be used for residential purposes.

It is your intention to sell the property and premises without implementing the remaining items of the development consent. That is, you intend to sell the Property as it stands today. Further, the cottages are subject to the condition which states they can only be used for residential accommodation due to their heritage status.

The issue regarding the future use of premises was considered in the Sunchen case. Specifically, the Sunchen case considered whether property purchased was residential premises 'to be used predominantly for residential accommodation' within the meaning of subsection 40-65(1) of the GST Act, so that the supply of the property would be input taxed.

The court held that the phrase 'to be used predominately for residential accommodation' is only concerned with the attributes of the property at the time it is supplied, and to what use those attributes or characteristics are suited. Given this, the intention of the future owner is irrelevant.

As noted in the Decision Impact Statement for the Sunchen case this decision confirms the long held view by the ATO that subsection 40-65(1) of the GST Act requires an objective assessment of the nature of the premises rather than a prediction of future use or consideration of the subjective intention of the future owner.

Therefore in this case we agree with your conclusion that the physical characteristics of the Property you supply are residential premises in accordance with the view in GSTR 2000/20.

In conclusion, a residential premise requires that a place normally should have the facilities for day to day living. These characteristics are inherent in the fabrication of the structure itself, including the facilitation for human habitation. In this case, the cottages contain sleeping, bathing and living facilities by way of water and electricity.

Therefore based on the proposed contract, when you sell the Property the physical characteristics of the cottages are residential premises and you will make an input taxed supply.