Edited version of private ruling

Authorisation Number: 1011825411404

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Ruling

Subject: Sale of accommodation premises

Question

Will the sale of accommodation premises be an input taxed supply in accordance with section 40-65 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes, the sale of the accommodation premises will be an input taxed supply in accordance with section 40-65 of the GST Act.

Relevant facts and circumstances

Entity A is currently the owner of the specified accommodation premises.

Entity A was established as a Special Purpose Vehicle (SPV) for the development of the property.

The premises consist of residential premises and commercial premises.

Construction of the premises commenced on a specified date.

Construction was completed on a specified date.

Entity A did not claim input tax credits on the construction costs related to the residential component of the premises.

Entity A has not claimed input tax credits on subsequent costs related to the residential component of the premises.

The commercial premises are subject to numerous leases and operating and maintenance agreements.

The residential premises consist of numerous apartments capable of accommodating a specified number of occupants.

The residential premises consist of studio apartments (available in either regular and deluxe), two bedroom apartments (regular, deluxe and terrace) and three or four bedroom apartments (regular, superior and deluxe).

The studio apartments are fully furnished, including a single bed, table, chairs and sofa (couch), built-in wardrobe, drawers and shelving. The study area has an oversized desk and chair. The kitchen area contains modern appliances and the separate bathroom contains a shower, toilet, basin and shelving.

The two bedroom apartments are also fully furnished and contain two separate single bedrooms with study area, bathroom and a modern kitchen that opens onto the living / dining area. The bedrooms are lockable with a single bed and mattress with base storage. The study area has a desk, chair and shelving. The built-in wardrobe and drawers offer plenty of storage. The separate shared bathroom contains a shower, toilet, basin and shelving.

The three and four bedroom apartments are fully furnished with separate single bedrooms, two bathrooms and a modern kitchen with an open planned living / dining area. The bedrooms are secure and lockable with a single bed and mattress, built-in wardrobe and drawers. The study area has a desk, chair and shelving. The three bedroom apartment has one separate shared bathroom with additional separate toilet while the four bedroom apartment has two full sized bathrooms.

The residential premises are not divided into individual strata titles and are subject to individual licences and one operating agreement and one maintenance agreement.

The first licence to occupy the residential premises was signed and commenced on a specified date.

Entity A contemplated the transfer of the premises asset by way of the sale of shares in Entity A.

This option was abandoned and Entity A began considering the alternative of selling the underlying premises.

An Asset Sale Agreement between the parties was first drafted on a specified date for the transfer of the premises.

Subsequently, Entity A entered into an Asset Sale Agreement with Entity B for the sale of the premises.

Settlement will occur after the date the Asset Sale Agreement was entered into and prior to a specified date.

Entity A did not actively market the premises for sale. Entity A did not list the premises for sale with a real estate agent or advertise the premises for sale in relevant publications.

Entity A continued to not claim ITCs on costs associated with the residential component of the premises.

The accounting and financial statements of Entity A did not treat the premises as being held for sale.

Entity A does not have a history of developing and selling new residential premises.

Entity A's business plan in constructing the premises did not include the contemplation of sale of the premises.

Taxpayer contentions:

During the period Entity A contemplated the sale of the premises, Entity A did not treat the premises as being held for sale for GST purposes.

During this period, Entity A did not hold or apply the premises for the purpose of sale. The premises were held and being used solely for the purpose of generating residential lease income.

Although Entity A contemplated that it may sell the premises, you maintain that the premises were not being held and applied for that purpose of sale, but rather were still being used and held solely for the purpose of generating residential and commercial lease income. Therefore you do not consider that the intention to sell the premises during that period created a dual purpose which interrupted the 5-year period stipulated in subsection 40-75(2) of the GST Act.

Reasons for decision

The premises consist of residential premises (apartments) and commercial premises. It is acknowledged that the commercial component of the premises will be a taxable supply with the vendor (Entity A) being liable for GST on the sale of the commercial component. As such, the following explanation is limited to the residential (apartments) component of the sale.

Subdivision 40-C of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) contains provisions relating to the GST classification of the sale of residential premises.

Section 40-65 of the GST Act states:

40-65 Sales of residential premises

(1) 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).

(2) However, 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 those used for residential accommodation (regardless of the term of occupation) before 2 December 1998.

Residential premises are defined in section 195-1 of the GST Act 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) and includes a *floating home.

[note: the terms marked with an * are defined in section 195-1 of the GST Act. ]

Goods and Services Tax Ruling GSTR 2000/20 Goods and Services Tax: commercial residential premises provides guidance in regard to the definition of residential premises. Paragraph 25 of GSTR 2000/20 states that 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.

In this case the premises contain the physical characteristics common to residential premises that provide accommodation such as sleeping, kitchen and bathroom facilities and were designed and constructed for this purpose. As such, it is considered the premises fall within the definition of residential premises for GST purposes.

The premises are not considered to be commercial residential premises.

Paragraph 40-65(2)(b) of the GST Act excludes 'new residential premises' from being input taxed. The definition of new residential premises is contained in section 40-75 of the GST Act and states in part:

40-75 Meaning of new residential premises

(1) *Residential premises are new residential premises if they:

(a) have not previously been sold as residential premises (other than *commercial residential premises) and have not previously been the subject of a *long-term lease; or

(b) have been created through *substantial renovations of a building; or

(c) have been built, or contain a building that has been built, to replace demolished premises on the same land.

(2) However, the premises are not new residential premises if, for the period of at least 5 years since:

(a) if paragraph (1)(a) applies (and neither paragraph (1)(b) nor paragraph (1)(c) applies) - the premises first became *residential premises; or

(b) if paragraph (1)(b) applies - the premises were last *substantially renovated; or

(c) if paragraph (1)(c) applies - the premises were last built;

the premises have only been used for making supplies that are *input taxed because of paragraph 40-35(1)(a).

The relevant paragraphs of the definition of new residential premises in this case are paragraphs 40-75(1)(a) and 40-75(2)(a) of the GST Act.

In accordance with paragraph 40-75(1)(a) of the GST Act, residential premises that have not previously been sold as residential premises and have not previously been the subject of a long-term lease are new residential premises.

In this case, the premises have not been sold previously as residential premises or been the subject of a long-term lease, as such, satisfying the positive limb of subsection 40-75(1) of the GST Act. However, subsection 40-75(2) of the GST Act provides that premises will not be new residential premises where the premises have only been used for making input taxed supplies of residential rent in accordance with paragraph 40-35(1)(a) of the GST Act for a period of five years since the premises first became residential premises.

In this case, construction of the premises was completed on a specified date. It is considered that the premises first became residential premises as at this date and you advised that the premises were constructed and held for the express purpose of making input taxed supplies.

In regard to the application of subsection 40-75(2) of the GST Act, GSTR 2003/3 states at paragraph 91 that we consider that the 5 year period must be a continuous period. Therefore, the issue is whether the premises have only been used for making input taxed supplies of residential rent for a continuous period of 5 years from the time construction was completed.

While the premises were held and used for the purpose of making input taxed supplies of residential rent for a specified period, in order to satisfy subsection 40-75(2) of the GST Act, the premises must have been used solely for this purpose during the 5 year period.

Goods and Services Tax Ruling GSTR 2009/4 Goods and services tax: new residential premises and adjustments for changes in extent of creditable purpose states at paragraph 132 that the term 'used' in subsection 40-75(2) of the GST Act and the meaning of 'apply' for the purposes of Division 129 of the GST Act should be interpreted consistently. That is, the relevant meanings are largely synonymous.

The concept of 'dual application' or 'use' of new residential premises is also discussed in GSTR 2009/4 which acknowledges that an entity may apply or use new residential premises for the purpose of making input taxed supplies of residential rent whilst concurrently holding the premises for the creditable purpose of sale of new residential premises. Where new residential premises have been applied for this dual purpose then the requirements of subsection 40-75(2) will not be satisfied.

Paragraph 41 of GSTR 2009/4 states that the concept of holding a thing for the purpose of sale as part of an enterprise is similar to holding a thing for the purpose of trade. Miscellaneous Taxation Ruling MT 2006/1 The New Tax System: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number discusses a number of factors which help identify whether or not an entity is engaged in trade or, rather in this context, holds a thing for the purpose of sale, including:

· the subject matter - if a thing provides either a regular or periodic income (such as through rental income) or personal enjoyment to the owner it is more likely to be an investment rather than a trading asset; however, a large quantity of goods is likely to point towards trade;

· the length of period of ownership - trading assets are generally traded within a short time after acquisition;

· the frequency or number of similar transactions - the greater the frequency of transactions the greater the likelihood of trade;

· improving a property beyond merely preparing it for sale - this suggests an element of trade;

· the circumstances responsible for a sale; and

· motive (if an objective assessment of the other factors is not conclusive).

Paragraphs 45 and 46 of GSTR 2009/4 provide a number of factors which may be considered when demonstrating whether premises are being held for the purpose of sale or, to some extent, held in relation to making input taxed supplies including:

· marketing of the premises;

· financial statements and accounting reports;

· business plans, feasibility studies or minutes of meetings;

· past activities of the entity; and

· periods of actual leasing of the premises.

It is necessary to consider these factors on balance and there must be satisfactory evidence to support a conclusion that the premises are being held for sale, or for some other purpose. No single factor or piece of evidence will be sufficient, particularly where other evidence suggests a contrary purpose. For example, the fact that the premises were not marketed for sale through usual channels will not of itself support a conclusion that the premises were not held for sale, as negotiations may have already been entered into with a prospective buyer.

Your tax agent contends that during the period you intended to sell the premises does not constitute the premises being held for a dual purpose. We agree that an intention to sell at some time in the future without more, will not necessarily amount to an application of the premises for sale. However, the fact that an Asset Sale Agreement was drafted on a specified date and subsequently entered into, suggests that the premises were held for sale at some point during (or prior to) this period. Therefore, it is relevant to consider whether the premises were held for a dual purpose prior to the expiration of the 'five year period'.

We accept that the premises continued to be held solely for rental during the period that negotiations took place to transfer the assets of the company by selling the shares in Entity A. We also acknowledge that 'turning your mind' to selling an asset will not constitute the property being held for sale. It follows that the mere drafting of an Asset Sale Agreement by itself would not necessarily be conclusive. However, given the negotiations between Entity A and Entity B for Entity B to acquire the premises and the timeframe from the drafting and signing of the agreement we consider that the negotiations had progressed beyond merely 'contemplating' the sale of the premises.

In the absence of any facts to the contrary, we consider that on balance the evidence supports that the premises were held for sale at the time that the agreement was drafted. Entity A is considered to have held the premises for the sole purpose of making input taxed supplies residential accommodation for a period in excess of five years. From the date the agreement was drafted, Entity A is considered to have applied the premises for dual purposes concurrently. That is, they applied the premises for the purpose of both making input taxed supplies residential accommodation in accordance with paragraph 40-35(1)(a) of the GST Act and, in this case, an input taxed supply of residential premises under section 40-65 of the GST Act.

As such, as the premises were only used for making input taxed supplies of residential rent (under section 40-35 of the GST Act) for a continuous period of 5 years prior to the sale of the property, the premises are not 'new residential premises'. Therefore, the sale of the residential premises (comprising the student accommodation premises and associated communal areas) will be an input taxed supply in accordance with section 40-65 of the GST Act.