Edited version of private ruling

Authorisation Number: 1011836516938

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Ruling

Subject: GST and renovation and sale of property

Questions

1. Does the individual's sale of the strata titled units ('sale units') constitute an enterprise under section 9-20 of the A New Tax system (Goods and Services Tax) Act 1999 (GST Act)?

2. If all of the listed alterations are undertaken, will the sale of a sale unit by the individual constitute a sale of new residential premise as defined in section 40-75 of the GST Act?

3. If all of the listed alterations including converting units X and Y to a larger unit are undertaken, will the sale of a sale unit by the individual constitute a sale of new residential premise as defined in section 40-75 of the GST Act?

Advice

1. The individual's sale of the strata titled units will constitute a supply they will be making in the course of the leasing enterprise they are carrying on under paragraph 9-20(1)(c) of the GST Act.

2. Yes, where all of the listed alterations are undertaken, the sale of a sale unit by the individual will constitute a sale of new residential premise as defined in section 40-75 of the GST Act.

3. Yes, where all of the listed alterations including converting units X and Y to larger units are undertaken, the sale of a sale unit by the individual will constitute a sale of new residential premise as defined in section 40-75 of the GST Act.

Relevant facts

You are an individual and are an investor in properties. You currently do not have an Australian business number (ABN) and are not registered for the goods and services tax (GST). You have advised that you are not required to be registered for GST.

You currently own two blocks of units in Australia (Property A and Property B) which are leased out to third parties for rental income

You previously owned several properties which were leased and sold after holding them for rental purposes for some time. Some of the properties were renovated before their sale.

Property A

You acquired Property A from a third party after July 2000 and paid no goods and services tax (GST) on the basis that the supply to you was a supply of existing residential premises.

Property A constitutes a 3 storey block of units; the features of which were provided in your application:

After you completed the purchase of the property, you have been renting the units to third parties for rental income. You bought the property with existing leases and new leases have been entered into in respect of a number of units due to the passage of time and tenants moving on.

The garages have been separately leased. All but one of the garages are leased and the remaining garage is used by you for storage. You have advised that the annual rental income for these garages is less than $75,000.

You will have alterations done to the property and you will cease renting out the property to third parties at the commencement of such alterations. Instead you will receive a monthly rental payment from a developer with whom you will have a Development Agreement in regard to the renovation and development of the property.

You plan to sell all the units except one which will be kept as a long term rental investment.

Alterations

The alterations to be done on the property are as follows:

The property is currently on one Torrens title land title. It is proposed that the property be strata titled into separate titles for each unit.

Structural

· removal of fire escape to some units and new fire stairs constructed

· new main entry to the building;

· lift

· additional bedrooms for some units

· lock up storage areas

· Balconies will be added to some units

· New timber decks and screens will be added to some units

· some internal structural changes ie some rooms converted to different uses

· On the current alteration proposal the floor space of the building will be increased.

· Garage will be remodelled to provide extra parking spaces

Non-structural

· New kitchens and bathrooms, hot water systems and electrical wiring, air conditioning and fans.

Cosmetic

· Alterations relating to a new façade, front boundary fence and new flooring in common areas, plus new carpet and painting.

Reasons for decisions

Question 1

The term enterprise is defined in subsection 9-20(1) of the GST Act to include, amongst other things, an activity, or series of activities done:

(c) on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property.

You advise that you currently own X blocks of units and Y garages located in Australia and you are currently leasing these units and all but one of the garages. You also state that you previously owned other properties in Australia, rented them and then sold them. In this instance, your activity of letting properties on a regular and continuous basis meets the definition of enterprise in paragraph 9-20(1)(c) of the GST Act.

Accordingly, you are carrying on a leasing enterprise for the purposes of the GST Act.

You further advise that you are considering renovating Property A, strata title the property in separate titles for each unit, selling all but one of the units and leasing the remaining unit after the renovation is done.

In this instance we consider the sale of all but one of the strata titled units will be a supply that you will make in the course of the leasing enterprise which you are carrying on because these units are part of the assets that you are holding while carrying on your leasing enterprise. When selling these units you are selling X of the assets of that leasing enterprise hence reducing the size and scale of your leasing enterprise.

Similarly, when you will receive the monthly income from the developer while they carry on the renovation on the property, you will be making a supply in the course of the leasing enterprise that you are carrying on as the purpose of this monthly income is to allow the related company access the property. Hence this income is connected to your leasing enterprise.

For more information in regard to letting out of residence and disposal of assets please refer to the following publications which are available at www.ato.gov.au

· Goods and Services Tax Determination GSTD 2000/9 - If you let out a residence do you need to get an ABN for PAYG purposes or register for GST?

· Goods and Services Tax Ruling GSTR 2001/7 - meaning of GST turnover, including he effect of section 188-25 on projected GST turnover.

Summary

When you will sell the X strata titled units, you will be making a supply in the course of the leasing enterprise that you are carrying on under paragraph 9-20(1)(c) of the GST Act.

Questions 2 and 3

Section 40-65 of the GST Act provides that a sale of real property is input taxed to the extent that it is residential premises to be used predominantly for residential accommodation. However, the sale is not input taxed to the extent that the premises are commercial residential premises or new residential premises other than those used for residential accommodation before 2 December 1998.

Paragraph 40-75(1)(b) of the GST Act provides that premises will be considered to be new residential premises if they have been created through substantial renovations of a building. In this instance, the sale of the new premises may be a taxable supply if the requirements in making a taxable supply under section 9-5 of the GST Act are satisfied.

New residential premises are created through 'substantial renovations' when an owner of residential premises does work to it that satisfies the definition of 'substantial renovations' in section 195-1 of the GST Act. Where new residential premises are created through substantial renovations, the owner of the residential premises is not required to do the renovation work themselves and can contract someone else to do the renovation work on their behalf.

The term 'substantial renovations' is defined in section 195-1 of the GST Act as:

renovations in which all, or substantially all, of a building is removed or is replaced. However, the renovations need not involve removal or replacement of foundations, external wall, interior supporting walls, floors, roof or staircases.

Substantial renovations are discussed at paragraphs 53 to 87 in Goods and Services Tax Ruling GSTR 2003/3 (available at www.ato.gov.au)

As stated in GSTR 2003/3, neither the term 'renovation' nor 'building' is defined in the GST Act, and therefore, take their ordinary meanings. The general usage of the term 'renovate' means 'to make new or as if new again; restore to good condition; repair; to reinvigorate; refresh; revive'. However the term needs to be considered in light of the surrounding words in the definition of substantial renovation. In the context of the definition, we consider 'renovations' can be categorised as structural, non-structural or cosmetic work.

The word 'building' means 'a substantial structure with a roof and walls, as a shed, house, department store and so on'. For a renovation to affect the building as a whole, work must be done to the whole, or a large part (for example, most of the rooms) of the building itself.

Work which is not directly attributable to a building, for example, landscaping of surrounding land or replacement of a boundary fence, are excluded because it is not work to a building.

Criteria for substantial renovations

Paragraphs 60 and 61 of GSTR 2003/3 state:

60. Whether renovations are substantial is to be determined in the light of all the facts and circumstances.

61. We consider that for substantial renovations to occur for the purposes of the GST Act the renovations need to satisfy the following criteria before it is necessary to make further inquiry to establish whether the renovations are substantial:

(i) the renovations need to affect the building as a whole; and

(ii) the renovations need to result in a removal or replacement of all or substantially all of the building.

Both of the above criteria must be satisfied. Each criterion is discussed in more detail below.

(i) The renovations need to affect the building as a whole

Paragraph 64 of GSTR 2003/3 states:

64. Whether substantial renovations have occurred should be based on consideration of the building in its entirety, that is the building as a whole, and not by reference to specific or individual rooms in the building. For renovations to be substantial they must directly affect most rooms in a building. The renovation of only one part of a building, without any work on the remaining parts of the building, would not constitute substantial renovations.

From the description of the work to be carried out at the property it is clear that every area in the property will be affected to some extent by the renovation.

However, we need to consider whether the work to be done to the property will be sufficient to satisfy the second part of the requirements that are set out in paragraph 61 of GSTR 2003/3

(ii) Removal or replacement of substantially all of the building

Paragraphs 68 to 79 of GSTR 2003/3 provide the following guidelines for the second requirement of a substantial renovation:

68. The extent to which parts of a building are removed or replaced will determine whether the above criterion is satisfied. The definition of substantial renovations states that it is not necessary for foundations, external walls, interior supporting walls, floors, roof or staircases to be removed or replaced for renovations to be substantial.

 

69. This criterion is satisfied where there is a removal or replacement of a substantial part of the:

· structural components of the building; or

· non-structural components of the building.

 

70. Structural work may give rise to substantial renovations in its own right. Structural work includes such work as:

· altering, or replacing of foundations;

· replacing, removing or altering of floors or supporting walls, or parts thereof (interior or exterior);

· lifting or modifying of roofs;

· replacing existing windows and doors such that it is necessary to alter brickwork, (for example, replacing a single door with a double sliding door).

 

71. Structural work is also undertaken in the course of building an extension to a house or adding new bedrooms to a house.

 

72. Where a substantial part of the structural components of a building is removed or replaced this will often mean that a substantial part of the non-structural components is also removed or replaced.

 

73. However, substantial renovations may also occur where a substantial part of the non-structural components is removed or replaced but the structural components are not substantially affected. For example, in a unit, it is not essential that both components are substantially removed or replaced for substantial renovations to have occurred.

 

74. Non-structural building work includes:

· replacing electrical rewiring;

· replacing, removing or altering of non-supporting walls, or parts thereof (interior or exterior);

· plastering or rendering an entire wall or walls;

· plumbing (eg replacing old metal pipes with copper pipes or plastic pipes);

· the removing or replacing of kitchen cupboards, bathrooms fixtures etc.;

· removing or replacing of air-conditioning or security systems.

 

75. Guidance is provided on what we regard as substantial renovations in Examples 3 to 5 at paragraphs 104 to 114 and Examples 8 to 9 at paragraphs 124 to 130 of this Ruling. For instance, in Example 8, the removal and replacement of the exterior walls, the removal of some internal walls, and the replacement of the flooring and the kitchen in a house are considered collectively to amount to substantial renovations.

 

76. However, the removal and replacement of a kitchen and bathroom with little else done to the building, apart from repainting and minor repair work, in most circumstances would not be sufficient to regard substantial renovations to have occurred.

 

77. As part of renovations, work is often undertaken which does not impact on the structure of the building but is more in the nature of renewing or refreshing what is already there. We would consider work of this nature to be cosmetic. Cosmetic work by itself does not amount to substantial renovations. We consider cosmetic work includes:

· painting;

· sanding floors;

· removing and replacing worn or out of date fittings such as light fittings;

· replacing curtains or carpets.

 

78. Cosmetic work may be undertaken to obtain a better price when selling a property (sometimes referred to as a 'makeover') or to obtain a higher rent. While this is often referred to as a renovation this is not what the legislation contemplates as substantial renovations. One example of where the work undertaken is largely cosmetic and does not result in substantial renovations, is contained in Example 4 at paragraphs 109 to 110.

 

79. Where structural or non-structural work amounts to substantial renovations that create new residential premises, any cosmetic work undertaken will form part of the new residential premises.

 

From the description of the renovation to be performed, every area inside each unit will be affected and will have structural and/or substantial non-structural work done combined with cosmetic work. In this instance we are of the view that substantial renovations will be carried out in each unit. Hence, the renovated units will be new residential premises after their renovation for GST purposes.

Summary

After the described substantial renovations have been made to the units, these units will be new residential premises under paragraph 40-75(1)(b) of the GST Act.

Further, if you decide to alter units X and Y to a larger unit when undertaking the renovations, the outcome will still be the same , i.e. all units will be new residential premises under paragraph 40-75(1)(b) of the GST Act.