Edited version of private ruling

Authorisation Number: 1011862690127

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Ruling

Subject: GST and substantial renovations

Question

Are you required to remit goods and services tax (GST) on the supply by way of sale on the house situated at Victoria (Property)?

Answer

No

Relevant facts and circumstances

· You are registered for GST.

· Following registration you purchased a residential premise.

· No GST was payable by you on the purchase.

· You are presently refurbishing the house with the intention of either selling it or retaining it for rental.

· The solid brick house has been on the site for many years and has been continuously occupied.

· You have entered into agreements with a builder to undertake renovation works which are currently underway.

· You have not claimed any input tax credits (GST credits) in relation to the costs associated with the renovations.

· In relation to the renovations you advise the following:

o The main part of the house comprises a number of bedrooms on either side of the central hallway.

o The works to this part of the house are to replace existing wiring, patch plaster and repaint and re-wallpaper.

o The only change in the layout is to insert a stud-walled ensuite in the bedroom behind the master bedroom.

o At the back of the house is a fully equipped kitchen, including dishwasher, bathroom with full size bath, separate toilet and separate laundry which are to be retained.

o There was also a large L-shaped living area at the left hand side and at the back. This has been demolished as part of the renovations.

o A new brick veneer living area has been joined onto the front part of the existing living area, projecting to the left hand side of the house.

o On the front veranda. Missing tiles and lacework are being replaced.

o Existing heritage fencing at the front is being retained/replaced in exactly the same style.

o The side timber paling fence is being replaced by a similar paling fence but cut down in height at the corner to comply with a new council road visibility law.

Reasons for decision

Summary

The renovations do not amount to substantial renovations for the purposes of the GST Act. As the premises are not new residential premises under any other provision of the GST Act, the supply by way of sale is an input taxed supply of residential premises. Consequently no GST is payable on the sale but nor are you entitled to claim any GST credits in relation to costs associated with the renovations or subsequent sale.

Detailed reasoning

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

· it is made for consideration

· it is made in the course or furtherance of an enterprise that the entity carries on

· it is connected with Australia, and

· the entity is registered or required to be registered for GST.

However, a supply is not taxable to the extent that it is GST-free or input taxed.

In your situation the four positive elements of section 9-5 of the GST are satisfied. Your supply by way of sale of the premises is not GST-free under the GST Act or any other Act.

We therefore need to determine whether your supply by way of sale is an input taxed supply of residential premises.

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

The term residential premises is defined in section 195-1 of the GST Act as land or a building that is occupied as a residence or is intended and capable of being occupied as a residence. Additional guidance on the meaning of residential premises is provided in Goods and Services Tax Rulings GSTR 2000/20.

Subsection 40-75(1) of the GST Act provides that residential premises are new residential premises if they:

· have not previously been sold as residential premises and have not previously been the subject of a long-term lease; or

· have been created through substantial renovations of a building; or

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

However, subsection 40-75(2) of the GST Act provides that the premises are not new residential premises if the premises have only been used for making input taxed supplies of residential premises for the period of at least five years since the premises were last substantially renovated or last built, or first became residential premises where the premises have not previously been sold as residential premises.

Whether renovations are substantial renovations is a matter of fact and degree. The Australian Taxation Office's (ATO) view in relation to this matter is provided in Goods and Services Tax Ruling GSTR 2003/3.

Under section 195-1 of the GST Act, for there to be substantial renovations:

· the renovations need to affect the building as a whole; and

· the renovations need to result in the removal or replacement of all or substantially all of the building.

Where one of the above criteria is not satisfied substantial renovations have not occurred (see paragraph 61 of GSTR 2003/3).

In respect of the word building, paragraph 56 of GSTR 2003/3 states:

56. The word building is not defined in the GST Act. Building means a substantial structure with a roof and walls, as a shed, house, department store etc. (The Macquarie Dictionary, 3^rd Edition). In the context of the provision, we consider that an individual strata unit or apartment is a building and its structure is enclosed within the external walls of the unit, rather than the entire complex.

This means that the building in its entirety must be considered and, for renovations to be substantial, the renovations must directly affect most rooms in a building. The renovations of only one part of a building, without any work on the remaining parts of the building, would not constitute substantial renovations.

Work associated with the renovations, but not directly attributable to the building itself, for example, landscaping and beautification of surrounding land, is not renovations of a building (see paragraph 66 of GSTR 2003/3).

Additions that are undertaken with renovations, such as the construction of a new carport, are not included in determining whether a building has been substantially renovated. However, where it is determined that a building has been substantially renovated and new residential premises created, all additions to the building form part of the new residential premises (see paragraph 67 of GSTR 2003/3).

Paragraphs 70 and 74 of GSTR 2003/3 set out examples of structural and non-structural work which may result in the removal or replacement of all or substantially all of the building. We also refer to Goods and Services Tax Advice GSTA TPP 068 and 069 which are about what constitutes substantial renovations for the purposes of the GST Act.

Application to your circumstances  

Renovations to existing house

In your case the main rooms at the front of the house are to remain largely untouched apart from the insertion of a stud-walled ensuite in the bedroom behind the master bedroom.

The replacement of existing wiring is considered to be non-structural but in itself is not sufficient to be substantial in its own right. The other work to these rooms namely patching plaster, repainting and re-wallpapering is considered to be cosmetic.

At the rear of the house you advise that the existing kitchen, bathroom, laundry and separate toilet have been retained.

You also advise that the rear living area has been demolished.

On the front veranda missing encaustic tiles and lacework are being replaced.

However, the structure of the veranda will not be affected because the veranda's frame will be kept in tact.

Additions

As part of the renovations following the demolition of the living area at the rear of the house you have added a living area to the left hand side of the house.

As outlined above additions are not included in the determining whether a building has been substantially renovated.

Curtilage

You have/are to do the following:

· Existing heritage fencing at the front is being retained/replaced in exactly the same style.

· The side timber paling fence is being replaced by a similar paling fence but cut down in height at the corner to comply with a new council road visibility law.

As explained above work associated with the renovations, but not directly attributable to the building itself, for example, landscaping and beautification of surrounding land, is not renovations of a building

Following from the above we do not consider that your renovations of the residential premises fall within the ATO's view of what constitutes substantial renovations in GSTR 2003/3.

Therefore, your premises are not new residential premises created through substantial renovations. As your premises are not new residential premises, paragraph 40-65(2)(b) of the GST Act does not exclude them from being sold as an input taxed supply under section 40-65 of the GST Act.

As the sale of the residential premises is input taxed the sale is not a taxable supply under section 9-5 of the GST Act.

If a supply is input taxed, there is no GST liability on the supply but there is also no entitlement to GST credits on GST included in the price of purchases for making the supply.

Therefore, you are not liable for GST on the sale of the residential premises and cannot claim any GST credits for GST included in the price of acquisitions for renovation and the sale of the premises.