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Ruling

Subject: GST and whether renovations are substantial renovations which have created new residential premises

Question 1

Do the proposed works to be undertaken to the house constitute substantial renovations which result in the creation of new residential premises for the purposes of paragraph 40-75(1)(b) of the A New Tax System (Goods and Services Tax) Act 1999? 

Answer

The proposed works to the house are substantial renovations which will create new residential premises for the purposes of paragraph 40-75(1)(b) of the A New Tax System (Goods and Services Tax) Act 1999

Relevant facts and circumstances

You acquired a heritage listed house.

You intend to carry out works to the house to develop the site.

The house was previously used to house many people so there are a number of rooms and a dormitory area. The house also has a reception area, offices and meeting rooms.

The following renovations will be made to the house to create residential apartments:

· The majority of the internal walls will be removed and new walls will be installed. As a result the number and configuration of the rooms will change.

· The electrical wiring is required to be removed or replaced to allow the wiring to be compliant with current day standards.

Similarly, extensive plumbing work is required for the following:

· No existing kitchens or bathrooms will be retained as they are not fit for purpose or compliant with current day standards. New kitchens, en-suites, bathrooms and laundries will be installed for the residential apartments.

· The plumbing will be removed or replaced to connect with the new wet areas that are being rebuilt.

· Existing sewer and stormwater systems on the site will be decommissioned and new drainage systems installed for sewer and stormwater.

Floor structure work includes:

· The floor will be raised so that access can be obtained for termite treatment. The floor will then be fully reinstated.

· Some limited strengthening may be required to the floor joists and some replacement of the floor may be required.

All new wet areas are to be fully rebuilt, including all sewer and storm water services. In most cases they will require floor removal and replacement to allow for sub floor drainage to be installed.

· Removal of existing roof sheeting and refixing of new roof covering is required.

· Staircases will be removed and replaced.

· Alterations will be made to the brickwork to convert existing windows to doorways and existing door opening to windows and to infill other openings.

· Minor modifications will be made to the structural walls.

· An area is to be demolished to return the building to its heritage form.

· The ceiling on the lower floor is to be sheeted over.

· Windows and doors will be refurbished or replaced.

· Existing verandas on the ground and first floor will be refurbished and made good.

· New floor coverings including timber and carpets will be installed throughout.

· The residential apartments will be sold once the renovations have been completed.

Relevant legislative provisions

Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999

Section 40-65 of the A New Tax System (Goods and Services Tax) Act 1999

Section 40-75 of the A New Tax System (Goods and Services Tax) Act 1999

Section 195-1 of the A New Tax System (Goods and Services Tax) Act 1999

Reasons for decision

Paragraph 40-75(1) (b) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that new residential premises may be created through substantial renovations of a building.

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.

Section 195-1 states:

Substantial renovations of a building are 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 walls, interior supporting walls, floors, roof or staircases.

Goods and Services Tax Ruling GSTR 2003/3 GSTR 2003/3: when is a sale of real property a sale of new residential premises? (GSTR 2003/3 provides guidelines on when the sale of real property is the sale of new residential premises. It considers substantial renovations in paragraphs 53 to 87.

As stated in paragraphs 56 and 57 of GSTR 2003/3, the terms 'renovation' or 'building' are not defined in the GST Act. Therefore these terms take on their ordinary meaning. The word 'building' means 'a substantial structure with a roof and walls, as a shed, house, department store etc'. 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'.

Paragraph 66 of GSTR 2003/3 states that work which is not directly attributable to a building, for example, landscaping of surrounding land or replacement of a boundary fence, is excluded because it is not work to a building.

Paragraph 61 of GSTR 2003/3 explains that for the work to constitute substantial renovations, it must satisfy the following criteria:

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

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

Paragraph 64 of GSTR 2003/3 states:

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.

Paragraphs 68 to 79 of GSTR 2003/3 provide guidelines in relation to the question of whether all or substantially all of a building is removed or replaced.

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).

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);

· removing or replacing kitchen cupboards, bathrooms fixtures etc;

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

From the information provided, your non structural renovation plans include:

· the removal of the majority of the internal walls and the installation of new walls which will change the number and dimensions of the rooms.

· electrical wiring will be removed and replaced throughout the building

· plumbing on each floor will be removed and replaced to connect with the new wet areas that are being rebuilt. Existing sewer and stormwater systems on the site will be removed and new drainage systems installed for sewer and stormwater.

· the kitchen, bathroom and other wet areas will be removed. The wet areas will be replaced and relocated to provide kitchens, bathrooms, en-suite bathrooms and laundries for the residential apartments.

GSTR 2003/3 explains that substantial renovations may occur where a substantial part of the non-structural components is removed or replaced but the structural components are not substantially affected.

Based on the submitted plans, there are no rooms in the building which will not be affected by the renovation. A substantial part of the non structural components of the building will be removed or replaced. We consider that the renovations will affect the building as a whole and the non structural renovations will result in the removal or replacement of all or substantially all of the building.

On the basis that all or substantially all of the building will be removed or replaced, the renovations satisfy the definition of substantial renovations as defined in section 195-1 of the GST Act.

This conclusion is further supported by the structural work that you are also carrying out, including the flooring work as well as modifications to the roofing and staircases.

Of note are paragraphs 77 to 79 of GSTR 2003/3, which explain that cosmetic work does not amount to substantial renovations. However, where the structural and non-structural work amounts to substantial renovations that create new residential premises, all of the cosmetic work to be undertaken will form part of the new residential premises. Cosmetic work includes painting, sanding floors, removing and replacing worn out light fittings or replacing curtains and carpets