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Ruling

Subject: goods and services tax (GST) and property

Question

Are you entitled to an input tax credit on your purchase of the property?

Answer

No.

This ruling applies for the following periods:

The scheme commences on:

Relevant facts and circumstances

You are registered for GST.

You purchased a property located in Australia (the property) with vacant possession from the vendor.

The vendor was registered for GST when he/she sold the property to you

The property is zoned commercial.

The property had a house on it when you purchased the property.

The house looks like a house on the outside.

The house had the following rooms when you purchased the property:

· Room W, room X, room Y and room Z

· Room A and room B

· a living room

· a kitchen

· a bathroom

· a number of toilets

· a small room with a laundry sink in it.

· an office

· a tea room, and

· an upstairs room.

The vendor leased out the property to a medical practice for the first so many years that he/she owned the property. Then the medical professionals moved out. Then the vendor requested a change of use and moved in.

The vendor used the property as his/her residence. He/she also used the property in his/her business.

During the vendor's period of ownership of the property, rooms W, X and Y were set up as bedrooms. Rooms W and Z were used as bedrooms shortly before you purchased the property. Room Y had a spare bed in it shortly before you purchased the property. You do not recall if room X was completely empty or was used for non work related storage shortly before you purchased the property. Rooms W, X and Y previously had sinks in them and the vendor removed these sinks. Room Z had a sink in it when you purchased the property.

Rooms A and B were used for storage or were empty shortly before the property was sold to you. Room A had a sink in it when you purchased the property.

The vendor removed an internal wall in the living room to increase the room's size.

When you purchased the property, the kitchen included kitchen benches, kitchen cupboards, a stove and a sink.

When you purchased the property, the bathroom included a shower, vanity and spa bath. This room was formerly a medical professional's consulting room, which the vendor converted into a bathroom.

The house was on the property when the vendor purchased the property.

The vendor did not substantially renovate the house.

As at the time of sale of the property to you, the house had not been built, and the house did not contain a building that was built, by the vendor to replace a building the vendor demolished on the same land.

Current listings from websites show the vendor as conducting his/her business from the property.

The vendor advertised his/her business on a sign put up on the house.

The vendor had certain things in the yard and these were used for the storage of something.

The vendor's business cars were parked in the yard.

The vendor used the office in his/her business.

You will lease out the property to a medical professional. The house will be used as a specified medical practice when you lease out the property.

You renovated some of the rooms.

You removed the sink from room A

You converted the kitchen into a waiting room. You removed kitchen facilities from this room.

You reduced the shelving height in the office to allow more light into the office.

You installed a dishwasher and instant boil unit in the tea room.

The premises could only be used as residential accommodation again if a planning application was lodged to change the use back to residential and the kitchen was rebuilt.

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 paragraph 9-20(1)(c)

A New Tax System (Goods and Services Tax) Act 1999 section 11-5

A New Tax System (Goods and Services Tax) Act 1999 subsection 11-15(1)

A New Tax System (Goods and Services Tax) Act 1999 subsection 11-15(2)

A New Tax System (Goods and Services Tax) Act 1999 section 40-35

A New Tax System (Goods and Services Tax) Act 1999 section 40-65

A New Tax System (Goods and Services Tax) Act 1999 section 40-75

Reasons for decision

Summary

You are not entitled to an input tax credit on your purchase of the property as the sale of the property to you was an input taxed supply of residential premises under subsection 40-65(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)

Detailed reasoning

You are entitled to input tax credits on your creditable acquisitions.

You make a creditable acquisition where you satisfy the requirements of section 11-5 of the GST Act, which states:

You make a creditable acquisition if:

(a) you acquire anything solely or partly for a *creditable purpose; and

(b) the supply of the thing to you is a *taxable supply; and

(c) you provide, or are liable to provide, *consideration for the supply; and

(d) you are *registered or *required to be registered.

(*Denotes a term defined in section 195-1 of the GST Act)

Subsection 11-15(1) of the GST Act states:

You acquire a thing for a creditable purpose to the extent that you acquire it in carrying on your *enterprise.

Subsection 11-15(2) of the GST Act states:

However, you do not acquire the thing for a creditable purpose to the extent that:

(a) the acquisition relates to making supplies that would be *input taxed;

or

(b) the acquisition is of a private or domestic nature.

Paragraph 9-20(1)(c) of the GST Act provides that an activity or series of activities done on a regular or continuous basis in the form of a lease, licence or other grant of an interest in property is an enterprise. You acquired the property in carrying on your property leasing enterprise.

Your acquisition of the property was not of a private or domestic nature.

Subsection 40-35(1) of the GST Act provides that a supply of premises that is by way of lease is input taxed if the supply is of residential premises (other than a supply of commercial residential premises or a supply of accommodation in commercial residential premises provided to an individual by the entity that owns or controls the commercial residential premises).

However, subsection 40-35(2) of the GST Act states:

However:

(a) the supply is input taxed only to the extent that the premises are to be used predominantly for residential accommodation (regardless of the term of occupation); and

(b) the supply is not input taxed under this section if the lease, hire or licence, or the renewal or extension of a lease, hire or licence, is a

*long-term lease.

Goods and Services Tax Ruling GSTR 2000/20 Goods and Services Tax: commercial residential premises (GSTR 2000/20) provides the Australian Taxation Office view on the meaning of residential premises and to be used for residential accommodation.

Paragraphs 19 and 20 of GSTR 2000/20 state:

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.

Paragraph 26 of GSTR 2000/20 states:

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.

Paragraph 28 of GSTR 2000/20 states:

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.

Paragraph 22 of GSTR 2000/20 states:

22. The function of paragraph 40-35(2)(a) and subsection 40-65(1) is to differentiate the GST treatment of any portions of residential premises that are commercial. This would apply, for example, to a house that has been partly converted for use as a doctor's surgery. Several parts of the house may still be used predominantly for residential accommodation, such as bedrooms, bathroom, kitchen, living rooms and gardens, while other areas are not, being turned over to office and consulting room space, and storage for the surgery. In this case paragraph 40-35(2)(a) and subsection 40-65(1) operate to exclude these commercial parts from the input-taxed treatment of the rest of the property.

Paragraph 27 of GSTR 2000/20 states:

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.

Paragraph 31 of GSTR 2000/20 discusses the purpose of premises factor. It states:

Purpose of premises

31. In some cases, the purpose for which the premises are to be used will be evident from their form or fit-out. This is most clearly the case where premises have been fabricated, or altered, to accommodate commercial or professional activities.

Paragraph 23 of GSTR 2000/20 discusses home offices. It states:

23. Whether or not a particular room or part of a house or apartment is to be used predominantly for residential accommodation, as opposed to commercial purposes, is a question of fact and degree. A home office in a house will not generally be sufficiently separate from the rest of the residential premises to distinguish its use and its predominant use will still be residential accommodation.

When you lease out the property to a medical professional, the premises will not be residential premises to be used for residential accommodation as:

· You have converted the kitchen into a waiting room; a kitchen is one of the basic facilities for day to day living other than sleeping accommodation and residential premises to be used for residential accommodation have sleeping accommodation and the basic facilities for day to day living.

· The premises could only be used as residential accommodation again if a planning application was lodged to change the use back to residential and the kitchen was rebuilt.

Therefore, you will not make an input taxed supply under subsection 40-35(1) of the GST Act when you lease the property to the psychologist. Your lease of the property will not be an input taxed supply under any other provision in the GST Act.

Hence, you acquired the property for a creditable purpose. Therefore, you satisfied the requirement of paragraph 9-5(b) of the GST Act.

Taxable supply

You make a taxable supply where you satisfy the requirements of section 9-5 of the GST Act), which states:

You make a taxable supply if:

(a) you make the supply for *consideration; and

(b) the supply is made in the course or furtherance of an *enterprise that you *carry on; and

(c) the supply is *connected with Australia; and

(d) you are *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.

Consideration

The vendor supplied the property to you for consideration when he/she sold the property to you. Hence the requirement of paragraph 9-5(a) of the GST Act was satisfied.

Enterprise

The vendor used the property in his/her business. Therefore, the vendor's sale of the property was a supply made in the course or furtherance of an enterprise that he/she carried on. Hence, the requirement of paragraph 9-5(b) of the GST Act was satisfied.

Connected with Australia

The sale of the property to you was connected with Australia as the property is located in Australia. Hence, the requirement of paragraph 9-5(c) of the GST Act was satisfied.

GST registration

The vendor was registered for GST when he/she sold the property to you. Therefore, the requirement of paragraph 9-5(d) of the GST Act was satisfied.

GST-free

There are no provisions in the GST Act under which the sale of the property to you was GST-free.

Input taxed

In accordance with subsection 40-65(1) of the GST Act, a sale of residential premises is input taxed.

However, subsection 40-65(2) of the GST Act states:

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.

New residential premises are defined in section 40-75 of the GST Act.

Subsection 40-75(1) of the GST Act states:

*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.

When the property in your case was sold to you, it had the physical characteristics of residential premises that were to be used for residential accommodation, as it had bedrooms, living room, kitchen, bathroom, toilets and laundry. The fact that the vendor lived in the house also suggests that the premises had the physical characteristics of residential premises to be used for residential accommodation at the time the property was sold to you.

Considering the form and fit-out of the premises in your case at the time the premises were sold to you, the purpose or context of the premises' use would have been for personal accommodation. At the time the premises were sold to you, the building did not have the appearance of having been fabricated or altered to accommodate commercial or professional activities.

Immediately prior to the sale of the premises to you, the characteristics of the premises suggested that the tasks of day to day living, such as preparing food, cleaning and laundering, would have been performed by the occupant.

Immediately prior to the sale of the premises to you, the characteristics of the premises suggested that the status of the occupant would have been owner, tenant or lessee.

Council permitted the property to be used for residential accommodation when the vendor lived in it.

As the property had the physical characteristics of residential premises to be used for residential accommodation when the property was sold to you and the features in paragraph 27 of GSTR 2000/20 were present at that time, the property was residential premises to be used for residential accommodation when it was sold to you. The home office was not sufficiently separate from the rest of the residential premises to distinguish its use and its predominant use was residential accommodation. We consider that all rooms existing when the property was sold to you were part of the residential premises that were sold to you and that they were to be used predominantly for residential accommodation at that time.

These residential premises were not commercial residential premises when the residential premises were sold to you.

The house was on the property when the vendor purchased the property. The sale of the property to the vendor was not a sale of commercial residential premises. Therefore, at the time the property was sold to you it had previously been sold as residential premises (other than commercial residential premises).

Paragraph 28 of Goods and Services Tax Ruling GSTR 2003/3 Goods and services tax: when is a sale of real property a sale of new residential premises? (GSTR 2003/3) provides that paragraphs 40-75(1)(b) and 40-75(1)(c) of the GST Act raise the question of what has been done to the building or the activity of building by the current owner and this will determine whether the residential premises are new residential premises.

The vendor did not substantially renovate the residential premises.

The residential premises were not built by the vendor, and they do not contain a building that was built by the vendor, to replace premises the vendor demolished on the same land.

Therefore, the sale of the residential premises to you was not a sale of new residential premises.

Hence, the sale of the property to you was an entirely input taxed supply under subsection 40-65(1) of the GST Act.

As not all of the requirements of section 9-5 of the GST Act were satisfied, the vendor did not make a taxable supply to you. Therefore, you did not satisfy the requirement of paragraph 11-5(b) of the GST Act.

Conclusion

As you did not satisfy all of the requirements of section 11-5 of the GST Act, you did not make a creditable acquisition of the property. Therefore, you are not entitled to an input tax credit on your purchase of the property.