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Ruling

Subject: GST and sale of residential rental properties

Question 1

Are you liable for GST in relation to the sale of two residential rental properties that you own, situated in Australia?

Answer

No, you are not liable for GST in relation to the sale of the residential rental properties. Your supply of these properties is input taxed and therefore is not subject to GST.

Relevant facts and circumstances

You purchased a residential property situated in Australia on a specified date after 1 July 2000.

You subsequently purchased the property next door.

Both properties were 'old' residential premises and required some repairs and maintenance to freshen the properties and prepare them for rental. There were no structural changes or substantial renovations made to either of the properties.

The properties have been rented out since you acquired them.

You do not carry on any other enterprise other than the rental of these residential properties.

The relevant local authority since approved a plan that specified that land zoned residential within a specified area could be used for the construction of residential apartment buildings. One of the requirements of the Plan is that that the land size must be no less than a specific area.

To be able to sell the properties under this Plan, your further properties that adjoin your properties were purchased by your associates. Those properties have all only been used for residential rental purposes since they were acquired by the relevant owners.

You and your associates were advised by your real estate agent that there was a possibility of selling all of the properties under the Plan and that an architect should be approached to prepare a development application (DA) for residential apartments to be developed on the properties. This activity commenced on a specified date and resulted in a DA approval being granted on a specified date by the relevant local authority.

All of the properties are on suburban sized residential blocks and contain 'old' houses. That is, they are not 'new residential premises'.

The properties will all be sold with the houses in situ.

As the sale proceeds from each property will exceed $75,000 you are seeking confirmation as to whether you are required to be registered for GST and if so, whether you will be liable for GST on the sale of your properties.

Relevant legislative provisions

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

A New Tax System (Goods and Services Tax) Act 1999 section 9-5.

Reasons for decision

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

An entity is liable for GST on any taxable supplies that it makes.

Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that you make a taxable supply where all of the following conditions are met:

The supply is made for consideration

The supply is made in the course or furtherance of an enterprise that you carry on

The supply is connected with Australia; and

You are 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.

Input taxed supplies of residential premises

Section 40-65 of the GST Act provides:

A sale of residential premises 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).

However, the sale is not input taxed to the extent that the residential premises are:

· commercial residential premises; or

· new residential premises other than those used for residential accommodation (regardless of the term of occupation) before 2 December 1998.

The requirement for residential premises to be used predominantly for residential accommodation is an objective test that looks at the intention with which the premises were designed, built or modified. This focuses on the physical characteristics of the premises in terms of their suitability for residential accommodation. Premises are suitable for occupation as a residence, or for residential accommodation if they possess features necessary for residential accommodation and are able to be occupied as residential premises.

To satisfy the definition of residential premises, premises must provide shelter and basic facilities for day to day living. Premises are not residential premises where their physical characteristics indicate that they are not intended to provide living accommodation.

To be capable of residential occupation, the premises must be fit for human habitation. Residential premises are not suitable for human habitation when they are in a dilapidated condition which prevents their being occupied for residential accommodation. However, residential premises in a temporary state of disrepair may remain residential premises.

You advised that the premises in question are both suburban blocks containing an 'old' house on each block. While the houses needed some repainting and repairs to prepare them for rental, you did not make any structural changes or undertake any substantial renovations of either property. Both houses are in a habitable state and have only been used by you for residential rental purposes since you acquired them.

The premises clearly have the physical characteristics of residential premises as they were designed and built as houses and provide the facilities for basic living. Further, the premises are not 'new residential premises' for GST purposes. Therefore, the premises are residential premises for GST purposes.

You intend to sell the properties with the houses intact, to a developer (in conjunction with the adjoining properties owned by your associates and the development approval granted by relevant local authority). As such you will be making an input taxed supply when you sell the premises in question and will not be liable for GST.

As a supply is not taxable to the extent that it is input taxed, your supply falls within the exclusion provided in section 9-5 of the GST Act and it is not necessary to consider the remaining conditions. However, as you sought advice regarding whether you are required to be registered for GST, for completeness we provide the following information.

You are required to be registered for GST if you are carrying on an enterprise and your GST turnover meets the registration turnover threshold, which is currently $75,000 (for entities other than non-profit bodies).

You have a turnover that meets the registration turnover threshold if:

· Your current GST turnover is at or above the turnover threshold, and the Commissioner is not satisfied that your projected GST turnover is below the threshold; or

· Your projected GST turnover is at or above the turnover threshold.

Supplies that are input taxed are excluded from the calculation of your current and projected turnover. You advised that you do not conduct any other enterprise apart from the rental of the residential houses. As your supplies of residential rent would be input taxed under section 40-35 of the GST Act, these amounts would not form part of your current or projected turnover. Therefore, you would not be required to be registered for GST in relation to your residential rental activities.

However, you asked whether you will be required to be registered for GST when you sell the properties as the sale of each house will exceed $75,000.

Section 188-25 of the GST Act provides that in working out your projected GST turnover, the following supplies are disregarded:

· Any supply made, or likely to be made by you by way of transfer of ownership of a capital asset of yours; and

· Any supply made, or likely to be made, by you solely as a consequence of ceasing to carry on an enterprise, or substantially and permanently reducing the size or scale of an enterprise.

As the properties are capital assets used in conducting your rental enterprise and you will be transferring ownership of these assets when you sell the properties, the sale proceeds do not form part of your projected GST turnover for GST purposes. As your projected turnover will be below the GST turnover threshold you would not be required to be registered as a consequence of selling the properties.