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Ruling

Subject: GST and the supply of real property which includes a vacant house

Question

Is the supply of the property which includes a vacant house a taxable supply on which GST is payable pursuant to section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No, the supply of the property which includes a vacant house is not a taxable supply on which GST is payable pursuant to section 9-5 of the GST Act. The supply of the property is an input taxed supply of residential premises.

Relevant facts and circumstances

Some 40 years ago you purchased a parcel of land situated in Australia. The parcel of land consists of number of acres and is a single registered title (Property).

A house was constructed on the land which you occupied for many years as your home.

At some point in time you vacated the Property, which you then rented to a tenant. The rental of the Property was managed by a local real estate agent. The whole of the Property had been the subject of the residential lease with the tenant and the land was enjoyed by the tenant in conjunction with the residential house.

The tenant vacated the Property a couple of years ago. The Property has been vacant since and was listed for sale. Notwithstanding that the house has been vacant it is in a sound condition and easily rentable with a few minor maintenance issues. You confirmed that although the house is old it is not in a dilapidated condition which prevents it from being occupied for residential accommodation.

You, as Vendor, entered into a contract of sale of real property with a Purchaser. You have provided a copy of the contract of sale (Contract) and other documents.

The Contract nominates the sale price which the parties agree does not include GST. Settlement has been set down.

You have confirmed that the Purchaser proposes to demolish the existing building located on the Property to construct other buildings.

A three page document you provided indicates that the Property is zoned in a low density residential zone.

You are registered for goods and services tax (GST) with effect from July 2000. You are currently engaged in a number of other activities. The sale of the Property does not form part of your other enterprise which you carry on from another property..

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 section 7-1.

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

A New Tax System (Goods and Services Tax) Act 1999 section 9-10.

A New Tax System (Goods and Services Tax) Act 1999 subsection 9-20(1).

A New Tax System (Goods and Services Tax) Act 1999 paragraph 40-35(1)(a).

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.

A New Tax System (Goods and Services Tax) Act 1999 subsection 75-5(1).

A New Tax System (Goods and Services Tax) Act 1999 section 195-1.

Reasons for decision

Subsection 7-1(1) of the GST Act provides that GST is payable on taxable supplies and taxable importations. Section 9-5 of the GST Act provides that you make a taxable supply if:

(a) you make the supply for consideration

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

(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.

'Supply' is defined in section 9-10 of the GST Act as 'any form of supply whatsoever' and includes amongst other things, a grant, assignment or surrender of real property (paragraph 9-10(2)(d) of the GST Act).

'Real Property' is defined in section 195-1 of the GST Act as including

· any interest in or right over land

· a personal right to call for or be granted any interest in or right over land

· a licence to occupy land or any other contractual right exercisable over or in relation to land.

Section 9-15 (1) of the GST Act defines 'consideration' to include 'any payment, or any act or forbearance, in connection with a supply of anything' or for the inducement of a supply of anything.

The definition in section 9-5 of the GST Act expressly excludes from the definition of taxable supply a supply which is GST-free or input taxed.

The circumstances in which a supply is GST-free or input taxed are found in Division 38 and Division 40 of the GST Act respectively.

Division 38 GST-free supply

Division 38 of the GST Act includes supplies that are GST-free and therefore, not taxable supplies. For example, section 38-325 of the GST Act is concerned with a GST-free supply of a going concern which can include a transfer of real property. On the facts provided, the supply of the Property does not come within any of the provisions in Division 38 of the GST Act.

Division 40 Input taxed supply

Division 40 of the GST Act identifies those supplies which are input taxed and therefore, not a taxable supply. If a supply is input taxed, no GST is payable on the supply and there is no entitlement to an input tax credit for anything acquired or imported to make the supply. Examples of an input taxed supply include the supply of residential premises by way of lease, hire or licence (section 40-35 of the GST Act) and a sale of residential premises (section 40-65 of the GST Act).

Section 40-65 of the GST Act states:

40-65 Sales of residential premises

(1) A 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 (regardless of the term of occupation).

(2) 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.

The expression 'residential premises' is defined in section 195-1 of the GST Act as follows:

residential premises means land or a building that:

(a) is occupied as a residence or for residential accommodation; or

(b) is intended to be occupied, and is capable of being occupied, as a residence or for residential accommodation;

(regardless of the term of the occupation or intended occupation) and includes a *floating home.

* To find definitions of asterisked terms, see the Dictionary, starting at section 195-1 of the GST Act.

Subsection 40-75(1) of the GST Act relevantly provides that residential premises are 'new residential premises' if, amongst other things, they have not previously been sold as residential premises and have not been the subject of a long term lease. However, the premises are not 'new residential premises' if for the period of at least 5 years since the premises first became residential premises the premises have only been used for making supplies that are input taxed because of paragraph 40-35(1)(a) of the GST Act.

Paragraph 40-35(1)(a) of the GST Act provides that a supply of premises that is by way of lease, hire or licence is input taxed if the supply is of residential premises other than a supply of commercial residential premises….

Section 75-5 of the GST Act provides that the margin scheme applies in working out the amount of GST on a taxable supply of real property which includes selling a freehold interest in land if the supplier and the recipient of the supply have agreed in writing that the margin scheme is to apply.

Enterprise

You have advised that activities you undertook in leasing and then subsequently selling the Property are separate from other activities you undertake.

An essential requirement of section 9-5 of the GST Act is that the supply is made in the course or furtherance of an enterprise that you carry on.

Section 9-20 of the GST Act defines the term 'enterprise' to include, amongst other things, activities or a series of activities done in the form of a business (paragraph 9-20(1)(a) of the GST Act) or on a regular and on a continuous basis, in the form of a lease, licence or other grant of an interest in property (paragraph 9-20(1)(c) of the GST Act).

The term 'carrying on' in relation to an enterprise is described in section 195-1 of the GST Act to include anything done in the course of the commencement or termination of the enterprise.

The meaning of the term 'enterprise' as defined in the A New Tax System (Australian Business Number) Act 1999 (ABN Act) is considered by the ATO in Miscellaneous Taxation Ruling MT 2006/1. The discussion in that ruling is considered to apply equally to the term 'enterprise' as used in the GST Act and can be relied upon for GST purposes.

You advised that for many years you engaged in activities which involved the supply of the Property by way of lease, hire or licence to a tenant or tenants. Such activities come within the definition of an enterprise pursuant to paragraph 9-20(1)(c) of the GST Act.

Paragraph 147 of MT 2006/1 explains that the question of whether the activities are done in terminating the enterprise or at some later point (and do not have a connection with the termination activities) is one of fact and degree depending on the circumstances of each particular case.

The disposal of the Property in the present matter is in a sense the supply of a capital asset of the leasing enterprise, which you carried on for many years, and is supplied as a consequence of ceasing that enterprise. Since carrying on an enterprise includes doing anything in the course of the termination of an enterprise, it can be argued that paragraph 9-5(b) of the GST Act which requires that the supply is made in the course or furtherance of an enterprise you carry on, is satisfied.

Residential premises

In the present circumstances, you are registered for GST, the supply of the Property is for consideration (being the price nominated in the Contract), the supply of the Property is made in the course or furtherance of an enterprise that you carry on, the supply is connected with Australia (being situated in Australia) and the supply is not GST-free.

As the Property includes a house which has been occupied as a residence the issue that arises under section 9-5 of the GST Act is whether the supply of the Property is to any extent an input taxed supply of residential premises.

The meaning of 'residential premises' for the purposes of Subdivision 40-C of the GST Act (Residential premises) is examined in Goods and Services Tax Ruling GSTR 2011/D2. GSTR 2011/D2 is a draft for public comment and represents the Commissioner's preliminary view about the way in which a relevant taxation provision applies, or would apply to entities generally.

Determining whether premises are residential premises to be used predominantly for residential accommodation for the purposes of section 40-65 of the GST Act is to be made by reference to a single test that looks to the characteristics of the property. This test does not require an examination of the subjective intention or use of any particular person. It is the objective intention with which the premises are designed, built or modified that is relevant. 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 (paragraphs 6 and 7 of GSTR 2011/D2).

To satisfy the definition of residential premises, premises must provide shelter and basic living facilities. Premises are not residential premises where their physical characteristics indicate that they are not intended to provide living accommodation (paragraph 12 of GSTR 2011/D2).

In order 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 them from being occupied for residential accommodation. Residential premises in a temporary state of disrepair remain residential premises (paragraph 13 of GSTR 2011/D2).

There is no specific restriction, in the definition of residential premises, on the area of land that can be included with a building. The extent to which land forms part of residential premises, to be used predominantly for residential accommodation is a question of fact and degree in each case. A relevant factor in determining this is the extent that the physical characteristics of the land and building as a whole indicate that the land is to be enjoyed in conjunction with the residential building (paragraphs 31 and 146 of GSTR 2011/D2).

Vacant land is not capable of being occupied as a residence or for residential accommodation as it does not provide shelter and basic living facilities. Vacant land is not residential premises (paragraph 36 of GSTR 2011/D2).

On the facts provided, the Property includes a house which was occupied initially by you as your home and then later by the tenant. The house constructed on the land provided the persons occupying it with shelter and basic living facilities. You have advised that notwithstanding that the house is vacant and has been vacant for a couple of years it is in a 'sound condition and easily rentable with a few minor maintenance issues'. It follows that the house is, therefore, fit for human habitation and is not in such a dilapidated condition as to prevent it being occupied for residential accommodation.

The Property has been used to make supplies of residential premises for many years. It follows that the Property does not come within the meaning of new residential premises nor does the Property come within the definition of commercial residential premises.

The house is the only building on the land. There are no physical characteristics of the land and the house to indicate that the land was not to be enjoyed in conjunction with the residential building. The whole of the Property had been leased to the tenants for their enjoyment. The house was occupied as a residence and continues to exhibit those characteristics which indicate that it was intended to be occupied and is capable of being occupied as a residence. In the absence of evidence to the contrary, the Property which includes the land and the house come within the definition of residential premises to be used predominantly for residential accommodation. This is the case notwithstanding that the Property had not been occupied for a number of years (vacant) before being sold or that the intention of the Purchaser is to demolish the residential premises and redevelop the site.

Accordingly, the sale of the Property which includes land and the residential house satisfies the requirements under section 40-65 of the GST Act for the sale of real property that is input taxed.

You will note that the margin scheme under Division 75 of the GST Act applies in working out the amount of GST on a taxable supply of real property. To the extent a supply is an input taxed supply it is not a taxable supply.