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Ruling

Subject: GST and sale of residential rental property

GST and sale of residential rental property

Question 1

Are you liable for GST in relation to the sale of your residential rental property, situated in Australia?

Answer

No, you are not liable for GST in relation to the sale of your residential rental property situated in Australia. Your supply of this property is input taxed and therefore is not subject to GST.

Relevant facts and circumstances

You, individual A and individual B (collectively referred to as 'you') are salary and wage earners and are not registered for GST either individually or jointly.

You purchased a residential property in Australia some time after 1 July 2000.

The property is an 'old' house which was initially acquired by you together with your family members. The property was held in your names as co-owners, until a specified date when your family members sold their share in the property. Since that time the property has been held by you as tenants in common.

The property has only been used by you for residential rental purposes since it was acquired by you. You do not carry on any other enterprise apart from the rental of this property.

The local authority has since approved a development plan (Plan). This Plan specified that land zoned residential within the CBD 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 specified area.

To be able to sell the property under this Plan, adjoining properties were acquired by your associate.

On a specified date another associate acquired an adjoining property. Further to the above acquisitions and in order to meet the minimum size limitation imposed by the Plan, your associate acquired options over two other adjoining properties to include in a development application.

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 in a specified year and resulted in a DA approval being granted on a specified date by the 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 residential rental property

Relevant legislative provisions

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

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.

Detailed reasoning

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 is a suburban block containing an 'old' house and the premises have only been used by you for residential rental purposes since it was initially acquired by you.

The premises clearly have the physical characteristics of residential premises as it was designed and built as a house and provides 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 property with the house intact (to a developer in conjunction with the adjoining properties owned by your associates and the development approval granted by local authority). As such you will be making an input taxed supply when you sell the premises 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 house. (You are salary and wage earners).

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 property as the sale of the 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 property in question is a capital asset used in conducting your rental enterprise and you will be transferring ownership of this asset when you sell this property, 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 your residential rental property.