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Ruling

Subject: GST and supply of vacant land

Question 1

Is an Australian entity (you), making input taxed supplies under subsection 9-30(4) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) when you sell two properties (the properties) as vacant land because of fire damage to the dwellings on the properties, which prior to the fire, you had intended to sell as input taxed supplies?

Answer

No, you are not making input taxed supplies under subsection 9-30(4) of the GST Act when you sell the properties as vacant land. The supplies are taxable supplies.

Relevant facts and circumstances

You are carrying on an enterprise of property development and are registered for GST.

As part of your property development activities, you acquired two properties in two titles, each incorporating existing residential premises occupied by the vendors.

You completed settlement and withheld a bond from the settlement funds for the vendor to clean up the property. After settlement the vendor began an extended process of moving and cleaning up the property. During this period they continued to occupy the property.

One dwelling was a X bedroom weatherboard house with corrugated iron roof. The house was surrounded by associated shedding and gardens. The other property contained a small weatherboard dwelling, utilised for storage of excess furniture by the vendor.

After settlement you lodged a development application requesting approval to subdivide the land into rural residential allotments with the existing residential premises to be retained and incorporated into two Lots in the subdivision.

A bushfire destroyed both dwellings, together with vegetation and fencing around the property. You did not have insurance to cover this event and you considered that it was not financially viable to have the two residential premises reinstated on the respective allotments.

You had allowed the vendor to continue to occupy the residential premises on an irregular basis until the bushfire destroyed the dwelling. You did not have a formal leasing agreement in place with the occupants (the vendor) for these two dwellings and had not received consideration from the vendor for their occupancy.

You received approval for the development of the land and you proceeded to subdivide the land. As part of the subdivision, you have improved the properties through completing road construction, fencing, drainage, electricity and telecommunications installation on the allotments.

You have sold all of the allotments in this development as vacant land.

Relevant legislative provisions

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

Subsection 9-30(4) of A New Tax System (Goods and Services Tax) Act 1999

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

Subsection 40-65(1) of A New Tax System (Goods and Services Tax) Act 1999

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

Reasons for decision

Subsection 7-1(1) of the GST Act provides that GST is payable on taxable supplies.

The sales of the properties will be taxable if the supplies satisfy all the elements of section 9-5 of the GST Act. Under section 9-5 of the GST Act you make a taxable supply if:

· you make the supply 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, the supply is not a taxable supply to the extent that it is GST-free or input taxed.

The facts indicate that your sales of the properties satisfy the requirements under paragraphs
9-5(a), 9-5(b), 9-5(c) and 9-5(d) of the GST Act as the sales are made for consideration, the sales are made in the course or furtherance of your enterprise of property development, the properties are located in Australia and you are registered for GST.

Therefore, the sales of the properties will be a taxable supply under section 9-5 of the GST Act, unless the supply is GST-free or input taxed.

In your circumstances, there are no provisions in the GST Act that provide for the sale of the properties to be GST-free. Therefore, the matter that remains to be determined is whether the supplies will be input taxed.

Input taxed

Division 40 of the GST Act covers supplies, including the transfer of land, that are input taxed and are therefore not taxable supplies. If a supply is input taxed, then no GST is payable on the supply and there is no entitlement to GST credits for acquisitions that relate to making the supply.

Under section 40-35 of the GST Act, a supply of residential premises, other than commercial residential premises (such as hotels, motels and boarding houses), by way of lease, hire or licence is an input taxed supply.

Further, subsection 40-65(1) of the GST Act provides that the 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.

'Residential premises' is defined in section 195-1 of the GST Act as 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.

Supply of vacant land

You are advised that vacant land, of itself, can never have sufficient physical attributes to characterise it as being able to be, or intended to be, occupied as a residence. Goods and Services Tax Ruling GSTR 2000/20: commercial residential premises (GSTR 2000/20) confirms this at paragraph 25:

25. The definition requires that land must have a building affixed to it and that the building must have the physical characteristics that enable it to be occupied or be capable of occupation as a residence or for residential accommodation. Vacant land of itself can never have sufficient physical characteristics to mark it out as being able to be or intended to be occupied as a residence or for residential accommodation.

The term 'commercial residential premises' is defined in section 195-1 of the GST Act. The sale of vacant land does not fall within any of the defined categories.

In addition the sale of the properties does not constitute sales of new residential premises as the lots were sold as vacant land.

Thus the supply of the properties does not satisfy the definition of commercial residential premises or new residential premises.

Residential Premises

You contend that if not for the bushfire, the supply of the properties would have been treated as input taxed as supplies of residential premises. Your contention is addressed below.

As discussed above, subsection 40-65(1) of the GST Act provides that 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.

GSTR 2000/20 states at paragraph 19:

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.

Further, paragraph 26 of GSTR 2000/20 provides that the physical characteristics common to residential premises that provide accommodation are:

· The premises provide the occupants with sleeping accommodation and at least some basic facilities for day to day living.

· The premises may be in any form, including detached buildings, semidetached buildings, strata-titled apartments, single rooms or suites of rooms within larger premises.

We now need to consider if the properties had the physical characteristics common to residential premises.

From the facts provided, the former residence on the first property was capable of being used for residential accommodation. It has the physical characteristics of a house which provides the occupants with sleeping accommodation and the basic facilities for day to day living. The premises were used for personal accommodation.

The former residence on the second property was not being used for residential accommodation. However you advise that this was a small weatherboard dwelling that was being used for storage of excess furniture.

Therefore, the supply of the properties would have been capable of being sold as input taxed supplies of residential premises under section 40-65 of the GST Act if there were dwellings attached to the land at the time of sale. However as the bushfire destroyed the premises the properties were cleared and sold as vacant land at a later date. As a result the supply of the properties cannot be considered to be input taxed supplies of residential premises, they are taxable supplies.

Leasing enterprise

As mentioned, under section 40-35 of the GST Act, the supply of residential premises, other than commercial residential premises (such as hotels, motels and boarding houses), by way of lease, hire or licence is an input taxed supply.

In your situation you allowed the occupants (the vendor) to continue to reside in the residential premises on an irregular basis until the bushfire destroyed the dwelling. You allowed the vendor access to the properties for the purpose of cleaning and removing their possessions from these two dwellings.

You did not formalise a leasing agreement with the vendor in relation to either of these properties. The vendors did not pay consideration for their occupancy of the dwelling. Thus we do not consider that these properties were being held by you as part of a leasing enterprise.

As you were not leasing the properties as residential premises, you are not making an input taxed supply of residential leasing under section 40-35 of the GST Act.

Subsection 9-30(4) of the GST Act

You contend that subsection 9-30(4) should apply to the supply of the properties and offer ATO ID 2009/18 as the ATO view that supports your contention.

Subsection 9-30(4) of the GST Act provides:

A supply is taken to be a supply that is *input taxed if it is a supply of anything (other than *new residential premises) that you have used solely in connection with your supplies that are input taxed but are not *financial supplies.

In considering the application of subsection 9-30(4) of the GST Act to the supply of the vacant land it is necessary to identify the uses to which the entity has put the land and whether these uses are solely in connection with the entity's input taxed supplies (other than financial supplies). This requires that the land, whether by itself or as part of the residential premises, has not been used in any way other than in connection with the entity's input taxed supplies.

The Commissioner's view is that 'used' has a broad meaning in the context of subsection 9-30(4) of the GST Act (see the interpretation of 'use' in other statutory contexts in Council of the City of Newcastle v. Royal Newcastle Hospital (1959) 100 CLR 1; Ryde Municipal Council v. Macquarie University (1978) 139 CLR 633; and Lennard v. Jessica Estates Pty Ltd [2008] NSWCA 121).

The Macquarie Dictionary, 2005, 4th edition, The Macquarie Library Pty Ltd, NSW, defines 'use' as including 'to employ for some purpose'. In considering whether land has been used solely in connection with input taxed supplies, it is important to consider throughout the period of ownership by the entity:

· how the land has been exploited or enjoyed (for example, private use by the entity, business use by the entity, or leasing to a third party);

· what the entity has done to change or develop the land, and whether those things can be said to be connected to input taxed supplies; and

· what the entity's purpose has been in holding the land (for example, if the land is dormant for a period of time, whether the purpose of holding the land is to achieve profits through appreciation in the capital value).

It is necessary to look at the surrounding circumstances to determine if the entity's activities can be said to be connected with the entity's input taxed supplies, or whether they instead should be regarded as having a separate purpose.

You purchased the properties for business use by your entity as part of its property development enterprise. Prior to the bushfires you sought approval to subdivide the two blocks of land into rural residential allotments. After the fire, you arranged for the land to be cleared and your entity held the land whilst waiting for approval of your development application.

You have improved the properties through completing the subdivision of the lots comprising road construction, fencing, drainage, electricity and telecommunications installation.

You clearly improved these properties with the purpose of achieving profits through subdivision and ultimately sale of the properties. Both properties were significantly changed as a result of the rezoning, the subdivision, and the improvements to the properties.

We do not consider that the properties were used solely in connection with input taxed supplies of residential premises; the land was purchased and used for the purpose of development by your entity.

As previously stated, we do not consider that the properties were being held by you as part of a leasing enterprise.

Your enterprise involves activities of property development. You did not use the properties for leasing purposes or for activities of making supplies by way of lease. You held the property for the purpose of, or as part of, your activities of property development and not for the purpose of supplying residential premises.

Your use of the land has not been solely in connection with making input taxed supplies by way of lease of residential premises or supply of residential premises. Therefore, the sale of the properties is not taken to be an input taxed supply under subsection 9-30(4) of the GST Act.

Accordingly the sales of the lots of vacant land are taxable supplies as they satisfy all the requirements of a taxable supply under section 9-5 of the GST Act.

ATO ID 2009/18

In summary we do not agree with your contention that subsection 9-30(4) of the GST Act should apply to the supply of the properties. You rely on the ATO view offered in ATO ID 2009/18 to support your contention.

We are of the opinion that the facts of your case can be differentiated from ATO ID 2009/18 for the following reasons:

· You were not conducting a residential leasing enterprise in relation to the properties.

· You have not leased the properties at any time, thus, the properties could not have been used solely in connection with any input taxed supply of residential leasing.

· You purchased and held the property for the purpose of property development, the entity in ATO ID 2009/18 did not.

· The facts in ATO ID 2009/18 state that the entity had not done anything significant to improve the value of the land or occupied the land in a way to suggest that it commenced to hold the land for a purpose not connected with its input taxed supplies of residential leasing. You made significant improvements to the land by completing road construction, fencing, drainage, electricity and telecommunications installation on the allotments.

We consider that the differences in facts as outlined between your situation and the facts listed in ATO ID 2009/18 do not support your contention. We are not of the view that the supplies of the properties are input taxed supplies. The supplies of the properties are taxable supplies.