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Authorisation Number: 1011984296038

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Ruling

Subject: GST and entitlement to input tax credits on the sale of property.

Question:

Is an Australian entity (you) entitled to claim an input tax credit (ITC) in relation to the acquisition(s) of the property (or properties) at an address in Australia from the partnership (vendor)?

Advice:

You are not entitled to claim an ITC on the acquisition of the lot with the residential house (referred to as 'property A') because the supply of property A will be an input taxed supply to you, and no GST is payable on this sale.

You are entitled to claim an ITC on the acquisitions of the lots of vacant land (referred to as 'properties B and C') because the supplies of properties B and C are taxable supplies to you, and GST will be payable on these sales.

Relevant facts and circumstances

An Australian entity (you) has entered into a contract to purchase a property (or properties) at an address in Australia. You are registered for goods and services tax (GST).

The vendor is the partnership which is registered for GST.

The contract of sale at the address is for three lots on three separate titles (together referred to as 'properties').

The price of the properties is $XXX. However under a special condition 'GST', whether GST is paid at settlement is determined by this private ruling. The sale is due to settle soon.

One lot has a single story brick veneer residential house ('property A'). The other two lots are vacant lots of land ('properties B and C').

At the time of contract signing, property A has a residential dwelling that was occupied and leased to a tenant on a month to month basis. At settlement, you will have vacant possession and have no intention of developing the site for residential purposes.

The structure of property A is a standard single story brick veneer house with three bedrooms, one bathroom and a central living space. No part of the residential building has been converted by the vendor or tenants for any commercial purposes prior to sale.

The zoning of the properties is Zone 1 residential which is subject to a special building overlay. You intend to develop the site in accordance with permits allocated to the properties. The properties have some planning permits to which you will develop the site in accordance to one of the permits.

You intend to demolish the residential dwelling as soon as practical.

The vendor acquired the properties less than 5 years ago, which were leased soon after. It is your understanding that the property/ies had been previously sold as residential premises by owners who were registered for GST. It does not appear that the vendor had made significant renovations to the residential dwelling. The residential building has not undergone/been created through substantial renovations, nor has it been replaced by demolished premises on the same land.

The contract for sale provides (amongst other things), the vendors details, purchaser's detail, property details, payment, and settlement date. The clauses for GST (price), farming business/going concern, and margin scheme are marked as not applicable (N/A). There are special conditions relating to GST which provides that the vendor appoints the purchaser as its agent for the purposes of making this private ruling application to confirm whether or not the sale is a taxable supply, and whether or not you (as the purchaser) are entitled to ITC on the acquisition(s).
You will use the properties for a creditable purpose per the applicable planning permit applied to the properties.

A copy of the contract, a property report (with an area map) and a plan of survey (showing the site with three lots/parcels, with a border or fencing surrounding the middle lot), and a planning property report are provided.

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, Section 11-5

A New Tax System (Goods and Services Tax) Act 1999, Section 11-15

A New Tax System (Goods and Services Tax) Act 1999, Section 11-20

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

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

Reasons for decision

Input tax credits

Under section 11-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), you are entitled to claim an input tax credit (ITC) on any creditable acquisition you make.

Section 11-5 of the GST Act provides that you make a creditable acquisition if:

1. you acquire anything solely or partly for a creditable purpose; and

2. the supply of the thing to you is a taxable supply; and

3. you provide or are liable to provide consideration for the supply; and

4. you are registered or required to be registered for GST.

You acquire a thing for a creditable purpose to the extent that you acquire the thing in carrying on your enterprise. However, you do not acquire a thing for a creditable purpose to the extent that the acquisition relates to making input taxed supplies or is of a private or domestic nature.

The facts indicate that you have satisfied paragraphs 11-5(a), 11-5(c) and 11-5(d) of the GST Act as:

You will acquire and use the properties for a creditable purpose as you will develop the site in accordance to one of the planning permits.

You will provide consideration for the acquisition(s) of the properties.

You are registered for GST.

What remains to be determined is whether the sale of the properties to you is a taxable supply (as per paragraph 11-5(b) of the GST Act).

Taxable supply

The facts indicate that the contract of sale at that address is for three lots with three separate titles, and the plan/report(s) of the site shows three lots with a border or fencing surrounding the lot consisting of the residential dwelling. Accordingly, there are separate supplies of three properties.

GST is payable on a taxable supply under section 9-5 of the GST Act. The facts indicate that the vendor satisfies all the requirements under paragraphs 9-5(a) to 9-5(d) of the GST Act as follows:

1. The vendor makes the supplies of the properties in return for consideration;

2. The supplies are made in the course or furtherance of their enterprise;

3. The supplies are connected with Australia as the properties are located in Australia; and

4. The vendor (being the partnership) is registered for GST.

However, a supply will not be a taxable supply to the extent that it is GST-free or input taxed.

Property A has a residential house, whereas properties B and C are vacant lots of land. The supplies of the properties in the circumstances you have described are not GST-free. What remains to be determined is whether the sale of each property is an input taxed supply.

Input taxed supply

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 (regardless of the term of occupation). 

The term 'residential premises' is defined in section 195-1 of the GST Act. It states:

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.

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

Whether or not a building on a property is occupied as a residence or is capable of being occupied as a residence is a question of fact. 

Goods and Services Tax Ruling GSTR 2000/20 and Draft Goods and Services Tax Ruling GSTR 2011/D2 cover residential premises and commercial residential premises.

The requirement in section 40-65 of the GST Act that premises are residential premises to be used predominantly for residential accommodation is to be interpreted as a single test that looks at the characteristics of the property. The requirement for residential premises to be used predominantly for residential accommodation 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. The focus is on the physical characteristics of the premises in terms of their suitability for residential accommodation. That is, they possess features necessary for residential accommodation, and are able to be occupied as residential accommodation.

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. However, 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.

Property A - residential house

In relation to property A, from the facts provided it is a standard single story brick veneer house with three bedrooms, one bathroom and a central living space. No part of the residential building has been converted by the vendor or tenants for any commercial purposes prior to sale. The residential dwelling on property A was leased and occupied. Although you have no intention of using and developing the site for residential purposes, the objective intention with which the house was designed and built (physical characteristics of the premises) are suitable for residential accommodation. That is, the residential building (property A) that you have described possesses features necessary for residential accommodation, and is able to be occupied as residential accommodation. Accordingly, property A satisfies the definition of residential premises in section 195-1 of the GST Act.

The next step is to determine whether the sale of this property is excluded from being input taxed under subsection 40-65(2) of the GST Act. Subsection 40-65(2) of the GST Act provides that the sale of residential premises 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 definition of commercial residential premises is provided in section 195-1 of the GST Act. It includes, amongst other things, a hotel, motel, inn, hostel, or boarding house. In your circumstances, property A is not considered to be commercial residential premises, and paragraph 40-65(2)(a) of the GST Act does not apply. 

The term 'new residential premises' is defined in subsection 40-75(1) of the GST Act. In your circumstances, property A is not new residential premises as the property had been previously sold as residential premises, has not undergone/been created through substantial renovations, nor has it been replaced by demolished premises on the same land. Paragraph 40-65(2)(b) of the GST Act does not apply.

The sale of property A is not excluded from being input taxed under subsection 40-65(2) of the GST Act. Accordingly, the sale of property A is an input taxed supply, and no GST is payable on this supply.

Properties B and C - Vacant land

Although 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.

The facts indicate that the contract of sale is for three lots with three separate titles, and the plan/report(s) of the site shows three lots with a border or fencing surrounding the lot consisting of the residential dwelling. Accordingly, it is considered that the lots with the vacant land (that is, properties B and C) do not form part of the lot consisting of the residential dwelling and its associated land (that is, property A), and therefore are separate supplies of three properties.

In relation to properties B and C, these properties are vacant lots of land. 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 does not satisfy the definition of residential premises in section 195-1 of the GST Act. Accordingly, the supplies of properties B and C will not be input taxed supplies, and are taxable supplies.

Summary - entitlement to ITCs

There is a mixed supply which is partly input taxed and partly taxable.

The supply of property A (residential house) to you is an input taxed supply and GST is not payable on this supply. Therefore, you will not satisfy the requirement of paragraph 11-5(b) of the GST Act and are not entitled to claim an ITC on the acquisition of property A.

The supplies of properties B and C (vacant land) to you are taxable supplies under section 9-5 of the GST Act, and therefore you will satisfy the requirement of paragraph 11-5(b) of the GST Act and are entitled to claim an ITC on the acquisitions of properties B and C.

Apportioning the consideration for a mixed supply

As there is a mixed supply, where there is a single consideration for the sale of the properties, you and the vendor will need to apportion the consideration on a fair and reasonable basis. You and the vendor must keep records on how the calculation was made. For further information on apportioning the consideration for a mixed supply refer to Goods and Services Tax Ruling GSTR 2001/8. 

The vendor will be required to remit 1/11^th of the consideration received for the sales of properties B and C, and you will be entitled to claim ITCs for the GST paid on the acquisitions of properties B and C.

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