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Ruling
Subject: GST and sale of property used as an office
Question 1
Will the proposed sale of your property be an input taxed supply of residential premises under section 40-65 of A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?
Answer
Yes, the proposed sale of your property will be an input taxed supply of residential premises under section 40-65 of the GST Act.
Relevant facts and circumstances
You are not registered for GST as your GST turnover is below the registration threshold for Not for Profit Bodies.
You operate from premises purchased in yyyy, and comprise a large freestanding post-federation style house on land of approximately x square metres in a residential area.
You have provided a copy of the title search on the property.
The main house is in its original condition and the rooms are used as offices, meeting area, library, storage, kitchen, dining, laundry and toilet facilities. The land is zoned 2A residential.
Economic circumstances have forced you to sell the premises, which you intend to do via public auction. The property is being marketed as a substantial residence of local significance.
You have provided a copy of the draft marketing brochure. It provides the property has:
o a land size of x sqm
o five bedrooms plus a study or 6th bedroom
o two bathrooms
o grand formal living and separate interconnecting dining
o tall ornate ceilings, marble fireplace and intricate timber joinery
o large eat in kitchen, rear family room flows out to undercover entertaining area
o sweeping frontage with an abundance of street parking, double garage and expansive sun drenched north facing rear lawn area
o an elevated setting with a short stroll to the vibrant shopping strip, train station and elite schools.
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 40-75.
A New Tax System (Goods and Services Tax) Act 1999 Section 195-1.
A New Tax System (Goods and Services Tax) Act 1999 Section 40-65.
Reasons for decision
Section 40-65(1) of the A New Tax System (Goods and Services Tax) Act 1999 (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 to mean land or a building occupied or intended to be occupied as a residence or for residential accommodation, regardless of the term of occupation or intended occupation and includes a floating home.
Goods and Services Tax Ruling GSTR 2000/20 'Goods and Services Tax: commercial residential premises' provides that the definition of residential premises 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. This ruling is available on the Tax Office website at www.ato.gov.au
Paragraph 19 of GSTR 2000/20 states:
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.
Paragraph 22 of GSTR 2000/20 states:
The function of paragraph 40-35(2)(a) and subsection 40-65(1) is to differentiate the GST treatment of any portions of residential premises that are commercial. This would apply, for example, to a house that has been partly converted for use as a doctor's surgery. Several parts of the house may still be used predominantly for residential accommodation, such as bedrooms, bathroom, kitchen, living rooms and gardens, while other areas are not, being turned over to office and consulting room space, and storage for the surgery. In this case paragraph 40-35(2)(a) and subsection 40-65(1) operate to exclude these commercial parts from the input-taxed treatment of the rest of the property.
Whether residential premises are to be used predominantly for residential accommodation as opposed to commercial purposes, is a question of fact and degree. A home office in a house will not generally be sufficiently separate from the rest of the residential premises to distinguish its use and its predominant use will still be residential accommodation.
Paragraph 26 of GSTR 2000/20 details the physical characteristics common to residential premises that provide accommodation as:
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-title apartments, single rooms or suites of rooms within larger premises.
From the facts you provided, the residential premises have all the physical characteristics that enable it to be used for residential accommodation. No substantial renovations or repairs have been carried out on the residential premises. No part of the residential premises such as bedrooms, lounge, bathroom and kitchen of the residential premises has been converted for use as an office or storage area.
The premises satisfy the definition of residential premises as the physical characteristics such as bedrooms, lounge, bathroom and kitchen of the residential premises remain unchanged and the premises are still capable of being used for residential accommodation purposes. The fact that the residential premises are used as an office does not change the nature of the premises and does not give the premises a character different from the residential premises.
However, before concluding that the supply of the property is input taxed, we need to consider the exclusions 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:
o commercial residential premises, or
o new residential premises other than those used for residential accommodation
(regardless of the term of occupation) before 2 December 1998.
Therefore, we need to consider whether the property was commercial residential premises or new residential premises.
The facts indicate that the property is not commercial residential premises as defined under section 195-1 of the GST Act.
Subsection 40-75(1) of the GST Act provides that residential premises are new residential premises if they:
· have not previously been sold as residential premises (other than commercial
residential premises) and have not previously been the subject of a long-term lease, or
· have been created through substantial renovations of a building, or
· have been built, or contain a building that has been built, to replace demolished premises on the same land.
You have advised that you purchased the property from the previous owner in yyyy and the main house is in its original condition. You have not made any substantial renovations to the premises. Accordingly, it is not considered new residential premises under paragraph 40-75(1) of the GST Act.
Accordingly, the supply of the property is considered to be a supply of residential premises under subsection 40-65(1) of the GST Act. Therefore, the sale of the property by you is an input taxed supply.