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Ruling

Subject: sale of premises

Question

Is the proposed sale of premises (the Property) a taxable supply under the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No.

Relevant facts

Entity X as a trustee of a trust (you) owns a property (the Property).

You are a regulated self manage superannuation fund of which one of your members is a medical professional (Doctor).

You acquired the Property from the Doctor prior to 1 July 2000 and as such it was not subject to the goods and services tax (GST).

You have been leasing the premises to the Doctor.

Both before and after the transfer, the Doctor occupied and used the premises as consulting rooms for his general medical practice.

Prior to your acquisition of the Property, the Doctor had acquired the Property from another vendor (Vendor) who had made modifications to the Property. Prior to the date of the Vendor modifications the Property was used as a home residence.

The modifications by the Vendor provided a paved parking area in an otherwise unaltered rear yard, and a reception desk at the front of what was previously the hallway into the kitchen. The kitchen was moved to the area previously occupied by the laundry. The laundry facility was also incorporated into the new kitchen.

All other rooms, including bathrooms, bedrooms, and living rooms remain as they existed at the time of purchase.

The Property is currently being proposed for sale on the open market.

Due to the Property's various attributes such as location, size and unusual appeal, you have been advised that there may be considerable interest from a diverse range of potential purchasers.

Potential purchasers may continue to use the Property as a medical practice or other professional rooms, a residence, or for a new residential development project.

You have provided a copy of the marketing brochure, photographs and the floor plan of the Property which advertise that the Property consists of a number of features.

The property is zoned by the council as residential Zone 1 (RZ1), which required you to obtain approval to use the premises as medical suites, however no approvals are required for the Property to be used as a residence.

You are registered for GST.

Reasons for decision

Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) states that:

You make a taxable supply if:  

(a) you make the supply for *consideration; and

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

(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.

In this case, the sale of the premises will be for consideration, you are conducting an enterprise of leasing the property to a related party which would be in the course of your enterprise, the supply is connected with Australia as the premises are located in Australia and you are registered for GST.

Therefore, the sale of the Property will be a taxable supply provided that the sale is not an input taxed supply under Division 40 of the GST Act.

Section 40-65 of the GST Act states that:

(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.

Goods and Services Tax Ruling GSTR 2000/20, Goods and services tax: commercial residential premises (GSTR 2000/20) discusses residential premises and commercial residential premises. A house is a residential premises if it is intended to be occupied, and is capable of being occupied, as a residence or for residential accommodation. In particular GSTR 2000/20 at paragraph 19 and 20 states:

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.

20. To be used for 'residential accommodation' or to be 'occupied as a residence', premises do not have to be a home or a permanent place of abode. To be residential premises as defined, a place need only provide sleeping accommodation and the basic facilities for daily living, even if for a short term. This follows from the definition of commercial residential premises referred to in paragraph 18.

Further, paragraphs 26 to 29 and 31 of GSTR 2000/20 provides guidance on the meaning of 'residential premises' and 'to be used for residential accommodation' for the purposes of subsection 40-65(1) of the GST Act. They state:

26. The physical characteristics common to residential premises that provide accommodation are:

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

(ii) The premises may be in any form, including detached buildings, semidetached buildings, strata-title apartments, single rooms or suites of rooms within larger premises.

27. In addition to the physical characteristics, there are other factors which may be of use in determining whether premises are to be used for residential accommodation or accommodation of another kind. These characteristics would usually be present in residential premises that have the physical characteristics given in paragraph 26. These often, but not always, include:

(i) The purpose or context of the premises' use is for personal accommodation, rather than another purpose, such as for a business.

(ii) The tasks of day to day living, such as, preparing food, cleaning and laundering, are performed by the occupant, or by others under private arrangements.

(iii) The status of the occupant is most commonly that of owner, tenant or lessee. Any boarders, lodgers or guests occupy the premises by private arrangement with the owner, tenant or lessee.

(iv) The premises will be in an area zoned by Council or Shire regulations as suitable for human habitation.

Sleeping accommodation and facilities for human habitation

28. The definition states that residential premises must be capable of occupation as a residence. To be a residence in this sense, a place normally should have the facilities required for day to day living. These characteristics are inherent in the fabrication of the structure itself. The premises should have such things as areas for sleeping, eating and bathing, but it is not necessary that these things be arranged in a similar manner to a conventional house or apartment.

29. Premises that lack these basic features, may not be either residential premises or commercial residential premises. Supplies of buildings or other structures without these characteristics are subject to GST under the basic rules, regardless of whether or not they are or have been at one time, occupied as some form of residence.

Purpose of premises

31. In some cases, the purpose for which the premises are to be used will be evident from their form or fit-out. This is most clearly the case where premises have been fabricated, or altered, to accommodate commercial or professional activities.

Paragraph 22 of GSTR 2000/20 explains the difference in the GST treatment of any portions of residential premises that are commercial. It states that 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 these cases the GST legislation may exclude these commercial parts from the input taxed treatment of the rest of the property.

Paragraph 23 of GSTR 2000/20 provides that whether or not a particular room or part of a house or apartment is to be used predominantly for residential accommodation, as opposed to commercial purposes, is a question of fact and degree.

Consistent with paragraph 27 and 28 of GSTR 2000/20 we consider the Property has the physical characteristics of a residence and satisfies the definition of residential premises to be used predominately for residential accommodation. That is, in this case the Property has bedrooms, bathrooms, toilets, kitchen, laundry, study, dinning and a sitting area. Further the outdoors areas include private parking, garden areas and fencing which are features consistent with premises which are for residential use.

In addition, the Property is also zoned by the council as residential zone 1 and as such council approval is not required for the premises to be used as a residence. As such the Property is intended to be occupied, and is capable of being occupied, as a residence or for residential accommodation.

Although the premises were leased by you to a Doctor who used the Property for business purposes, this does not give the Property a character different from those required to satisfy the definition of residential premises to be used for residential accommodation. Therefore in your case, you are not supplying anything more than the residential premises when you supply the Property. That is, the Property retains all the characteristics of residential premises.

On this basis, the sale of the Property is an input taxed supply of residential premises under section 40-65 of the GST Act.

As the supply of the Property is input taxed you will not make a taxable supply and no GST is required to be remitted on the sale of the Property.