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Ruling

Subject: GST and sale of real property

Question

In the event that the Vendor/s are registered or required to be registered for GST, will the supply of the interest in the property located at the specified address (the Property) be an input taxed supply for GST purposes?

Answer

Yes, the supply of the interest in the Property will be an input taxed supply for GST purposes.

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You (the Buyer and the Vendor) are jointly applying for this GST private ruling.

You/your tax agent submit the following facts and contentions:

On a specified date, the Buyer entered into a Put and Call Option Deed (the Deed) with the Vendor in respect of the property located at the specified address (the Property). The Put/Call options were granted for a nominal consideration of $x. You have provided a copy of the Deed.

The Buyer has recently exercised the Call Option and will be acquiring the Property for consideration of $x million.

The Property was purchased by the Vendor on xx date. As the Property was purchased xx years ago you are not certain how the property was marketed for sale at that time. The contract for the Vendor's purchase of the Property described the Property as 'multiple dwelling'.

Two dwellings are on the Property linked by an undercover walkway. Both dwellings are located under the same title. The Property with both the dwellings has existed for approximately xx years.

Both dwellings are currently leased to a single tenant from xx year. Dwelling B is used by the current tenant as a facility to provide support accommodation to persons suffering from certain health issues.

There were no substantial renovations made to the 2 buildings during the Vendor's ownership other than the upgrade of the kitchen.

Dwelling B was not modified or renovated in any way to meet requirements for operating such a facility. Dwelling B is not held out to the public generally. In addition to providing accommodation, the tenant supplies meals to the occupants, administers medication and provides some laundry services. The Vendor does not have any direct involvement or connection with this activity.

Dwelling A has 1 kitchen, 1 bathroom and 2 bedrooms.

Dwelling B is a double storey building and the floor plans show the various rooms, toilets, bathrooms and other features.

You have provided xx number of photographs of the Property which show the following:

Dwelling A:

front view

kitchen

kitchen

living room

bedroom

bathroom

Dwelling B

front view

front view

side view

kitchen

kitchen

multiple bedrooms

It is proposed that the Property will be vacant and unoccupied at the time of supply. The Deed provides that the seller must terminate the tenancy at such time as may be reasonably necessary to enable the seller to provide vacant possession of the Property to the buyer on settlement under the contract.

You are not clear whether the Property has previously been sold as residential premises. The Vendor is not currently registered for GST. You submit that it is possible the Vendor is not required to be registered for GST on the basis they do not meet the requisite GST registration threshold.

You state that notwithstanding their current GST registration status, (and that the supply of the interest in the Property by the Vendor may be an input taxed supply for GST purposes), the Vendor has warranted that GST registration (if required) will occur prior to the sale of the interest in the Property.

Relevant legislative provisions

The A New Tax System (Goods and Services Tax) Act 1999 Division 38

The A New Tax System (Goods and Services Tax) Act 1999 Division 40

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

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

The A New Tax System (Goods and Services Tax) Act 1999 Section 40-75

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

Reasons for decision

These reasons for decision accompany the Notice of private ruling for the Buyer and the vendor.

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Summary:

In considering the overall physical characteristics of the 2 dwellings on the property situated at the specified address, referred to as Dwelling A and Dwelling B, we have made the decision that the supply of the premises is the sale of residential premises to be used predominantly for residential accommodation. Therefore, the supply will satisfy subsection 40-65(1) of the GST Act and will be input taxed. GST will not be payable on the supply.

Further, as the Vendor is not registered, provided that they are not required to be registered for GST, the supply will be out of scope of the GST.

Detailed reasoning:

Note: Unless otherwise stated, all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

All reference materials used in this ruling are available on the Australian Taxation Office (ATO) website www.ato.gov.au

Section 9-5 provides that you make a taxable supply if:

(a) you make a supply for consideration

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

(c) the supply is connected with Australia

(d) you are registered, or required to be registered, for GST.

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

In this case:

· the Vendor will supply the Property to the Buyer for $xx million

· the supply is made in the course or furtherance of the leasing enterprise conducted by the Vendor

· the supply is connected with Australia as the Property is located in Australia

Accordingly, paragraphs 9-5 (a) (b) and (c) will be satisfied.

The Vendor is not registered for GST. You state that it is possible the Vendor is not required to be registered for GST on the basis they do not meet the requisite GST registration turnover threshold. However, the Vendor has warranted that GST registration (if required) will occur prior to the sale of the interest in the Property.

Division 38 and 40 provides for certain supplies to be GST-free and input taxed respectively.

In the circumstances outlined, we consider Division 38 has no application to the supply of the Property.

Division 40 is relevant. Subdivision 40C provides for supplies of residential premises and section 40-65 states:

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.

Note: The terms marked with an asterisk are defined in section 195-1.

In applying subsection 40-65(1) it is necessary to consider the meaning of the terms 'residential premises' and 'residential premises to be used predominantly for residential accommodation'.

The Tax Office has issued a number of publications to provide guidance on residential and commercial residential premises, including:

Goods and Services Tax Ruling GSTR 2000/20 Goods and services tax: commercial residential premises

Draft Goods and Services Tax Ruling GSTR 2012/D1 Goods and services tax: residential premises and commercial residential premises

'Residential premises' is defined in section 195-1 to mean 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.

GSTR 2012/D1 states:

9. The requirement in sections 40-35, 40-65 and 40-70 that premises be 'residential premises to be used predominantly for residential accommodation (regardless of the term of occupation)' is to be interpreted as a single test that looks to the physical characteristics of the property to determine the premises' suitability and capability for residential accommodation.

10. The requirement for residential premises to be used predominantly for residential accommodation does not require an examination of the subjective intention of, or use by, any particular person. Premises that display physical characteristics evidencing their suitability and capability to provide residential accommodation are residential premises even if they are used for a purpose other than to provide residential accommodation (for example, where the premises are used as a business office).

The physical characteristics common to residential premises is that they provide the occupants with sleeping accommodation and at least some basic facilities for day to day living. These characteristics will be inherent in the design and fabrication of the premises, which typically include areas for sleeping, eating and bathing. However, these things do not need to be arranged in a manner that is similar to a conventional house or apartment.

There are two freestanding dwellings on the Property. You referred to one of the dwellings as Dwelling A, and the other as Dwelling B. For the purpose of this ruling we will also refer to these dwellings as Dwelling A and Dwelling B for ease of reference.

As there are 2 freestanding and distinct dwellings on the Property we will address each dwelling separately.

Dwelling A:

The photographs of Dwelling A show a single storey building typically that of a residence. You have described Dwelling A to consist of 1 kitchen, 1 bathroom and 2 bedrooms.

Based on the facts provided, we consider Dwelling A provides shelter and basic living facilities and it is clear the physical characteristics of Dwelling A demonstrate suitability and capability to provide residential accommodation. Accordingly, Dwelling A will satisfy the definition of residential premises to be used predominantly for residential accommodation.

Therefore, the Commissioner is satisfied that the supply of this part of the Property will satisfy subsection 40-65(1) to be an input taxed supply. This is provided Dwelling A is not commercial residential premises under paragraph 40-65(2)(a) or new residential premises under paragraph 40-65(2)(b).

We consider the physical characteristics of Dwelling A would not satisfy the definition of commercial residential premises for GST purposes.

Dwelling A is not new residential premises because when the Vendor purchased the Property in xx year, Dwelling A and Dwelling B were already in existence on the Property for approximately xx years and during the Vendor's ownership of the Property no substantial renovations were made to the 2 buildings.

Accordingly, we consider the supply of Dwelling A will be an input taxed supply under subsection 40-65(1) as determined earlier in this ruling.

Dwelling B

You have provided some photographs and the floor plans of Dwelling B. The photographs show Dwelling B as a double storey building that resembles a large residence compared to the residential house. The floor plans for the 2 levels are summarised to contain a number of various rooms, toilets, bathrooms and other features.

According to the floor plans, we consider Dwelling B satisfies the definition of residential premises in that it would provide occupants with sleeping accommodation and other facilities for day to day living and also have the physical characteristics that satisfy subsection 40-65(1) as residential premises to be used predominantly for residential accommodation.

However, Dwelling B has some distinguishing characteristics and is currently used as a facility for support accommodation. Therefore it is relevant to consider whether those characteristics take the premises out of the class of 'residential premises' and align more with that of 'commercial residential premises'.

The definition of 'Commercial residential premises' for the purposes of GST means:

(a) a hotel, motel, inn, hostel or boarding house; or

...

(f) anything similar to *residential premises described in paragraphs (a) to (e).

Paragraph 81 in GSTR 2012/D1 states:

81. Premises may be characterised under paragraphs (a) or (f) of the definition of commercial residential premises even when they are not operating. Premises that are not being operated at the time of supply may be classified by their overall physical character, considered with other objective characteristics. Prior use, physical characteristics, plans, or council or other government planning and/or zoning restrictions may all be indicative of the premises' nature.

GSTR 2012/D1 explains that in addition to living accommodation areas, premises that are commercial residential premises include commercial infrastructure to support the commercial operation of the premises. This infrastructure includes (but is not limited to) reception areas, dining and bar areas, meeting/function areas, kitchens, laundry facilities, storage areas and car parks. This infrastructure is used to provide services to occupants. Premises described in paragraph (a) and similar premises under paragraph (f) of the definition contain some or all of these areas to some degree.

Paragraph 232 in GSTR 2012/D1 further states:

This position is supported by the following observation made by Emmett J in the Full Federal Court decision of South Steyne:⁸³

A hotel, motel, inn, hostel or boarding house consists of more than the rooms or apartments that are occupied by guests. It must also of necessity include common areas such as reception areas, dining areas, car parks and the like, such as were the subject of the management lot. The supply that consisted only of the rooms or apartments or accommodation units in a hotel complex is not, without those other areas, the supply of commercial residential premises. The management lot is an essential part of the Sebel Hotel.

In this case, the size and layout of the premises allow for a number of people to occupy the premises at the same time and to share communal facilities such as the dining areas and lounge areas. However, the premises do not contain the necessary infrastructure (such as commercial kitchen, laundry, reception area, etc) to make it 'similar to' a hotel, motel, inn, hostel or boarding house or to support its operation as 'commercial residential premises'.

Accordingly, we consider Dwelling B will satisfy the definition of residential premises to be used predominantly for residential accommodation under subsection 40-65(1), and will be input taxed.

Conclusion:

As we have determined the supply of both Dwelling A and Dwelling B will be input taxed, the supply of the property located at the specified address by the Vendor will be an input taxed supply and no GST is payable.

Further, as the Vendor is not registered, provided they are not required to be registered for GST, the supply will be out of scope of the GST.