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Ruling

Subject: GST and sale of property

Question

Are you liable to pay GST on the sale of the property located in Australia?

Advice

No, you are not liable to pay GST on the sale of the property located in Australia.

Relevant facts

You are registered for the goods and services tax and own a property that is located in Australia.

The property has been an unoccupied and unused residential house when you purchased it and has remained the same after you purchased it. Currently, the property does not have electricity or gas connected.

The house is in a dilapidated situation and will need renovations to be in a habitable situation. However the house is not subject to any demolition or contamination notice which would remove it from being suitable for occupation.

The design of the house is that of an older style house and the house consists of bedrooms, bathroom and car space.

You have entered into a sale contract for the sale of this property.

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 40-65

Reasons for decision

GST is payable on any taxable supply you make.

Under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999, a supply is a taxable supply if:

(a) you make the supply for consideration; and

(b) the supply is made in the course 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 for GST.

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

From the information received, you satisfy paragraphs 9-5(a) to 9-5(d) of the GST Act as:

(a) the supply of the property will be for consideration;

(b) the supply is made in the course of the enterprise (business) that you carry on;

(c) the supply is connected with Australia as the property is located in Australia; and

(d) you are registered for GST.

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

There is no provision in the GST Act that will make your supply of the property GST-free. The next step is to consider whether the supply of the property is an input taxed supply.

Input taxed supply

Under subsection 40-65(1) of the GST Act, 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).

Section 195-1 of the GST Act defines 'residential premises' 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.

Draft Goods and Services Tax Ruling GSTR 2012/D1 (available at www.ato.gov.au) provides guidance on residential premises and commercial residential premises. This publication is a draft for public comment. It represents the Commissioner's preliminary view about the way in which a relevant taxation provision applies, or would apply to entities generally or to a class of entities in relation to a particular scheme or a class of schemes.

You can rely on this publication (excluding appendixes) to provide you with protection from interest and penalties in the following way. If a statement turns out to be incorrect and you underpay your tax as a result, you will not have to pay a penalty. Nor will you have to pay interest on the underpayment provided you reasonably relied on the publication in good faith. However, even if you don't have to pay a penalty or interest, you will have to pay the correct amount of tax provided the time limits under the law allow it.

The following information has been extracted from the draft GSTR 2012/D1:

Definition of residential premises

6. Premises, comprising land or a building, are residential premises under paragraph (a) of the definition of residential premises in section 195-1 where the premises are occupied as a residence or for residential accommodation regardless of the term of occupation. The actual use of the premises as a residence or for residential accommodation is relevant to satisfying this limb of the definition.

7. Premises, comprising land or a building, are also residential premises under paragraph (b) of the definition of residential premises if the premises are intended to be occupied, and are capable of being occupied, as a residence or for residential accommodation regardless of the term of the intended occupation. This limb of the definition refers to premises that are designed, built or modified so as to be suitable to be occupied, and capable of, being occupied as a residence or for residential accommodation. This is demonstrated through the physical characteristics of the premises.

8. A supply of residential premises may consist of a single room or apartment, or a larger complex consisting of rooms or apartments.

Residential premises to be used predominantly for residential accommodation (regardless of the term of occupation) - physical characteristics

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).

11. In limited circumstances, a premises' physical characteristics may not conclusively demonstrate the premises' suitability or capability for occupation as a residence or for residential accommodation. In these circumstances, design or construction documents such as architectural plans may evidence whether the premises are suitable for, and capable of, being occupied as a residence or for residential accommodation. This additional evidence may assist when, for example, the character of the premises needs to be determined before construction of the premises is completed.

12. Premises that do not display physical characteristics demonstrating that they are suitable for, and capable of, being occupied as a residence or for residential accommodation are not residential premises to be used predominantly for residential accommodation, even if the premises are actually occupied as a residence or for residential accommodation. For example, someone might occupy premises that lack the physical characteristics of premises suitable for, or capable of, residential accommodation (such as a squatter residing in a disused factory). Although the premises may satisfy paragraph (a) of the definition of residential premises in section 195-1, the premises are not residential premises to be used predominantly for residential accommodation.

Living accommodation provided by shelter and basic living facilities

15. 'Residential premises' are not limited to premises suited to extended or permanent occupation. Residential premises provide 'living accommodation', which does not require any degree of permanence. It includes lodging, sleeping or overnight accommodation.

16. To satisfy the definition of residential premises, premises must provide shelter and basic living facilities. Premises that do not have the physical characteristics to provide these are not residential premises to be used predominantly for residential accommodation.

Fit for human habitation

18. Premises must be fit for human habitation in order to be suitable for, and capable of, being occupied as a residence or for residential accommodation. Residential premises are not fit for human habitation when they are in a dilapidated condition which prevents them being occupied for residential accommodation. Residential premises in a minor state of disrepair remain residential premises. A partially built building is not residential premises until it becomes fit for human habitation. Contractual or legal prohibitions against residential occupation do not prevent premises from being suitable for, and capable of, providing residential accommodation.

153. The condition of the premises supplied is relevant in deciding whether they are suitable for, and capable of, being occupied as a residence or for residential accommodation. To be residential premises as defined, premises must be fit for human habitation. Premises are not suitable for, or capable of, human habitation if they are in a dilapidated condition to the extent that it prevents occupation for residential accommodation (as may be evidenced by a demolition order issued by a relevant authority because of the premises' condition). In these circumstances, the condition of the premises indicates that the premises are no longer suitable for, or capable of, providing shelter and the basic living facilities. However, residential premises that are in a minor state of disrepair remain residential premises.

Other premises

19. Not all premises that possess basic living facilities are residential premises to be used predominantly for residential accommodation. If it is clear from the physical characteristics of the premises that their suitability for living accommodation is ancillary to the premises' prevailing function, the premises are not residential premises to be used predominantly for residential accommodation.

157. A variety of buildings may include basic living facilities, including office buildings and hospitals. However, it does not follow that all premises that have these facilities are necessarily residential premises to be used predominantly for residential accommodation.

158. Although these premises have, in part, physical characteristics common to premises that provide living accommodation, they also have physical characteristics which reflect their suitability for another purpose. Where premises' suitability for the provision of living accommodation is ancillary to the premises' prevailing function, they are not residential premises to be used predominantly for residential accommodation.

159. Even if an office worker eats and sleeps overnight in an office building for a period, it does not follow that the premises are residential premises to be used predominantly for residential accommodation. Rather, the physical characteristics of the premises reveal that the building is an office. Similarly, a squatter might eat and sleep in an otherwise vacant factory or warehouse but this does not make it residential premises to be used predominantly for residential accommodation

From the pictures and information available we can clearly identify that the design of the house is that of an older style house and the house consists of bedrooms, bathroom and car space. Accordingly the house has facilities that are considered necessary for day to day living.

You have advised that the house is a residential house that is in a dilapidated situation and will need renovation for it to be habitable. However, the house is not subject to any demolition or contamination notice which would remove it from being suitable for occupation. At the time of purchase, the property was vacant and is currently not occupied as a residence since its purchase.

Based on the above, your property has the physical characteristics of a residence and satisfies the definition of residential premises to be used predominantly for residential accommodation. The requirements in subsection 40-65(1) of the GST Act are therefore satisfied.

However, subsection 40-65(2) of the GST Act provides that 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.

Section 195-1 of the GST Act provides for the definition of commercial residential premises and generally includes a hotel, motel, inn, hostel or boarding house or anything similar to residential premises that satisfy these descriptions.

New residential premises are defined in section 40-75 of the GST Act. Subsection 40-75(1) of the GST Act provides that residential premises are new residential premises if they:

(a) have not previously been sold as residential premises (other than commercial residential premise), and have not previously been the subject of a long term lease; or

(b) have been created through substantial renovations of a building; or

(c) have been built, or contain a building that has been built, to replace demolished premises on the same land.

From the information received, the property does not satisfy the requirements in subsection 40-65(2) of the GST Act as it is neither a new residential premise under subsection 40-75(1) of the GST Act nor a commercial residential premise as defined in section 195-1 of the GST Act.

Accordingly, the sale of your property is an input taxed supply under subsection 40-65(1) of the GST Act, and GST does not apply to the sale.