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Ruling

Subject: GST and sale of strata titled apartments

Question

Are you making an input taxed supply of residential premises when you sell strata titled apartments?

Answer

Yes, you are making an input taxed supply of residential premises when you the sell your strata titled apartments. Therefore, as you acquired the apartments with the intention to provide taxable supplies of commercial residential accommodation, and your actual supply is an input taxed supply of residential premises, you are required to make adjustments pursuant to Division 129 of the GST Act.

Relevant facts and circumstances

You are registered for GST.

You purchased a specified number of strata titled apartments which settled after you registered for GST.

The apartments purchased represent the majority of the total number of apartments in the complex.

The apartments were not fully completed when purchased, with additional construction expenses being incurred.

The work required included:

· surfacing the roof of the apartments;

· installation of a water tank in order that the fire safety system would meet the requirements of the relevant fire safety regulations;

· the verandas on a number of apartments were 50% completed and required decking to be installed;

· painting of the apartments including the façade; and

· replacement of a number of stolen hot water systems.

When the apartments were purchased there was a small septic tank in use. In the event that all apartments were occupied, the existing septic tank would require emptying each day. As a result, you are currently in the process of upgrading the existing septic system to cater for the use of all apartments simultaneously.

In the event that further apartments are constructed, the system will be connected to the mains sewerage line.

Each apartment contains either two or three bedrooms, bathroom, kitchen, living room and laundry. The upper level apartments have a veranda/balcony.

The supply of the apartments to you was a taxable supply of new residential premises and you claimed an input tax credit in respect to the acquisitions. This was done on the basis that you would be making taxable supplies of commercial residential accommodation.

Your intention was to lease the apartments to holiday makers on a weekly to yearly basis.

Due to various reasons, including the expense of fitting out and furnishing the apartments, the apartments were not leased and have been left vacant for approximately the last 18 months - except for one apartment that was leased for approximately six months to the site manager.

The rental of the apartment included a GST component. You treated the supply as a supply of commercial residential premises.

You are now considering selling the apartments.

You have never undertaken any commercial activity in regard to the apartments.

The property does not exhibit commercial infrastructure such as reception areas, dining and bar areas, meeting/function areas, etc.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999

Section 9-5

Subdivision 40-B

Subdivision 40-C

Section 40-65

Section 40-75

Section 195-1

Reasons for decision

Under section 40-65 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), a supply of real property is input taxed to the extent that the property is residential premises to be use predominately for residential accommodation (regardless of the term of occupation).

However, the sale will not be input taxed to the extent that the residential premises are 'commercial residential premises' or 'new residential premises'.

The term '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.'

Note: Asterisked terms are defined in section 195-1 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

The definition states that the premises must be capable of occupation as a residence. The physical characteristics common to 'residential premises' is that they provide the occupants with sleeping accommodation and at least some of the 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.

In this case the apartments all contain a bedroom(s), kitchen, bathroom and living areas and are clearly residential premises. However, as the apartments are being aggregated it is relevant to consider whether the supply has the character of commercial residential premises or are considered to be new residential premises. As to this extent, the supply would be excluded from the input taxed treatment provided by section 40-65 of the GST Act.

Goods and Services Tax Ruling 2012/5 'Goods and services tax: residential premises' provides further guidance in regard to the definition of residential premises. In addition to the characteristics of providing shelter and basic living facilities, the 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. An objective consideration of the relevant facts and circumstances determines whether residential premises are fit for human habitation.

Paragraph 22 of GSTR 2012/5 explains that a partially built building is not residential premises until it becomes fit for human habitation.

In this case you purchased partially completed premises and advised the following work was carried out to complete the premises:

· surfacing the roof of the apartments;

· installation of a water tank in order that the fire safety system would meet the requirements of the relevant fire safety regulations;

· the verandas on a number of apartments were 50% completed and required decking to be installed;

· painting of the apartments including the façade; and

· replacement of a number of stolen hot water systems.

We consider that prior to the above work being carried out (i.e. at the time of your purchase of the apartments) the premises contained the characteristics of shelter and basic living facilities and were fit for human habitation. As such, we consider that you were supplied residential premises when you purchased the apartments.

New residential premises

Residential premises are considered to be 'new residential premises' where they have not previously been sold as residential premises (other than commercial residential premises). In this case, the apartments were sold to you as a taxable supply of new residential premises and you claimed an input tax credit in respect to the acquisitions.

As such, your supply of the apartments does not satisfy the definition of 'new residential premises'. Consequently, your supply of the strata titled apartments will not constitute a supply of new residential premises.

Commercial residential premises

Goods and Services Tax Ruling 2012/6 'Goods and services tax: commercial residential premises' provides the Commissioner's considered view about how Subdivision 40-B, 40-C and section 9-5 apply to supplies of commercial residential premises and accommodation in commercial residential premises. The principles outlined in GSTR 2012/6 have been applied in addressing the issues raised.

'Commercial residential premises' is defined in section 195-1 of the GST Act to include (amongst other things):

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

…

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

However, it does not include premises to the extent that they are used to provide accommodation to students in connection with an *education institution that is not a *school.

The terms hotel, motel, inn, hostel and boarding house are not defined in the GST Act and take their ordinary meaning. The Macquarie Dictionary (Macquarie) provides the following definitions:

Hotel a building in which accommodation and food, and alcoholic drinks are available

Motel a roadside hotel which provides accommodation for travellers in self-contained, serviced units, with parking for their vehicles.

Inn a small hotel that provides lodging, food etc., for travellers and others

Hostel a supervised place of accommodation, usually supplying board and lodging provided at a comparatively low cost, as one for students, nurses, etc.

Boarding house a dwelling in which lodging is provided to paying residents who share common facilities such as a kitchen, laundry, living room, etc.

In their ordinary meanings, these terms share the common attribute of providing accommodation to guests. Paragraph (f) of the definition of commercial residential premises extends the scope of the definition to premises that are 'similar' to the class of establishments described in paragraphs (a) to (e).

Premises that are 'similar' to establishments that are commercial residential premises must have sufficient characteristics in common with the class of premises described.

Paragraph 95 of GSTR 2012/6 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 may include (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.

This position is supported by the following observation made by Emmett J in the Full Federal Court decision of South Steyne Hotel Pty Ltd v. Federal Commissioner of Taxation [2009] FCAFC 155:

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…

A single supply by sale or lease of premises consisting of rooms, apartments, cottages or villas as well as commercial infrastructure, regardless of whether they are separately titled, is a supply of commercial residential premises.

In contrast, paragraph 98 of GSTR 2012/6 provides that a supply by sale or lease of strata titled rooms, apartments, cottages or villas without sufficient commercial infrastructure referred to above is an input taxed supply of residential premises to be used predominantly for residential accommodation regardless of whether the building complex, or any part of it, is being, or will be, operated as commercial residential premises.

You are considering selling a number of strata titled apartments within a complex. You are not supplying, nor does the complex exhibit, any commercial infrastructure such as reception areas, dining and bar areas, meeting/function areas, etc.

As such, your supply of the apartments will not constitute a supply of commercial residential premises.

Conclusion

Your supply of the strata titled apartments are considered a supply of residential premises to be used predominately for residential accommodation. The supply is considered to be neither a supply of commercial residential premises nor new residential premises.

As such, your supply will be an input taxed supply pursuant to section 40-65 of the GST Act.