Edited version of your private ruling

Authorisation Number: 1012439458585

Ruling

Subject: GST, mixed supply and sale of property

Question

Is the sale of a property that comprises a residential premises and a medical practice an input taxed supply?

Answer

The sale of the property is a mixed supply that is partly taxable and partly input taxed.

Relevant facts and circumstances

You practiced as a medical professional but have now retired. You conducted your practice from a property (the property). You are registered for GST.

As you have retired from your profession, you are considering selling the property from which you conducted your practice.

The property is zoned purely residential. The property consisted of a residential house ('the residence') and an extension that contained your medical practice ('the extension'). The residence contained a kitchen, bathroom, dining room, sun room and bedrooms. The extension, contained X consulting rooms, a waiting room, and a reception area. The extension has its own separate entrance.

You acquired the property before 1999. The extension was already installed and configured as a medical practice before you bought the property. You have not conducted any of the modifications to the property yourself, apart from minor renovations when required.

You have occasionally leased out the residence over your years of ownership. It has not been leased for a number of years. When the residence was not leased, you used it for storage. You have never lived at the residence.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act section 9-5; 9-80; 40-65 and 195-1

Reasons for decision

A supply is a taxable supply if all the conditions under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 ('the GST Act') are satisfied. Section 9-5 of the GST Act states:

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.

(Items marked with an asterisk (*) are defined in the Dictionary at section 195-1 of the GST Act).

Under subsection 40-65(1) of the GST Act, a sale of real property is input taxed to the extent that it is residential premises to be used predominately for residential accommodation, regardless of the term of occupation.

Paragraph 10 of Goods and Services Tax Ruling GSTR 2012/D1 Goods and services tax: residential premises and commercial residential premises provides that premises displaying 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.

In your case, you own a residence that has been leased occasionally as a residential property. When vacant, the residence has been used for storage. Despite periods of vacancy, the residence has maintained its essential character as a residential property. Hence, the supply of the residence is input taxed under section 40-65 of the GST Act.

However, the supply of commercial premises is not input taxed or GST-free. Where the supply satisfies the conditions under section 9-5 of the GST Act, it will be a taxable supply. In your case the extension is commercial premises because you conducted your business from those premises. You will make the supply for consideration, you are registered for GST, and your supply is connected with Australia. Section 195-1 of the GST Act provides that a supply made in the course or furtherance of an enterprise that you carry on includes doing anything in the course of the commencement or termination of your enterprise. Hence, you will make a taxable supply of the extension on your property.

Thus, you will make a supply of a property containing a taxable part and an input taxed part. We refer to this as a 'mixed supply'. Paragraph 12 of Goods and Services Tax Ruling GSTR 2001/8 Goods and services tax: apportioning the consideration for a supply that includes taxable and non-taxable parts (GSTR 2001/8) states that:

… where you make a supply that is a combination of separately identifiable taxable and non-taxable parts, you need to identify the taxable part of the supply. Then you can apportion the consideration for the supply and work out the GST payable on the taxable part of the supply.

Paragraph 26 of GSTR 2001/8 provides that apportionment must be undertaken as a matter of practical commonsense and that you can use any reasonable basis to apportion the consideration.

Paragraph 92 of GSTR 2001/8 provides that apportionment must be supportable by the facts in the particular circumstances.

GSTR 2001/8 provides a number of direct methods of apportioning consideration that give the most accurate measure of the consideration for the taxable supply that you make. A direct method relevant to your circumstances is related to the relative floor area in a supply of property.

Paragraph 106 of GSTR 2001/8 provides that to make an allocation on this basis, you also need to consider the relative price of different types of floor space (for example, floor space in residential and retail are often priced differently). Therefore, if the value per square meter does not vary, you may simply work out the proportionate floor area for which you received consideration for a taxable supply. However, if the value per square meter is variable, then you can reasonably apportion on a basis of each area and its relative value. You may also need to take into account external features, such as the value of recreational areas.

Once the taxable proportion is determined, you can use the formula in section 9-80 of the GST Act to determine the value of the taxable part.

Margin Scheme

As you purchased the property before 1999, you may be eligible to apply the margin scheme to the taxable part of your supply. For more information, please see GST and the margin scheme (NAT 15145).