Edited version of your private ruling

Authorisation Number: 1012450223504

Ruling

Subject: Sale of a property containing residential premises - vacant land input taxed supply

Question 1

Is the sale of a property containing residential premises and vacant land 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 conduct an enterprise of investing in commercial and rural property. You purchased a property before 1999. You have now sold the property. You are registered for GST.

The property consists of contiguous lots with a zoning allowing development and subdivision subject to approval. The property is predominantly vacant land. There is a curtilage area that includes a house, a cottage, old outbuildings, a carport and water tanks. The curtilage area was fenced off from the vacant land.

You derived rental income from leasing out the house and cottage to separate individuals for residential purposes. These individuals also had access to the outbuildings, which they used for storage of machinery and trucks. The individuals who rented the house and cottage did not use the vacant land.

You allowed your neighbour to agist of livestock on the vacant land. You charged your neighbour agistment rates that were inclusive of GST. You claimed input tax credits for expenses relating to the maintenance of the property.

You sold the property as wholly vacant land. Hence, your neighbour ceased agisting livestock on the land and you ceased leasing the house and cottage to your tenants.

You contend that the sale proceeds are 100% input taxed as a sale of residential premises.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 sections 9-5, 9-20, 9-80, 40-65 and 195-1.

Reasons for decision

Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 ('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.

(* denotes a defined term at section 195-1 of the GST Act).

In your case, you make the supply for consideration, the supply is connected with Australia and you are registered for GST. The supply is made in the course or furtherance of your property investment enterprise. Thus, all the conditions of section 9-5 of the GST Act are satisfied. The sale of the property will be a taxable supply except to the extent that it is GST-free or input taxed.

We have not considered whether your supply is a GST-free supply of farmland or a GST-free supply of a going concern. It must now be determined to what extent, if any, the supply is input taxed.

Whether the supply is input taxed

Subsection 40-65(1) of the GST Act states:

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).

Paragraphs 46 and 47 of Goods and Services Tax Ruling GSTR 2012/5 Goods and services tax: residential premises ('GSTR 2012/5') states:

46. There is no specific restriction, in the definition of residential premises, on the area of land that can be included with a building. The extent to which land forms part of residential premises to be used predominantly for residential accommodation is a question of fact and degree in each case. A relevant factor in determining this is the extent to which the physical characteristics of the land and building as a whole indicate that the land is to be enjoyed in conjunction with the residential building. The use of the land is not a determining factor in deciding if the land forms part of the residential premises.

47. Vacant land is not capable of being occupied as a residence or for residential accommodation as it does not provide shelter and basic living facilities. Vacant land is not residential premises.

In your case, the vast majority of the property is vacant land, previously used for agisting livestock. Thus, the vacant land is not input taxed as it is not, and cannot be, residential premises. Accordingly, the supply of the vacant land is a taxable supply. We therefore disagree with your contention that the property is 100% input taxed as residential premises.

The curtilage area contains a house, a cottage and old outbuildings. The house and cottage are residential premises as they are used predominately for residential accommodation. Therefore, your supply of the house and cottage is input taxed under section 40-65 of the GST Act.

For the old outbuildings to be residential premises, they must be used predominantly for residential accommodation. Paragraph 7 of GSTR 2012/5 provides that this 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. Paragraph 11 of GSTR 2012/5 provides that 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. Paragraph 15 of GSTR 2012/5 provides that residential premises must provide shelter and basic living facilities.

In your case, the old outbuildings do not display physical characteristics of residential premises, nor were they designed or built to provide residential accommodation. The old outbuildings do not provide basic living facilities. They are not residential premises and, thus, are not input taxed. Thus, you make a taxable supply of the old outbuildings.

After considering the facts provided, you are making a supply that is partly a taxable supply under section 9-5 of the GST Act and partly an input taxed supply under section 40-65 of the GST Act when you sell the property. When you make a supply of a property containing a taxable part and an input taxed part, we refer to it as a 'mixed supply'. Thus, you must pay GST on the taxable part of the property (that part of the property that is vacant land and the outbuildings) and cannot claim input tax credits on the input taxed part of the property (that is, the houses).

Apportionment under section 9-80 of the GST Act will be necessary based on the taxable and input taxed portions. Paragraph 26 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') 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.

Paragraph 97 of GSTR 2001/8 provides direct methods that can be used to apportion a supply. Direct methods use relevant variables that measure the connection between what is supplied (the taxable and non-taxable parts) and the consideration for the actual supply. Paragraph 97 of GSTR 2001/8 provides some direct methods:

· the price allocation as agreed between the parties to the supply;

· the comparative price of each part if it were supplied on its own, relative to the whole payment received;

· the relative amounts of rental consideration;

· the relative amount of time required to perform the supply; and

· the relative floor area in a supply of property.

Paragraph 27 of GSTR 2001/8 provides that you should keep records that explain the basis used to apportion the consideration between the taxable and non-taxable parts of a supply.

You must issue a tax invoice to the purchaser to the extent that your supply of the property is a taxable supply.

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).