Edited version of your private ruling

Authorisation Number: 1012516301345

Ruling

Subject: GST and the purchase of property

Question

Does the purchase of the property satisfy paragraph 11-5(b) of a creditable acquisition under section 11-5 of the A New Tax System (Goods and Services Tax) Act 1999?

Answer

No, the purchase of the property does not satisfy paragraph 11-5(b) of a creditable acquisition under section 11-5 of the A New Tax System (Goods and Services Tax) Act 1999.

Relevant facts and circumstances

You entered into a contract of sale for the purchase of the property.

The premises have previously been used for residential accommodation. The premises, contains several rooms on two levels, including two bathrooms and a kitchen.

The kitchen contains basic facilities including a bench, cupboards underneath and open shelving above the bench, a domestic sink and a dishwasher. An instant boiling water unit is installed over the sink.

The downstairs bathroom contains domestic toilet and a wall mounted wash basin. The upstairs bathroom contains a domestic toilet, vanity unit with wash basin, and a shower.

The property is zoned for commercial use and is currently being used as commercial premises (offices). Two large ground floor rooms and one first floor room have been adapted to be used as offices. The adaptation consists mainly of installation of workstations and bookshelves which can be removed without significant effort or damage to the building.

Each 'office' room appears to have a door and each has its own heating and cooling source. There doesn't appear to have been walls removed or substantial changes to the building to adapt it for commercial use.

Other rooms are empty of furniture and some are currently being used as storage areas.

The front of the property is fenced and contains a small garden. The rear of the property contains a small shed and the yard has been paved, possibly to allow for off-street parking.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 section 11-5

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

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

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

Reasons for decision

The purchase of real property is a creditable acquisition if the requirements of section 11-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) are met. Paragraph 11-5(b) of the GST Act requires that the supply of the thing to the recipient must be a taxable supply. Therefore, if the sale of the property is not a taxable supply made by the vendor, it can not be a creditable acquisition for the purchaser.

Section 9-5 of the GST Act provides the requirements for a taxable supply. However, section 9-5 notes that an input taxed supply is not a taxable supply. Supplies are input taxed under Division 40 of the GST Act. Section 40-65 of the GST Act specifically states that the supply of real property is input taxed in certain circumstances:

40-65 Sales of residential premises

(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.

The sale of residential premises, that is not new residential premises or commercial residential premises is input taxed under section 40-65 of the GST Act.

The definition of 'residential premises' is provided in section 195-1 of the GST Act and includes land or a building that is 'intended to be occupied, and is capable of being occupied, as a residence or for residential accommodation'.

Goods and services tax ruling, Goods and services tax: residential premises (GSTR 2012/5) provides guidance on when real property is residential premises to be used predominantly for residential accommodation. Paragraph 7 of GSTR 2012/5 explains that the physical characteristics of the premises will determine whether the property is residential premises for the purposes of subsection 40-65(1) of the GST Act. It states that the definition of residential premises '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'.

It is the physical characteristics of the property which determines whether it is intended to be occupied, and is capable of being occupied as a residence. The building is a house with a small garden in the front behind a fence. But for a small sign advising who occupies the property, the front of the building appears to be a regular house. The interior of the building does not appear to have had significant renovations or changes in order to make it suitable for use as commercial offices. Walls do not appear to have been removed or altered to accommodate the offices and the rooms appear to still have the doors. The kitchen and bathrooms, although small and outdated, still perform their primary function and there doesn't appear to have been any significant changes to the layout of the building to adapt it for commercial use. The rear yard allows for off-street parking but this is not unusual for a residential property.

The property is zoned for commercial use and it would need to be changed for the property to be used as a residence. However, as stated in paragraph 82 of GSTR 2012/5, this does not stop the building from being residential premises:

82. Contractual or legal prohibitions against long-term or short-term occupation as a residence do not prevent premises from being suitable for, and capable of, providing residential accommodation.

Example 9, beginning at paragraph 44 of GSTR 2002 illustrates that converting parts of a residence for use as commercial offices does not necessarily result in the essential character of the building changing:

Example 9 - the addition of furniture and minor fittings is not sufficient to modify physical characteristics

44. Rebecca is a solicitor. She lives in a terrace house that is not new residential premises, and decides to convert a room at the front of the house into an office for her practice. Rebecca arranges the installation of an electricity point and telephone line for the place in the room where she intends to set-up a printer and facsimile machine. She fits the room out with book shelves, filing cabinets, desk, office chairs, a table for the printer and facsimile machine, and suitable floor coverings. She also has an advertising sign placed outside the front door of her house. Rebecca does not modify any of the other rooms in the house.

45. These changes are not sufficient to modify the physical characteristics of the terrace house into premises other than residential premises to be used predominantly for residential accommodation. The furniture and fittings that Rebecca has brought into the room do not change the physical characteristics of the house itself. Also, the installation of an electricity point and telephone line, and the placement of a sign outside the house, are not sufficient modifications to alter the physical characteristics of the premises so that they are no longer residential premises to be used predominantly for residential accommodation. If Rebecca sells or leases the premises she will be making a wholly input taxed supply under section 40-65 or section 40-35 respectively.

The physical characteristics of the property are those of residential premises to be used predominantly for residential accommodation.

However, the sale of property is not input tax if it is the sale of 'new residential premises' as defined by section 40-75 of the GST Act. New residential premises include, amongst other things, residential premises which 'have been created through substantial renovations of a building'. Goods and services tax ruling, Goods and services tax: when is a sale of real property a sale of new residential premises? (GSTR 2003/3) explains that the there are two criteria which must be present for there to be 'substantial renovations'. Paragraph 61 of GSTR 2003/3 states:

61. We consider that for substantial renovations to occur for the purposes of the GST Act, the renovations need to satisfy the following criteria before it is necessary to make further inquiry to establish whether the renovations are substantial:

(i) the renovations need to affect the building as a whole; and

(ii) the renovations need to result in the removal or replacement of all or substantially all of the building.

Although there appears to have been some renovation works undertaken to allow the property to be used as a business premises, the building has not been subject to 'substantial renovations' for the purposes of the GST Act because there are significant portions of the premises which have not been renovated at all. Therefore, the sale of the property is not the sale of 'new residential premises' for the purposes of the GST Act.

Consequently, the sale of the property is input taxed under section 40-65 of the GST Act and your purchase is not a creditable acquisition as it does not satisfy paragraph 11-5(b) of the GST Act.