Edited version of your private ruling

Authorisation Number: 1012560732376

Ruling

Subject: GST and sale of property

Question 1

Will the sale of your property be an input taxed supply of residential premises?

Decision 1

The sale of your property will be a supply of two separately identifiable components, namely Lot A and Lot B. The sale of Lot A will be an input taxed supply of residential premises. The sale of Lot B will be a taxable supply of commercial premises.

Question 2

Does it have any bearing on the transaction, if a purchaser of the property not only wants to live in the property but also wants to operate his business from the property?

Decision 2

No, the Decision 1 is not affected if a purchaser wants to live in the property and operate their business from the property.

Question 3

Given that the property sits on a large area of land with three sheds, can you treat the vacant land and the sheds as being part of the residential premises?

Decision 3

Lot A containing X m2 of land, on which the residence and two smaller sheds sit, can be treated as residential premises. Lot B containing Y m2 of land, on which sits a large shed containing a workshop can be treated as commercial premises.

Question 4

There is a possibility that a purchaser not currently registered for GST, will lease back the workshop to the vendor until such time as a new workshop can be established elsewhere. Would it have any bearing on the application of the GST provisions to the sale of the property? Would GST apply to the rental income?

Decision 4

The intention of a purchaser at the time of purchase of the property is not relevant in determining the application of the GST provisions to the sale of the property. The GST status is determined by the physical characteristics of the property.

In respect of application of the GST provisions to possible rental income from the workshop, you should request for advice when that event occurs. You will have to provide us all the relevant facts of the situation.

Relevant facts and circumstances

§ You are an entity and own a property. The property sits on two titles and consists of two Crown Allotments (Lot A and Lot B)

§ As each Lot is a full Crown Allotment, each Lot may be sold separately.

§ Lot A has an area of X m2 and Lot B has an area of Y m2.

§ The local council has informed us that the above property is zoned as 'Industrial 1'. It means that the property can be used for industrial purposes such as to set up a factory, warehouse, a waste processing facility etc. However, residential use of the property is not entirely prohibited. If the current or a future owner wants to use the property for residential purposes, they have to apply for a permit from the council. Such an application will be processed on its own merits and a decision will be made.

§ Previously the property was a residence and it still has all the characteristics of a residential building. No alterations were carried out to the main building. At present it simply has transportable office furniture and it is used as an office.

§ The original house was built more than 50 years ago and it is still quite original. The house sits on Lot A of the property.

§ The largest shed on the property is used as workshop. It is used as a place to either learn or share skills such as woodwork and other projects. The shed has the characteristics of a workshop. It has a concrete floor, power, plumbing and work benches. Within the shed there is a workshop area, a toilet, a kitchen area and an office area. This shed sits on Lot B.

§ The second shed on the property is a garage type structure. The third shed is used as a storage shed for the property. These two sheds sit on Lot A.

§ Our records indicate that you are registered for goods and services tax (GST) effective from 1 July 2000.

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

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

Reasons for the decisions

Decision 1

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

*The asterisked terms are defined in section 195-1 of the GST Act.

You will make the supply of your property for consideration as it will be a sale of property. You will make this supply in the course or furtherance of your enterprise. The supply is connected with Australia as the property is located in Australia. You are registered for GST. Therefore, your supply satisfies the requirements of paragraphs 9-5(a) - (d) of the GST Act.

In the given circumstances, the sale of your property will not be a GST-free supply. However, it is necessary to ascertain whether the sale of your property is an input taxed supply to any extent under GST provisions.

As your property consists of two separately identifiable Lots, it is necessary to consider whether the supply of your property is partly or fully an input taxed supply.

Goods and Services Tax Ruling GSTR 2001/8 (GSTR 2001/8) refers to GST and apportioning the consideration for a supply that includes taxable and non-taxable parts.

Paragraph 16 of GSTR 2001/8 provides that the term 'mixed supply' is used to describe a supply that has to be separated or unbundled, as it contains separately identifiable taxable and non-taxable parts that need to be individually recognised.

The Commissioner's view is that a supply has separately identifiable parts, where the parts require individual recognition and retention as separate parts, due to their relative significance in the supply.

Example 2 of GSTR 2001/8 refers to mixed supplies and states:

Example 2 - commercial and residential premises

70. Roberto owns a building comprising both residential and commercial premises. He leases the building to Lawrence who operates a small recruitment agency from the commercial premises and lives in the residential part. The supply of the residential part is input taxed .³⁷ The supply of the commercial part is taxable. Roberto is making a mixed supply that is partly taxable and partly input taxed.

Components of your property

As per the given facts, your property consists of two distinctly identifiable components, namely Lot A and Lot B. At law, they can be sold separately. The fact that Lot A does not have a direct access to a road is an issue to be resolved by the local council. For GST purposes, it is sufficient if the parts of a supply are separately identifiable and retain their identity, to require them to be individually recognised.

Lot A and Lot B have quite different characteristics. Lot A covers an area of X m2 and contains a large residence built more than 50 years ago and two sheds. One shed has the characteristics of a garage and the other shed has the characteristics of a storage area. A person living at the residence could use the two sheds for domestic purposes. Taken as a whole, Lot A is suitable for residential purposes and can be treated as residential premises.

Lot B has characteristics radically different form those of Lot A. Lot B covers an area of Y m2 and contains a large shed. The shed has a fully equipped workshop with toilet, kitchen and office facilities. It is being used as a training facility. This shed is not required for domestic purposes for a person living in Lot A. On its own, this shed has its own separate identity and cannot be treated as a normal residence. Accordingly, Lot B cannot be treated as residential premises.

Sale of Lot A

Section 40-65 of the GST Act states:

(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.

Section 195-1 of the GST Act provides that residential premises means 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.

Goods and Services Tax Ruling GSTR 2012/5 (GSTR 2012/5) refers to residential premises. Paragraphs 6-7 of the ruling state:

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.

Paragraphs 9-10 of GSTR 2012/5 state:

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).

Lot A is zoned as Industrial 1. However, residential use of Lot A is not entirely precluded.

As per the facts, the main building of the property has been previously used as a residence and it still has all the characteristics of a residential building. No alterations were carried out to the main building. It is used as an office.

We consider that, the residence and the two sheds located on Lot A constitute residential premises to be used predominantly for residential accommodation. As mentioned above, even though the property is zoned as Industrial 1, residential use of the property is not precluded.

Accordingly, we consider that, under subsection 40-65(1) of the GST Act, the sale of Lot A of your property is an input taxed supply.

Sale of Lot B

As described above, Lot B covers a land area of Y m2 and contains a workshop. It cannot be treated as residential premises. Therefore, the sale of this part of your property is not an input taxed supply.

The term 'commercial premises' is not defined in the GST Act. We consider that the term 'commercial premises' is generally used to describe a property that is not residential or commercial residential and includes shops, factories, warehouses, showrooms, depots etc. Accordingly, Lot B can be considered as 'commercial premises'

As mentioned above, the sale of your property satisfies the requirements of paragraphs 9-5(a) - (d) of the GST Act. However, the sale of Lot B will not be a GST-free or an input taxed supply.

Accordingly, under section 9-5 of the GST Act, the sale of Lot B will be a taxable supply.

Therefore, the sale of your property will be a mixed supply, as it contains identifiable taxable and non-taxable parts that need to be individually recognised.

Decision 2

Example 1 of GSTR 2012/5 refers to the intention of a purchaser of a residential property and states:

Example 1 - purchaser's intention not to use premises for residential accommodation

12. John carries on an enterprise which involves leasing a house on property which he owns. Based on the physical characteristics of the house it is residential premises to be used predominantly for residential accommodation. The area in which the house is located has recently been rezoned by the local Council to permit higher density residential apartments. Following the rezoning, a developer, Knock Them Down Co, approaches John and offers to purchase his property. Knock Them Down Co intends to demolish the house, redevelop the property into a new apartment building, and sell the apartments .

13. The fact that Knock Them Down Co does not intend to use the house to provide residential accommodation does not mean that the house is not residential premises to be used predominantly for residential accommodation. Knock Them Down Co's intention is not a relevant factor in determining the character of the premises. Based on its physical characteristics, the house is residential premises to be used predominantly for residential accommodation. The sale of the house by John to Knock Them Down Co is an input taxed supply under section 40-65 .

Therefore, the intention of a purchaser at the time of purchase of your property is not relevant in determining the application of the GST provisions to the transaction. The GST status will be determined by the physical characteristics of your property.

Decision 3

Paragraph 46 of GSTR 2012/5 refers to land supplied with a building and states:

Land supplied with a building

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.

As explained above, your property is made up of two distinctly identifiable components, namely Lot A and Lot B. Lot A covers an area of X m2 of land. Considering the fact that the residence and the two smaller sheds are located on this land, we are of the view that the land area can be enjoyed in conjunction with the residential building. Therefore, the total land area of Lot A, the residence and the two sheds together can be treated as residential premises for GST purposes.

Lot B covers an area of Y m2 of land and contains a shed used as a workshop. A person or an organisation using the shed for any commercial purpose can use that land to facilitate that purpose, independently from Lot A. Therefore, we consider that the land area and the shed together can be treated as commercial premises.

Decision 4

As explained at Decision 2 above, the intention of a purchaser at the time of purchase of a property is not relevant in determining the application of the GST provisions to the transaction. The GST status is determined by the physical characteristics of the property.

Even if a purchaser leases back the workshop to the vendor until a new workshop is established elsewhere, for GST purposes, the sale of Lot B will remain a supply of commercial premises.

In respect of application of the GST provisions to possible rental income from the workshop, you should request for advice when that event occurs. You will have to provide us all the relevant facts of the situation.