Edited version of your private ruling

Authorisation Number: 1012577710179

Ruling

Subject: GST and sale of residential properties

Question 1

Is GST applicable on the sale of the properties to another developer before the Development Application (DA) is approved?

Answer 1

No, GST is not payable on the sale of the properties to another developer before the DA is approved. The supply of the properties will be input taxed.

Question 2

Is GST applicable on the sale of the properties to another developer after the DA is approved?

Answer 2

No, GST is not payable on the sale of the properties to another developer after the DA is approved. The supply of the properties will be input taxed.

Question 3

Does it make a difference if the properties are sold as vacant possession?

Answer 3

No, it does not make any difference if the properties are sold as vacant possession. The same reasoning as in questions 1 and 2 above will apply.

Question 4

Does the Margin Scheme apply to the sale of the properties?

Answer 4

No, the margin scheme does not apply to the sale of the properties.

Relevant facts and circumstances

You are registered for GST.

You purchased two residential properties a decade ago.

The properties date prior to the introduction of the GST and were acquired from private individuals not registered for GST. Therefore, the private sellers' supplies were neither taxable nor input taxed, nor were their supplies made under the margin scheme.

When both properties were purchased they were zoned as residential and were not subject to GST.

Both houses have been available for rent from the date of purchase, have not been extensively renovated and are currently rented to tenants.

The zoning of both properties was changed recently to high density development and a DA for unit development was lodged with the relevant council.

You will not subdivide the land and you will sell the two houses under their own separate titles. What you will sell are two residential premises.

You will sell the land as it is and the purchaser will subdivide, build and sell the new units. You will only get a DA certificate from the council and sell the residences with the development certificate issued by council.

You are not a participant in a GST JV.

You are not a participant in a GST group.

You are not related to the buyer.

The purchaser of the properties is registered for GST.

The sale of the properties to another developer is subject to approval of the DA, which should be within the next three months.

The two residences continue to be rented pending approval of the DA by council.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 subsection 9-30(4)

A New Tax System (Goods and Services Tax) Act 1999 section 40-35

A New Tax System (Goods and Services Tax) Act 1999 subsection 40-65(1)

A New Tax System (Goods and Services Tax) Act 1999 subsection 40-65(2)

A New Tax System (Goods and Services Tax) Act 1999 subsection 40-75(2)

A New Tax System (Goods and Services Tax) Act 1999 subsection 75-5(1)

Reasons for decision

Question 1

Summary

GST is not payable on the sale of the properties to another developer before the DA is approved.

Detailed reasoning

Input Taxed Supplies of Residential Premises

Subsection 40-65(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that the sale of residential premises is an input taxed supply.

However, subsection 40-65(2) of the GST Act excludes the supply of new residential premises from being an input taxed supply to the extent that they are commercial residential premises or new residential premises other than those used for residential accommodation before 2 December 1998.

Among other things subsection 40-75(1) of the GST Act defines residential premises as new residential premises where they have not previously been sold as residential premises.

Subsection 40-75(2) of the GST Act provides that premises are not new residential premises if they have been used for a period of at least five years to make input taxed supplies of residential premises by way of lease, hire or licence under section 40-35 of the GST Act.

Goods and Services Tax Ruling - GSTR 2003/3 explains when a sale of real property a sale of new residential premises.

Paragraph 13 of GSTR 2003/3 has been reproduced below:

13. Sales of housing which has been used for residential accommodation before 2 December 1998 (either for rental income production or for owner occupation) are not subject to GST as new residential premises. The exceptions are where new residential premises are created through substantial renovations or are built to replace demolished premises on the same land.

In this case the houses were built prior to the introduction of the GST; were acquired from private sellers not registered for GST and have been available for rent from the date of purchase.

The properties to be sold by you are not considered to be commercial residential premises, have not been substantially renovated and are not considered to be new residential premises.

Therefore, you would be making input taxed supplies of residential premises when you sell them to another developer before the Development Application is approved.

Note: Where a supply is input taxed no GST is payable on the supply and there is also no entitlement to input tax credits for anything acquired or imported to make the supply.

Question 2

Summary

GST is not payable on the sale of the properties to another developer after the DA is approved. The supply of the properties will be input taxed.

Detailed reasoning

Subsection 9-30(4) of the GST Act states that a supply is taken to be a supply that is input taxed if it is a supply of anything (other than new residential premises) that you have used solely in connection with your supplies that are input taxed but are not financial supplies.

In considering the application of subsection 9-30(4) of the GST Act to the supply of the properties it is necessary to identify the uses to which you have put the properties and whether these uses are solely in connection with your input taxed supplies (other than financial supplies). This requires that the properties have not been used in any way other than in connection with your input taxed supplies.

ATO ID 2009/18 is about GST and sale of vacant land after removal of a damaged house that had been used solely in connection with input taxed supplies.

The following paragraphs were reproduced from ATO ID 2009/18

The Commissioner's view is that 'used' has a broad meaning in the context of subsection 9-30(4) of the GST Act (see the interpretation of 'use' in other statutory contexts in Council of the City of Newcastle v. Royal Newcastle Hospital (1959) 100 CLR 1; Ryde Municipal Council v. Macquarie University (1978) 139 CLR 633; and Lennard v. Jessica Estates Pty Ltd [2008] NSWCA 121).

The Macquarie Dictionary, 2005, 4th edn, The Macquarie Library Pty Ltd, NSW, defines 'use' as including 'to employ for some purpose'. In considering whether land has been used solely in connection with input taxed supplies, it is important to consider throughout the period of ownership by the entity:

· how the land has been exploited or enjoyed (for example, private use by the entity, business use by the entity, or leasing to a third party)

· what the entity has done to change or develop the land, and whether those things can be said to be connected to input taxed supplies, and

· what the entity's purpose has been in holding the land (for example, if the land is dormant for a period of time, whether the purpose of holding the land is to achieve profits through appreciation in the capital value).

It is necessary to look at the surrounding circumstances to determine if the entity's activities can be said to be connected with the entity's input taxed supplies, or whether they instead should be regarded as having a separate purpose.

In this case, the entity's enterprise involves activities of property development and activities of making supplies by way of lease. Up to the time when the house was fire damaged the entity had used the property solely in connection with its leasing activities. The entity had not held the property for the purpose of, or as part of, its activities of property development.

Since the property was fire damaged the entity has not done anything significant to improve the value of the land or occupied the land in a way to suggest that it commenced to hold the land for a purpose not connected with its input taxed supplies of residential leasing. The fire damaged house was demolished and removed merely to prepare the land for sale, as it was a health and safety risk. In these circumstances where the fire made the house uninhabitable, the demolition should not be regarded as a separate and distinct use of the land, but rather as a consequential step between the end of the leasing activities and the sale of the land.

After the fire, the entity has only been carrying out activities and holding the land for the purpose of bringing an end to its leasing of the property, as it was not cost effective to rebuild the house for lease.

The entity's only use of the land has been in connection with making input taxed supplies by way of lease of residential premises. Therefore, the sale of the vacant land is taken to be an input taxed supply under subsection 9-30(4) of the GST Act

Similarly in this case your enterprise involves activities of property development and activities of making supplies by way of lease. You informed us that from the time of purchase to the time of sale you have used the properties solely in connection with input taxed supplies of residential leasing. You have not held the property for the purpose of, or as part of, your activities of property development.

Apart from obtaining a DA from council you have not done anything significant to improve the value of the properties or occupied the properties in a way to suggest that you commenced to hold the land for a purpose not connected with input taxed supplies of residential leasing. We are of the view that obtaining a DA from council is not sufficiently significant to indicate a separate use of the land.

Therefore, in accord with the reasoning above, your supply of the properties will be input taxed where you sell the properties to another developer after the DA is approved.

Question 3

Summary

It does not make any difference if the properties are sold as vacant possession.

Detailed reasoning

The same reasoning as in questions 1 and 2 above will apply.

Question 4

Summary

The margin scheme does not apply to the sale of the properties.

Detailed reasoning

Division 75 of the GST Act allows an entity to use the margin scheme in working out the amount of GST on a taxable supply of real property. 

Subsection 75-5(1) of the GST Act provides that the margin scheme applies in working out the amount of GST on a taxable supply of real property that you make by selling a freehold interest in land; selling a stratum unit; or granting or selling a long term lease; if you and the recipient of the supply have agreed in writing that the margin scheme is to apply.

In accordance with subsection 75-5(1A) of the GST Act, that agreement must be made on or before the making of the supply; or within such further period as the Commissioner allows.

In this case we are informed that you are selling two residential properties you acquired a decade ago from private sellers not registered for GST.

The facts in this case indicate that the supplies of the residential properties will be input taxed and not taxable. Therefore, you cannot use the margin scheme in relation to those supplies.