Edited version of your private ruling

Authorisation Number: 1012598296561

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Ruling

Subject: GST and sale of real property

Question

Did you make a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) in the sale of the property located at a specified address (the Property)?

Answer

Your sale of the Property was partly a taxable supply under section 9-5 of the GST Act and partly an input taxed supply under section 40-65 of the same Act.

Relevant facts and circumstances

You are trustees for a named estate. You are registered for GST from 1 July 2000.

You entered into the sale contract with the purchaser on dd/mm/yyyy for the sale of the Property. The location of the Property is specified. At the time of the sale, the lots were on a single certificate of title described as a specified lot on plan PS abcde. You sold the Property under public auction on a plus GST basis. You issued the tax invoice for the sale dated dd/mm/yyyy which includes an amount for GST. The sale contract specifies that at settlement the purchaser was entitled to vacant possession. The Property was vacant at the time of the sale. Immediately prior to becoming vacant the Property was tenanted under a commercial lease.

The building was originally built as a bar and X-bedroom dwelling more than 80 years ago. It is mainly solid brick construction with an asbestos cement sheet sleepout added probably more than 60 years ago, and built in verandah with laundry and toilet in fairly recent times. You believe the Property was leased out around 30 years ago as commercial tenancies, a shop and an office. You do not have records of when renovation was carried out to convert the building from residential use to business premises, or the specifics involved. You are certain that any renovation undertaken would be more than thirty years old.

The Property (zoned Business 5) consists of approximately x square meters (sqm) of land, a main building (converted from a residence to a shop some time ago) of approximately y sqm and outbuildings. The outbuildings are a laundry, toilet and garage which are in a dilapidated state.

At the time of the sale, approximately X% of the land component was vacant (previously used for customer and staff parking).

You do not have records on the age of the building. You believe that the main structure was built more than 80 years ago.

The floor plan at the time of the sale included:

• A portico and an entry

• X room spaces drawn, and labelled as:

n a shop front with separate entry (a specified sqm)

n bed 1 (a specified sqm)

n bed 2 (a specified sqm)

n bed 3 (a specified sqm), and

n a lounge (a specified sqm)

• a kitchen (a specified sqm)

• a sink area (a specified sqm)

• a bath

• a store

• a laundry

• a toilet

• a roller door for the front room

• 2 outbuildings in the backyard being:

n a toilet, and

n a laundry

The hand sketched floor plan prepared by the property manager which detailed the more recent use of the Property contains the same layout of the floor plan.

Information Statement dated dd/mm/yyyy from a specified authority for one of the lots includes the information that 'this property is a commercial property'.

Two documents from an authority obtained/issued on dd/mm/yyyy and dd/mm/yyyy each stating that 'more than one rate assessment is applicable to this property'. The information on the two documents are summarised in the table below to include:

Documents - specified authority

The valuation report prepared on dd/mm/yyyy to provide a current market valuation of the Property for the purposes of the Trustees of the named estate and the proposed sale of the Property includes the following information:

• The location of the Property is close to the named central business district in a mixed residential and commercial area.

• The Property is under the city's planning scheme:

n Business 5 Zone

n Design and Development Overlay

n Heritage Overlay

n Parking Overlay

• The building was originally built as a bar and X-bedroom dwelling more than 80 years ago.

• A cantilever verandah has been added over the shop entry.

• The shop section floor is concrete with a step down from the living area.

• Other buildings are described as:

n Laundry - brick detached of approximately with concrete floor, corrugated galvanised iron skillion roof and double concrete troughs.

n Outside toilet - unpainted asbestos cement sheet clad, out of order - no value.

n CGI garage - earth floor, semi-derelict - no value.

• The shop room has been largely cleared of amenities but includes a stainless steel hand basin and hands free tap.

• Building areas include shop/residence: y sqm approximately plus verandah and porch: z sqm approximately.

• The photographs attached include front elevation showing the shop signage across the cantilever.

• The valuer's comments include:

n The property is located on the fringe of the specified central business district in a mixed residential commercial area with many neighbouring dwellings occupied as commercial premises. Residential and now commercial buildings mainly date from the late Victorian era through to the mid-20^th century.

n The major component of the property is the yard which comprises approximately Y% of the site and is largely cleared apart from the derelict garage.

A copy of each of the following documents has been provided:

• Contract of Sale of Real Estate relating to the Property

• A number of photographs of the Property

• Floor plan of the building at the time of sale of the Property

• Tax invoice relating to the sale of the Property

• Planning certificate dated dd/mm/yyyy

• Document issued by the specified authority

• Valuation report completed prior to the sale of the Property.

• Hand sketched floor plan of the building prepared by the property manager and details the most recent use of the Property prior to the sale.

• Statement from specified authority

• Deed of appointment of new trustee

You contend that although you acknowledge that a portion of the Property may be fit to be used as residential accommodation, the fact that the Property only contain one kitchen, one bathroom and one laundry (all essential to the Property's primary function, which is that of a commercial shop) and cannot be occupied as separate tenancies. This would render the potential residential part of the Property incidental and ancillary to the Property's primary function and as such the sale is not a mixed supply. You note that the overriding commercial nature of the Property in question results in it being commercial property with the potential for residential use, as opposed to a residential property being used for a commercial purpose.

Relevant legislative provisions

The A New Tax System (Goods and Services Tax) Act 1999 Division 38

The A New Tax System (Goods and Services Tax) Act 1999 Division 40

The A New Tax System (Goods and Services Tax) Act 1999 section 9-5

The A New Tax System (Goods and Services Tax) Act 1999 section 9-40

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

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

The A New Tax System (Goods and Services Tax) Act 1999 Subdivision 40-C

Reasons for decision

Under section 9-40 you must pay the GST payable on any taxable supply that you make and section 9-5 provides:

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.

Division 38 and 40 provides for certain supplies to be GST-free and input taxed respectively.

We consider Division 38 does not apply to the facts of your situation.

Under Division 40, of relevance for consideration is subdivision 40-C which provides for residential premises. More particularly, section 40-65 provides for the sale 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.

We consider subsection 40-65(2) does not apply to your situation. In applying subsection 40-65(1) it is necessary to consider the terms 'residential premises' and 'residential premises to be used predominantly for residential accommodation'.

'Residential premises' is defined in section 195-1 to mean 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.

The phrase 'residential premises to be used predominantly for residential accommodation' is not defined in the GST Act. However, Goods and Services Tax Ruling GSTR 2012/5 Goods and services tax: residential premises (GSTR 2012/5) explains, at the following paragraphs:

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.²

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).

14. 'Residential premises' are not limited to premises suited to extended or permanent occupation. Residential premises provide 'living accommodation', which does not require any degree of permanence. It includes lodging, sleeping or overnight accommodation.

15.To satisfy the definition of residential premises, premises must provide shelter and basic living facilities. Premises that do not have the physical characteristics to provide these are not residential premises to be used predominantly for residential accommodation.

GSTR 2012/5 takes the view that the test to establish 'residential premises to be used predominantly for residential accommodation...' in subsection 40-65(1) requires a focus on the physical characteristics of the premises in terms of their suitability and capability for residential accommodation.

In your case, at the time of the sale of the Property, the floor plan of the building includes facilities for lodging, sleeping or overnight accommodation and other facilities for cooking, bathing and toilet use. Therefore, the premises display suitability and capability to provide shelter and basic living facilities for residential accommodation.

Accordingly, we consider you have made a supply of 'residential premises to be used predominantly for residential accommodation' that would satisfy the requirements under subsection 40-65(1) to be an input taxed supply.

However, the requirement in subsection 40-65(1) that input taxing only applies to the extent that the premises are 'to be used predominantly for residential accommodation' indicates that premises that are residential premises are capable of use for purposes other than residential accommodation.

GSTR 2012/5 considers that not all premises that possess basic living facilities are residential premises to be used predominantly for residential accommodation. Although certain premises may have, in part, physical characteristics common to premises that provide living accommodation, they may also have physical characteristics which reflect their suitability for another purpose.

Paragraphs 89 and 90 explain that in some circumstances, premises consist of two or more parts: one part residential premises to be used predominantly for residential accommodation, and the other part premises of another kind. This means that, if there is a single supply of the premises but only part of premises is residential premises to be used predominantly for residential accommodation, the supply is input taxed to the extent of that part. For example, if residential premises are designed, built or modified so that part of the premises is a house and part is for commercial purposes, such as a shop (based on its physical characteristics), a supply of the premises is a taxable supply to the extent that it relates to the shop. The supply of the premises is input taxed to the extent that it consists of the house.

Further, paragraph 68 explains:

Their Honours held that the phrase 'to be used predominantly for residential accommodation' does not refer to use by any particular person, but to the attributes of the property to which its use is suited. That is, the phrase is concerned with the characteristics of the property in terms of its suitability for residential accommodation. However, their Honours made the following observation:

…That is not to say that actual use of the property will necessarily be irrelevant; as the Full Court (Bowen CJ, Deane and Fisher JJ) said in the Hamilton Island Enterprises case: '[T]he use to which an item is actually put will ordinarily be illustrative of at least some aspects of its character.'

The relevant premises, amongst other things, possess the following characteristics:

• The floor plan labels a front room (a specified sqm) as 'shop front'. There is a separate door entry for the shop front from the street frontage. The shop front also has a roller door installed. The building has a main entry.

• A cantilever verandah over the shop front displays the name of the shop sign which can be viewed from both the street frontage and the side street.

• The planning certificate dated dd/mm/yyyy records the Property is in business 5 zone

• Immediately prior to becoming vacant for the sale, the Property was tenanted under a commercial lease

• The valuation report prepared in mm/yyyy includes the following:

n The location of the Property is close to the named central business district in a mixed residential and commercial area.

n The Property is zoned business, among other things.

n The building was originally built as a bar and a X bedroom dwelling more than 80 years ago.

n A hand basin with an hands free tap is located in the shop-front room.

Taking into account the above factors we consider that although the whole of the premises would satisfies the physical characteristics test as common to premises that provide living accommodation, the shop front also reflects suitability for commercial purposes. The fit out with a hand basin and the roller door reflect commercial facilities. Additionally, the shop sign being in existence at the time of supply clearly indicates the commercial characteristic of the shop front room.

Accordingly, it is reasonable to determine that the part of the Property relating to the shop front is commercial premises (rather than residential premises for residential accommodation).

Accordingly, your supply of the part of the premises that relates to the shop front would be a taxable supply as all the requirements of section 9-5 were satisfied:

• you made the supply for consideration (the sale contract provides for the price and payment).

• your supply was made in the course or furtherance of an enterprise that you carried on (you were carrying on a leasing enterprise in relation to the Property prior to the sale).

• your supply was connected with Australia (the Property being located in Australia).

• you are registered for GST from 1 July 2000.

• your supply of the Property did not fall under the GST-free provisions in Division 38

• we consider your supply of the part of the premises that relates to the shop front was of commercial premises and not of residential premises. Therefore, the supply of that part was not an input taxed supply under subsection 40-65(1).

You contend that the residential portion of the Property is merely incidental to the supply of the commercial portion of the Property.

We advise that the provision of section 40-65(1) states that:

A sale of real property is input taxed, but only to the extent that the property is residential premises... (emphasis added)

In a sale of real property where a part of the property is determined as residential premises that satisfy subsection 40-65(1), the statutory provision specifically requires the particular GST treatment of the residential part.

Further information and guidance on differentiating between a mixed supply and a composite supply are available in GSTR 2001/8, for example:

63. However, in some cases, no matter how insignificant a part may be, that part is recognised as being a part in its own right where a provision of the GST Act specifically requires you to recognise it, regardless of its scale and connection with the supply. For example, certain education excursions or field trips are GST-free under section 38-90. However, paragraph 38-90(2)(b) specifically provides that the supply of food as part of the excursion or field trip is not GST-free under this provision.³³ Therefore, a supply of food cannot be regarded as an incidental part of the supply of the excursion or field trip.

In your case, the supply of one part of the Property is the input taxed supply of residential premises and the other part is the taxable supply of commercial premises. Accordingly, under the effect of the provision in subsection 40-65(1) which provides for the supply of the residential part to be input taxed, neither the residential part nor the commercial part of the Property can be integral, ancillary or incidental to each other.

Conclusion

When you sold the Property you were making a single supply that was partly a taxable supply under section 9-5 and partly an input taxed supply under section 40-65.

Additional information - for apportionment:

Paragraph 40 of GSTR 2012/5 (and paragraphs 89 and 90) discusses supplies requiring apportionment:

40. The value of a supply of premises that includes residential premises to be used predominantly for residential accommodation needs to be apportioned to the extent that part of the premises is not residential premises to be used predominantly for residential accommodation.

89. In some circumstances, premises consist of two or more parts: one part residential premises to be used predominantly for residential accommodation, and the other part premises of another kind. As paragraph 40-35(2)(a), subsection 40-65(1), and paragraph 40-70(1)(a) refer to the extent that the premises or property are to be used predominantly for residential accommodation, it is necessary that the value of the supply of such premises be apportioned.

90. This means that, if there is a single supply of the premises but only part of premises is residential premises to be used predominantly for residential accommodation, the supply is input taxed to the extent of that part. For example, if residential premises are designed, built or modified so that part of the premises is a house and part is for commercial purposes, such as a shop (based on its physical characteristics), a supply of the premises is a taxable supply to the extent that it relates to the shop. The supply of the premises is input taxed to the extent that it consists of the house. See Examples 8 and 9 at paragraphs 41 to 45 of this Ruling.

Further information on apportionment is available in 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). GSTR 2001/8 states that a supply that contains taxable and non-taxable parts is referred to as a 'mixed supply'.

We consider you were making a mixed supply when you sold the Property. Under the circumstances, you need to apportion the consideration for the mixed supply.

The ATO does not provide or prescribe a particular method of apportionment to an entity. GSTR 2001/8 provides guidance on reasonable methods of apportionment, and explains:

92. Where, as in the case of supplies covered by section 9-75, there is no legislative provision specifying a basis for apportionment, you may use any reasonable method to apportion consideration to the separately identifiable taxable part of a mixed supply. However, the apportionment must be supportable by the facts in the particular circumstances and be undertaken as a matter of practical commonsense.

93. What is a reasonable method of apportioning the consideration for a mixed supply depends on the circumstances of each case. In some cases, there will be only one reasonable method you may use.

94. Depending on your circumstances, you may use a direct or indirect method when apportioning the consideration for a mixed supply.

95. The method you choose should be based on a consideration of all the circumstances and not because it gives you a particular result. You may need to use different methods, or a combination of methods, for different supplies to ensure the appropriate amount of GST is payable. You need to keep records that explain all transactions and other acts you engage in that are relevant to supplies you make, including supplies that are GST-free and input taxed.