Edited version of your private ruling

Authorisation Number: 1012624148241

Ruling

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Subject: Goods and services tax (GST) and purchase of property

Question

Are you entitled to an input tax credit on your purchase of the property?

Answer

You will be entitled to an input tax credit on your purchase of the property provided that you register for GST and your GST registration is backdated to the time of settlement of sale of the property to you. See reasons for decision for information on how to calculate the input tax credit.

Relevant facts and circumstances

You are not registered for GST.

Your GST turnover is under $75,000 a year.

You purchased a property located in Australia (the property) in a certain year.

The sale of the property to you was made by a bank in satisfaction of debts owed by the previous owner (the owner immediately prior to the sale of the property to you) to the bank.

You advised that the previous owner was registered for GST. We have confirmed through our investigations that the previous owner, (individual name), was registered for GST when the property was sold to you.

The property has been used for commercial and residential purposes.

The vendor has treated part of the property as commercial and part of the property as residential premises. The vendor has treated the sale as taxable to the extent that the property comprises of the areas it considers is commercial.

You and the vendor did not agree in writing that the margin scheme would be used to calculate GST on the sale of the property.

The property has a two storey residence with associated structure and garages (a certain area). The residence has bedrooms, a living room; a kitchen and a bathroom.

The previous owner built the existing house on the property. The previous owner did not substantially renovate the residential part of the property. The previous owner used the house as their residence since before 2 December 1998.

The previous owner operated a business from the property.

The area that the vendor has treated as commercial (a certain area) comprises of the following areas:

• commercial area/shop/toilet

• commercial area

• commercial area/commercial area/office

• a garage

A certain commercial area includes a certain type of room.

The areas that the vendor has treated as commercial were built for commercial use; were modified to accommodate commercial use or include modifications of the building to accommodate commercial use. For example:

• the ground floor commercial area was built to be used for this purpose

• the commercial area that was used for commercial purposes was built for that purpose

• the shop was created by extending the area that used to be the entrance to the house to accommodate commercial use

• at some point in time after the residence was built, two extra toilet rooms were added for use in connection with a business. After this addition, 3 toilet rooms were used in connection with this business. Signs indicate that the original toilet room and the two additional toilet rooms are for mens', ladies' and disabled persons' use respectively.

The fixtures and fittings were removed from the commercial use areas prior to sale. The commercial areas were gutted. There are holes in the walls in the commercial areas and pipes are visible in these areas.

The zoning of the property allows residential and commercial use.

You live in the house on the property.

You will lease out the commercial part of the property.

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 9-70

A New Tax System (Goods and Services Tax) Act 1999 subsection 9-75(1)

A New Tax System (Goods and Services Tax) Act 1999 section 9-80

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

A New Tax System (Goods and Services Tax) Act 1999 section 11-15

A New Tax System (Goods and Services Tax) Act 1999 section 11-20

A New Tax System (Goods and Services Tax) Act 1999 section 11-25

A New Tax System (Goods and Services Tax) Act 1999 section 23-5

A New Tax System (Goods and Services Tax) Act 1999 section 23-10

A New Tax System (Goods and Services Tax) Act 1999 section 25-10

A New Tax System (Goods and Services Tax) Act 1999 section 25-15

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 75-5

A New Tax System (Goods and Services Tax) Act 1999 section 75-20

A New Tax System (Goods and Services Tax) Act 1999 section 105-5

A New Tax System (Goods and Services Tax) Act 1999 Division 188

Reasons for decision

Summary

You will be entitled to an input tax credit on your purchase of the property provided that you register for GST and your GST registration is backdated to the time of settlement of sale of the property to you, because:

• you have acquired the property partly for a creditable purpose

• the sale of the property by the previous owner to you would have been a taxable supply

• you provided consideration for the sale of the property; and

• you would be registered for GST.

Detailed reasoning

You are entitled to input tax credits on your creditable acquisitions.

You make a creditable acquisition where you meet the requirements of section 11-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), which states:

You make a creditable acquisition if:

(a) you acquire anything solely or partly for a *creditable purpose; and

(b) the supply of the thing to you is a *taxable supply; and

(c) you provide, or are liable to provide, *consideration for the

supply; and

(d) you are *registered or *required to be registered.

(*Denotes a term defined in section 195-1 of the GST Act)

Section 11-15 of the GST Act explains when an acquisition is made for a creditable purpose.

Subsection 11-15(1) of the GST Act states:

• You acquire a thing for a creditable purpose to the extent that you

• acquire it in *carrying on your *enterprise.

Subsection 11-15(2) of the GST Act states:

• However, you do not acquire the thing for a creditable purpose to the

• extent that:

(a) the acquisition relates to making supplies that would be *input

taxed; or:

(b) the acquisition is of a private or domestic nature.

You have acquired the property in carrying on your leasing enterprise. You have also acquired part of the property to live in (the residential portion).

Leasing out the commercial part of the property is not an input taxed supply.

Hence, you have acquired the property for a creditable purpose to the extent of the commercial portion only. Therefore, you meet the requirement of paragraph 11-5(a) of the GST Act.

Acquisition of a taxable supply

You make a taxable supply where you satisfy the requirements of section 9-5 of the GST Act, which 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.

Section 105-5 of the GST Act provides a special rule for supplies made by creditors in satisfaction of debts. Subsection 105-5(1) of the GST Act states:

You make a taxable supply if:

(a) you supply the property of another entity (the debtor) to a

third entity in or towards satisfaction of a debt that the

debtor owes to you; and

(b) had the debtor made the supply, the supply would have been taxable.

The vendor sold the property to you in satisfaction of debts the previous owner (the debtor) owed to the vendor. Therefore, the requirement of paragraph 105-5(1)(a) of the GST Act is met.

We shall now determine whether the sale of the property by the debtor to you would have been taxable.

The debtor would have met the requirements of paragraphs 9-5(a) to 9-5(d) of the GST Act if it had sold the property to you. This is because:

• the property was sold to you for consideration; and

• they debtor would have sold the property to you in the course or furtherance of enterprises that they carried on; and

• the sale would have been connected with Australia (as the property is located in Australia); and

• the debtor was registered for GST.

There are no provisions of the GST Act under which the sale of the property by the debtor to you would have been GST-free.

Therefore, what remains to be determined is whether the sale of the property by the debtor to you would have been input taxed or partly input taxed.

Sales of residential premises

A sale of residential premises can be input taxed under section 40-65 of the GST Act.

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).

Subsection 40-65(2) of the GST Act states:

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 40-75 of the GST Act defines new residential premises.

Subsection 40-75(1) of the GST Act states:

*Residential premises are new residential premises if they:

(a) have not previously been sold as residential premises (other

than *commercial residential premises) and have not

previously been the subject of a long-term lease; or

(b) have been created through substantial renovations of a building; or

(c) have been built or contain a building that has been built, to replace demolished premises on the same land.

Paragraphs 7, 9, 10 and 15 of Goods and Services Tax Ruling GSTR 2012/5 provide the Australian Taxation Office (ATO) view on the meaning of residential premises to be used predominantly for residential accommodation. They state:

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.

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).

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.

Paragraphs 89 and 90 of GSTR 2012/5 explain that premises may consist of two parts - one part being residential premises to be used predominantly for residential accommodation and the other part being premises of another kind. They state:

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.

Paragraphs 41 to 43 of GSTR 2012/5 provide an example where a house is modified to accommodate commercial use. It states:

41. Shannon decides to partly modify her house to use in her profession as a doctor. She modifies an area of the house to provide office and consulting room space, an operating theatre, a waiting room and storage for the business. A sealed car park is also added to the property. Significant physical modifications are made to these areas, including the removal and alteration of walls, and the addition of lighting, hygiene facilities and security to meet industry standards. The existing lounge room is used as the patients' waiting room. An existing bedroom is used for storage. No physical modifications are made to the lounge room or bedroom.

42. The modifications result in the part of the premises consisting of the office, consulting room, operating theatre and car park no longer being residential premises to be used predominantly for residential accommodation. Objectively, part of the premises is still designed predominantly for residential accommodation, comprising bedrooms (including the bedroom used for storage), bathroom, kitchen, living room, lounge room and gardens.

43. If Shannon later sells or leases the premises, she will need to apportion the value of the supply between the taxable and input taxed parts of the supply.

Parts of the property in your case were built or modified to accommodate commercial use or include modifications that were done to accommodate commercial use. These parts of the property are commercial and not residential.

For example:

• the ground floor commercial area was built to be used for this purpose

• the commercial area that was used for commercial purposes was built for that purpose

• the shop was created by extending the area that used to be the entrance to the house to accommodate commercial use

• at some point in time after the residence was built, two extra toilet rooms were added for use in connection with a business. After this addition, 3 toilet rooms were used in connection with this business. Signs indicate that the original toilet room and the two additional toilet rooms are for mens', ladies' and disabled persons' use respectively.

Our examination of photos of the property also reveals that much of the property is commercial.

The remainder of the property, for example, the bedrooms, displays physical characteristics evidencing their suitability and capability to provide residential accommodation. This part of the property provides shelter and basic living facilities. Therefore, this part of the property is residential premises to be used predominantly for residential accommodation.

The removal of commercial fixtures and fittings from the commercial areas does not automatically give those areas the character of residential premises.

The fact that part of the property was built for residential use and retains residential characteristics is not sufficient to characterise the entire property as residential premises.

Paragraph 28 of Goods and Services Tax Ruling GSTR 2003/3 provides that paragraphs 40-75(1)(b) and 40-75(1)(c) of the GST Act raise the question of what has been done to the building or the activity of building by the current owner and this will determine whether the residential premises are new residential premises.

At the time the property was sold to you, it included new residential premises, because the residential premises had not previously been sold. The previous owner did not substantially renovate the residence. The new residential premises had been used for residential accommodation before 2 December 1998. Therefore, the sale of the property to you included an input taxed supply of residential premises under section 40-65 of the GST Act.

There are no other provisions in the GST Act under which the sale of the property by the debtor to you would have been input taxed. Therefore, the sale of the property by the debtor to you would not have been input taxed to the extent of the commercial portion.

As all of the requirements of section 9-5 of the GST Act would have been met if the debtor had sold the property to you, this sale would have been a taxable supply. However, it would not have been a taxable supply to the extent of the residential portion of the property.

As the sale of the property by the debtor to you would have been a partly taxable supply to the extent of the commercial portion of the property, the requirement of paragraph 105-5(1)(b) of the GST Act is met to the extent of that portion of the property.

As both requirements of subsection 105-5(1) of the GST Act are met, the sale of the property to you was a taxable supply to the extent of the commercial portion. Therefore, you meet the requirement of paragraph 11-5(b) of the GST Act

The sale of the property to you was not a taxable supply to the extent of the residential portion because to that extent the sale would not have been taxable if the debtor had made the sale.

In accordance with paragraph 16 of Goods and Services Tax Ruling GSTR 2001/8, the sale of the property to you was a mixed supply, meaning that the supply has to be separated or unbundled as it contains separately identifiable taxable and non-taxable parts.

In accordance with paragraph 29 of GSTR 2001/8, the GST on the sale of the property is 1/11^th of the part of the price that is reasonably apportionable to the commercial part of the property.

Consideration

You have provided consideration for the sale of the property to you. Therefore, you meet the requirement of paragraph 11-5(c) of the GST Act.

Registered or required to be registered for GST

You are not required to be registered for GST because your GST turnover is under $75,000 a year.

You will only meet the requirement of paragraph 11-5(d) of the GST Act if you register for GST and your GST registration is backdated to the time of settlement of sale of the property to you. You are entitled to register for GST because you are carrying on an enterprise.

For the purposes of determining whether you are entitled to an input tax credit on your purchase of the property, you will be treated as having been registered for GST as at the time of settlement of sale of the property to you if you register for GST and your GST registration is backdated to that time.

Conclusion

You will be entitled to an input tax credit on your purchase of the property provided that you register for GST and your GST registration is backdated to the time of settlement of sale of the property to you because the requirements of section 11-5 of the GST Act would be met under such circumstances.

Your input tax credit (if any) would be equal to the GST component on the sale of the property to you. Therefore, the input tax credit would be 1/11^th of the part of the price that is reasonably apportionable to the commercial part of the property (the commercial part being those parts that were built or modified to accommodate commercial use or that include modifications that were done to accommodate commercial use). It is the vendor's responsibility to determine the GST payable on the sale.

Additional information

The ATO has the power to backdate GST registrations up to 4 years (longer in some circumstances).

The GST refund verification area of the ATO might ask you for a copy of the sale contract, tax invoice and other documentation once you have made your input tax credit claim to substantiate the claim because of its large size.