Edited version of private advice

Authorisation Number: 1012624594001

Ruling

Subject: GST and the supply of property

Question 1

Is the supply of the property an input taxed supply of residential premises by Entity A and Entity B?

Answer

Yes

Question 2

Is Entity A liable to make an increasing adjustment under Division 129 of the GST Act, in respect of the acquisition or any subsequent capital improvements to the Property?

Answer

No

Relevant facts and circumstances

X and X (the Purchasers), entered into a contract with Entity A and Entity B [together 'the Vendors], to purchase the property, for consideration of $XX.

Prior to settlement, the Property was owned by the Vendors as tenants in common.

Entity A acquired its interest in the property from Y Y and Entity B had held the property as tenants in common as at 1 July 2000. Y sold his/her interest in the property to Entity A for consideration of $XX plus GST. This supply was treated as a fully taxable supply without applying the margin scheme. Entity A claimed an input tax credit for the GST paid.

The Property is over 100 years old and was originally constructed as a residential dwelling. Since its construction, the Property has been leased, at various times, for either residential or commercial purposes (or both purposes concurrently). Commercial uses have included operation as a consulting room.

The Purchaser is acquiring the property solely for use as a private dwelling and it is not expected to be used for any commercial purpose in the foreseeable future.

The Property is comprised of X floors. At present, the ground floor consists of various rooms. The second floor consists of various rooms. The garden consists of a garage and verandah. Photographs of the property have been provided in support of your application.

A copy of an early floor plan of the Property, based on a diagram extracted from an article published by a former resident of the Property, has been provided. A current floor plan has also been provided. Based on a comparison of the two floor plans and discussions with the vendor, the following modifications have been identified since construction of the Property:

• The removal of the kitchen from its original location.

• The addition of a new kitchen.

• Changes were made to various original rooms. The modifications remained at settlement, but will be removed by the purchaser to substantially return the property to its previous (and close to original) state. The modifications did not involve any material change to the primary structure of the Property.

The vendors are registered for GST.

The Property will be vacant at the time of supply by the Vendors to the Purchaser.

You advised that the property had previously been sold as residential premises.

In a telephonic conversation between Z of this office and your representative, it was confirmed that the property had been leased for commercial purposes to both residential and commercial tenants since purchase.

Further, in a letter dated DDMMYYYY, your representative provided the following additional information:

(1) Entity A and Entity B, each hold a 50% interest in the property.

(2) Renovations made to the property:

- The removal of the kitchen from its original location. A kitchenette was installed and over time updated with new appliances i.e. dishwasher, microwave etc.

- The addition of a new kitchen. The upstairs kitchen was in the building when purchased. This kitchen was also updated over time.

- Changes to various original rooms The modifications remained at settlement but will be removed by the Purchaser to substantially return the property to its previous (and close to original) state. The modifications did not involve any material change to the primary structure of the property. The downstairs room (original dining room) was installed in the later 1980's and once again modified and updated over the years.

(3) The price paid for the property was $XX plus GST (if any).

(4) Settlement occurred on DDMMYYYY.

The following documentation was provided in support of your application:

• Contract of Sale between Entity A, Entity B (the Vendors) and the purchasers

• Vendor section 32 statement

• Planning Certificate and Information Certificate

• Photographs of the property

• Early Floor plan of the property

• Current floor plan 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 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 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 Division 129

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

Reasons for decision

In this ruling, please note:

• All legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) unless otherwise specified.

• All terms marked by an *asterisk are defined terms in the GST Act.

Question 1

Is the sale of the property an input taxed supply of residential premises by Entity A and Entity B (together the Vendors)?

Section 9-40 provides that you are liable for GST on any taxable supplies that you make.

A supply is a taxable supply if it meets all the requirements of section 9-5. This section 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 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.

In the Vendor's case, the supply of the property would meet the requirements of paragraphs 9-5(a) to 9-5(d).

In addition, the supply is not GST-free under a provision of the GST Act or any other Act.

The issue to be determined in this case, is whether the Vendor's supply of the Property will be an input taxed supply of residential premises. Input taxed means that GST is not payable on the supply and there is no entitlement to an input tax credit for anything acquired to make the supply.

Under subsection 40-65(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).

Subsection 40-65(2) states:

(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.

Real Property is defined in section 195-of the GST Act to include: 

(a) any interest in or right over land; or

(b) a personal right to call for or be granted any interest in or right over land; or

(c) a licence to occupy land or any other contractual right exercisable over or in relation to land.

In your case, Entity A and Entity B hold the Property as tenants in common.

The term 'residential premises' is defined in section 195-1. This section states:

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 occupation or intended occupation) and includes a *floating home.

Goods and Services Tax Ruling GSTR 2012/5, Goods and services tax: residential premises (GSTR 2012/5) provides guidance on the meaning of residential premises.

Paragraph 9 provides that the requirement in section 40-65 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.

Paragraph 15 of GSTR 2012/5 states:

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

Paragraph 20 goes on to say that premises must be fit for human habitation in order to be suitable for, and capable of, being occupied as a residence or for residential accommodation.

The Property, in this case, is comprised of X floors, both consisting of various rooms. The garden consists of a garage and verandah.

Accordingly, the sale of the property will be the sale of residential premises to be used predominantly for residential accommodation and will be an input taxed supply under section 40-65 of the GST Act, unless the residential premises are considered commercial residential premises or new residential premises for GST purposes.

From the facts provided, the sale of the property will not be a supply of commercial residential premises for GST purposes. However it must be considered whether it is a supply of new residential premises pursuant to subsection 40-75(1)

This provision states that 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.

The property is over 100 years old and was originally built as a residential home. You advised in your application that the property had previously been sold as residential premises and therefore is not new residential premises because of subparagraph 40-75(1)(a).

Over the period that you have held the property, the vendors have made a number of modifications as detailed in the facts and property schematics provided. However, we do not consider that these are substantial renovations to the building and consequently the property is not new residential premises pursuant to subparagraph 40-75(1)(b) .

Subparagraph 40-75(1)(c) is not relevant in this case.

Accordingly, the sale of the Property will not be a supply of new residential premises as the requirements of section 40-75(1) of the GST Act are not satisfied.

As the supply of the Property is not a sale of commercial residential premises or new residential premises, subsection 40-65(2) of the GST Act does not apply to exclude the sale from being input taxed.

Therefore, the sale of the Property is an input taxed supply and GST will not apply to the sale.

Question 2

Is Entity A liable to make an increasing adjustment under Division 129 of the GST Act, in respect of the acquisition or any subsequent capital improvements to the Property?

Under Division 129, an entity may have an adjustment when the extent of creditable purpose of an acquisition changes. Whether the entity has an adjustment is affected by the GST exclusive value of the acquisition and whether there are any adjustment periods remaining for the acquisition.

Entity A purchased an interest in the Property from X. At this time, the floor plan of the property was not significantly different from what it is today, that is, a residential property (as outlined in Question 1).

The sale of the interest by X should therefore have been an input taxed supply and was incorrectly treated as a taxable supply. Further, as the acquisition related to supplies that would be input taxed (being a supply of residential premises), Entity A should not have made a creditable acquisition pursuant to section 11-5.

As the acquisition of the interest in the property and the capital improvements were not made for a creditable purpose and as the property was sold as an input taxed supply, there is no change in the extent of creditable purpose between the time of the acquisition of the interest in the property and the capital improvements up until the date of sale of the property. Therefore, you do not have an adjustment pursuant to Division 129.

However, when Entity A acquired the interest in the property, an input tax credit was claimed. In addition, a number of input tax credits were claimed on the capital improvements over time to which Entity A was not entitled as it was making input taxed supplies pursuant to section 40-35.

Practice Statement Law Administration PS LA 2009/3, Time limit on recovery by the Commissioner (PSLA 2009/3), sets out the circumstances in which the Australian Taxation Office (ATO) may recover indirect taxes outside the four-year time limit under the exceptions set out in section 105-50 of Schedule 1 to the Taxation Administration Act 1953.

Subsection 105-50(1) of Schedule 1 to the Taxation Administration Act 1953 (TAA) states that any unpaid net amount, net fuel amount or amount of indirect tax (together with any relevant general interest charge under the TAA) ceases to be payable four years after it became payable. 'Indirect tax' refers to any of the goods and services tax (GST), luxury car tax, and wine equalisation tax. In this practice statement, amounts covered by subsection 105-50(1) are generally referred to as 'unpaid amounts'.

Further, subsection 105-50(2) provides that:

• if an amount was paid as a refund or applied under the Running Balance Account (RBA) provisions, and

• that amount exceeded the amount (if any) that the entity was entitled to be paid or have applied,

the amount of the excess (together with any relevant general interest charge under the TAA) ceases to be payable four years after it became payable by the entity.

The four-year limit in subsection 105-50(2) commences from the day after the date that the overpaid refund amount became payable by the entity.

In the case of Entity A, the four-year time limit, during which the Commissioner may recover the input tax credit claimed on the purchase of the interest in the property, has expired and no further action is required.

You have also indicated that modifications/ capital improvements have been made to the Property for which input tax credits have been claimed. Where these claims have been made within the past four years, the Business Activity Statements for the relevant tax periods should be revised where the mistakes have occurred outside the appropriate time limit.

Corrections can however be made on your next activity statement if the errors fall within the following time limits: