Edited version of private advice

Authorisation Number: 1012651393281

Ruling

Subject: GST and sale and rental of premises

Question 1

Is the sale of the Property a taxable supply?

Answer

No.

Question 2

Is the rental of the Property whilst it is listed for sale a taxable supply or an input taxed supply?

Answer

The supply is input taxed.

Question 3

If the sale is a taxable supply, can section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) apply if a lease is assigned on the sale?

Answer

Not applicable, please see discussion below.

Relevant facts and circumstances

At the time of purchase the Property was used as commercial premises by the Vendor. Subsequent to the acquisition you utilised the Property in your GST registered business.

The Property's physical characteristics are such that it is evident that the Property was originally constructed as a residence. The Property effectively has bedrooms, a bathroom, a laundry, a toilet as well as a living area, a dining area and a verandah. As the Property has been used as business premises for many years there have been some minor internal alterations within to facilitate the business activities. The Property however retains the character of a residence.

Under local council zoning the use of the Property as residential accommodation is expressly prohibited.

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 40-35

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

A New Tax System (Goods and Services Tax) Act 1999 section 38-325

Reasons for decision

Questions 1 and 2

Summary

Both the rental and sale of the Property are a supply of residential premises which is input taxed.

Detailed reasoning

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.

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

You meet the requirements of paragraphs 9-5(a), 9-5(b), 9-5(c) and 9-5(d) of the GST Act. This is because:

• you made the supply of the Property for consideration;

• the Property was supplied in the course or furtherance of an enterprise that you carry on;

• the Property is in Australia; and

• you are registered for GST.

A supply of residential premises by way of lease or sale is input taxed to the extent that the premises are not either new or commercial residential premises and are to be used predominantly for residential accommodation. A further restriction placed on the sale of residential premises (not of the lease) is that a supply of 'new residential premises' is a taxable supply.

In the first instance we must consider whether the Property is residential premises and then consider whether either of the exceptions applies.

Goods and Services Tax Ruling GSTR 2012/5 notes that the requirement in the GST law 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.

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).

Conversely, premises that do not display physical characteristics demonstrating that they are suitable for, and capable of, being occupied as a residence or for residential accommodation are not residential premises to be used predominantly for residential accommodation, even if the premises are actually occupied as a residence or are for residential accommodation.

You have stated that the house on the Property still has the characteristics of residential premises despite being used as business premises. The house retains the bathing and cooking areas, etc. that distinguish it as residential premises. We consider that the house has the characteristics of residential premises.

While local zoning laws prohibit the use of the Property as residential premises, the relevant ATO policy, Goods and Services Tax Ruling GSTR 2012/5 'Goods and services tax: residential premises' notes that such an ordinance does not restrict a building from being residential premises. Paragraph 82 of GSTR 2012/5 states:

82. Contractual or legal prohibitions against long-term or short-term occupation as a residence do not prevent premises from being suitable for, and capable of, providing residential accommodation.

Paragraph 81 of GSTR 2012/5 notes that it is the physical suitability rather than the legal suitability of premises as residential premises that is to be assessed. As discussed above the Property has the physical characteristics of residential premises that are to be used predominantly for accommodation and therefore will constitute an input taxed supply under section 40-35 of the GST Act for the supply by way of lease.

New residential premises

New residential premises are defined as residential premises that:

(a) have not been previously sold as residential premises (other than commercial residential premises) and have not recently been the subject of a long term lease; or

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

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

Given that the Property was purchased in 200X in much the same configuration as it is now, it is considered that it has previously been sold as residential premises. Therefore paragraph (a) is not satisfied and the sale of Property is the input taxed supply of residential premises under section 40-65 of the GST Act.

Question 3

Discussion

If the going concern provisions of section 38-325 of the GST Act were satisfied, the sale of the Property would be GST-free rather than input taxed. You have not sought for this issue to be addressed if the sale is not taxable.

You may wish to consider however the effect of a GST-free sale rather than an input taxed sale. A GST-free sale carries with it an entitlement to claim input tax credits on sale expenses which an input tax sale does not.

You can claim an input tax credit if you make a 'creditable acquisition' as defined in section 11-5 of the GST Act. Paragraph 11-5(a) of the GST Act lists that the first requirement of making a creditable acquisition is that:

You acquire anything solely or partly for a creditable purpose

In turn, subsection 11-15(1) of the GST Act notes that an acquisition made for a 'creditable purpose' is an acquisition that is made in carrying on your enterprise. However a subsequent exclusion to this is when the acquisition made relates to making input taxed supplies.

Therefore for example, sale costs incurred in making the input taxed sale of the Property would not be made for a creditable purpose and would not carry an input tax credit entitlement. Sales expenses incurred in making a GST-free sale are not restricted in this way.

A leasing enterprise can be supplied GST-free where the supply meets the requirements of section 38-325 of the GST Act.

A supply of a going concern occurs when:

• a business is sold, and that sale includes all of the things that are necessary for the business to continue operating, and

• the business is carried on, up until the day of sale.

The supply of a going concern is GST-free if it meets certain requirements including:

• the sale is for a payment or consideration

• the purchaser is registered, or required to be registered, for GST, and

• the seller and the purchaser have agreed, in writing, that the supply is of a going concern.

It is usual in a standard land contract for the assignment of a lease (or of a specific tenancy if a lease does not exist) to be mentioned to evidence that a leasing enterprise exists. Copies of leases are often attached as schedules to the contract as well.