Edited version of private advice

Authorisation Number: 1012653582040

Ruling

Subject: Goods and services tax (GST) and new residential premises

Question 1

Did you make a taxable supply of new residential premises when you sold the house?

Answer

Yes.

Question 2

Are you entitled to a decreasing adjustment under Division 129 of the A New Tax System (Goods and Services Tax) Act 1999 for the construction costs?

Answer

Yes. You will have a decreasing adjustment in the tax period ending 30 June.

Relevant facts and circumstances

The Trustee (You) is registered for GST.

You constructed a house (property) solely for the purpose of leasing.

The property was one of two houses constructed on vacant land acquired under the margin scheme. The other house continues to be held for the purpose of leasing.

No input tax credits were claimed on construction costs.

The property was leased.

The decision was made to sell the property. A real estate agent was engaged and the property was advertised.

The property was sold.

The property was in the name of the Trustee.

You always intended the property to be an investment property and because you believed GST did not apply on the sale you did not collect GST on the sale or claim input taxed credits on the construction costs.

You have previously been involved in a property development as part of a GST partnership and sold a property. Upon completion of the development you decided that property development was too difficult and have acquired properties for the purpose of leasing. You have bought and sold other properties.

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 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 Section 40-75,

A New Tax System (Goods and Services Tax) Act 1999 Division 129 and

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

Reasons for decision

Question 1

In this ruling, please note:

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

• All terms marked by an asterisk are a defined term in the GST Act unless stated otherwise.

You must pay the GST payable on any taxable supply that you make.

Section 9-5 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.

In your case, you made a supply of the house in Australia for consideration in the course of your leasing enterprise and you are registered for GST, satisfying subsections 9-5(a), (b) (c) and (d).

Further the GST-free provisions do not apply in your circumstances.

However, the relevant issue to be determined is whether the input taxed provisions apply in your circumstances, specifically whether there is an input taxed supply of residential premises.

Residential premises

Under subsection 40-65(1), a sale of real property to be used predominantly for residential accommodation (residential premises) is input taxed. However, subsection 40-65(2) in part states that the sale is not input taxed to the extent that the residential premises are:

…

(b) *new residential premises other than those used for residential accommodation (regardless of the term of occupation) before 2 December 1998.

Input taxed means that there is no GST payable on the supply and there is no entitlement to an input tax credit for anything that is acquired to make the supply.

The definition of residential premises in section 195-1 refers to land or a building that is occupied as a residence or for residential accommodation, or is intended to be, and is capable of being, occupied as a residence or for residential accommodation (regardless of the term of occupation or intended occupation).

Based on the information submitted, the house is residential premises, and was not used for residential accommodation before 2 December 1998.

New residential premises

The term 'new residential premises' has the meaning given by section 40-75, which in part states:

40-75 Meaning of new residential premises

When premises are new residential premises

(1) *Residential premises are new residential premises if they:

(a) have not previously been sold as residential premises…;

(b) …; or

(c) ….

Paragraphs (b) and (c) have effect subject to paragraph (a).

…

(2) However, the *residential premises are not new residential premises if, for the period of at least 5 years since:

(a) if paragraph (1)(a) applies (…) - the premises first became residential premises; or

…

Based on the information submitted, the house has not previously been sold and it is less than 5 years since the house became new residential premises.

Therefore, your sale of the house was a taxable supply of new residential premises.

Question 2

You are entitled to the input tax credit for any creditable acquisition that you make.

Subsections 11-15(1) and (2) state:

(1) You acquire a thing for a creditable purpose to the extent that you acquire it in *carrying on your *enterprise.

(2) 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 carry on a leasing enterprise which consists of making input taxed supplies of residential rent and residential property.

In this instance, when you constructed the residential premises, you were not intending to make a taxable supply of new residential premises, but were intending to make input taxed supplies of residential rent.

Therefore, your acquisitions met the negative limb of subsection 11-15(2)(a), as they related to making supplies that would be input taxed.

Under Division 129 of the GST Act, you are required to monitor the extent to which your acquisition is applied to a creditable purpose. Where there is a change in the extent to which you have applied a thing to a creditable purpose, you may be required to make an adjustment.

When you advertised the property for sale, the property began to be applied partially to creditable purposes. Therefore, you were required to review your application of the 'things' that were acquired in the construction of your premises.

As the property was sold, there is only one adjustment period, being the tax period ending 30 June, as outlined in paragraph 41 of Goods and Services Tax Ruling GSTR 2000/24 Good and services Tax: Division 129 - making adjustments for changes in extent of creditable purpose.

Goods and Services Tax Ruling GSTR 2009/4 Goods and services tax: new residential premises and adjustments for changes in extent of creditable purpose (GSTR 2009/4) is concerned with new residential premises and a change in creditable purpose. In particular, GSTR 2009/4 addresses the calculation of the extent of creditable purpose where the new residential premises are subject to a 'dual application', ie the supplier leases the residential premises, while at the same time making the new residential premises available for sale under a taxable supply.

You must apportion your creditable purpose by applying a method that is fair and reasonable. Guidance on appropriate methods of apportionment is provided in Goods and Services Tax Ruling GSTR 2006/4 Goods and services tax: determining the extent of creditable purpose for claiming input tax credits and for making adjustments for changes in extent of creditable purpose.

An example of one reasonable method of apportionment where premises have been applied in relation to the creditable purpose of sale and the non-creditable purpose of making input taxed supplies during the relevant period and the premises have been sold prior to the relevant adjustment period is outlined in paragraph 83 of GSTR 2009/4.

The principle set out in GSTR 2009/4 is that the acquisitions in relation to the new residential premises are made for a creditable purpose to the extent that they relate to the subsequent taxable supply. The quantification of that extent is calculated using the following output based indirect formula:

Consideration for the taxable supply of the premises

____________________________________________________________________________

Consideration for the taxable supply of the premises plus consideration for the input taxed supplies of residential premises by way of lease