Edited version of private advice

Authorisation Number: 1012679625800

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Ruling

Subject: Entitlement to input tax credits on the sale of renovated residential property

Question

Are you entitled to claim input tax credits on the renovation services acquired prior to the proposed sale of your residential unit?

Decision

No, you are not entitled to claim input tax credits on the renovation services acquired prior to the proposed sale of your unit.

Relevant facts and circumstances

• You owned and leased an X bedroom strata titled residential unit for over 40 years. The unit is to be renovated. The renovations include a new kitchen with new kitchen cupboards, new appliances including a stove, sink, taps, exhaust fan, lighting etc.

• It has a single bathroom which will be refurbished with a new vanity toilet, bath, shower, tiling etc.

• The unit has timber floor boards with carpets. You will remove the carpets entirely and sand and polish the floor boards.

• As it is a strata tilted unit, you are not allowed to change anything outside.

• On completion of the renovations, the property will be sold. It will not be leased again under your ownership.

• You are registered for GST.

Relevant legislative provisions

All references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

• Section 40-65

• Section 40-75

• Section 11-5

• Section 11-15

Reasons for the decision

Section 11-5 of the GST Act refers to what is a creditable acquisition and provides that 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.

Section 11-15 of the GST Act refers to the meaning of creditable purpose and provides that;

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 .....

Therefore, it is necessary to ascertain whether your acquisition of the renovation services will relate to making input taxed supplies.

Subsection 40-65(1) of the GST Act provides that a sale of real property is input taxed but only to the extent that the property is residential remises to be used predominantly for residential accommodation.

Paragraph 40-65(2)(b) of the GST Act provides that a supply is not input taxed to the extent that the residential premises are new residential premises.

Paragraph 40-75(1)(b) of the GST Act provides that residential premises are new residential premises if they have been created through substantial renovations of a building.

Therefore, it is necessary to determine whether you will create new residential premises through substantial renovation of your residential unit and supply it to the purchaser. If so, the supply would not be an input taxed supply. GSTR 2003/3

Goods and Services Tax Ruling GSTR 2003/3 (GSTR 2003/3 or ruling) refers to when is a sale of real property a sale of new residential properties.

Paragraphs 54-56 explains what is substantial renovation as follow:

54. The term substantial renovations is defined in section 195-1:

'substantial renovations' of a building are renovations in which all, or substantially all, of a building is removed or is replaced. However, the renovations need not involve removal or replacement of foundations, external walls, interior supporting walls, floors, roof or staircases.

55. This definition requires consideration of what work has been done to the building since it was acquired by the current owner.

56. The word 'building' is not defined in the GST Act. 'Building' means 'a substantial structure with a roof and walls, as a shed, house, department store etc'. In the context of the provision, we consider that an individual strata title unit or apartment is a 'building' and its structure is enclosed within the external walls of the unit, rather than the entire complex.

Paragraphs 60-62 refer to criteria for substantial renovations and they are quoted below.

Criteria for substantial renovations

60. Whether renovations are substantial is to be determined in the light of all the facts and circumstances.

61. We consider that for substantial renovations to occur for the purposes of the GST Act, the renovations need to satisfy the following criteria before it is necessary to make further inquiry to establish whether the renovations are substantial:

(i)   the renovations need to affect the building as a whole; and

(ii)   the renovations need to result in the removal or replacement of all or substantially all of the building.

62. Where one of the above criteria is not satisfied substantial renovations have not occurred and no further inquiry needs to be made.

Paragraph 76 of the ruling refers to the effect of removal and replacement of a kitchen and bathroom and states:

76. However, the removal and replacement of a kitchen and bathroom with little else done to the building, apart from repainting and minor repair work, in most circumstances would not be sufficient for substantial renovations to have occurred.

Example 6 of the ruling refers to residential premises rented, restored and then sold and the activities are quite similar to the activities planned by you. The example is quoted below.

Example 6 - residential premises built, rented, restored and then sold

115. David is a property developer whose enterprise includes the construction of residential rental accommodation, renting those premises for a number of years (never less than 10 years) and the eventual sale of those premises.

116. Normal maintenance of the premises is undertaken while the premises are rented.

117. When the decision is made to sell the premises, work is undertaken to restore the premises to their original condition and to rectify damage done by the tenants. As part of this process a new kitchen, bathroom etc may be installed.

118. Where the restoration work affects most of the rooms in the house, but is largely cosmetic in nature (for example, replastering and repainting) and only the kitchen and bathroom are replaced, we consider there have not been substantial renovations.

119. The residential premises have been continuously used only for making input taxed supplies (i.e. residential rental) for a period of at least 5 years since the premises first became residential premises and there have not been substantial renovations. Therefore, the sale of the premises will be an input taxed supply.

120. However, where the damage done is so severe that it is necessary to replace the damaged plumbing, electrical wiring, most of the interior walls, floors, windows, doors, kitchen and bathroom (including fixtures and fittings), and restore the exterior walls and roof, there would be substantial renovations. The painting of the building inside and out is cosmetic in nature, and not a factor in deciding whether substantial renovations have occurred. In this case, the sale of the premises will be a taxable supply as the premises are new residential premises created through substantial renovations.

We consider that in these circumstances the works done on the unit, do not amount to substantial renovation of the unit and to the creation of new residential premises.

Accordingly, your proposed acquisition of renovation services will be for an input taxed supply of residential premises and will not be for a creditable purpose. Input tax credits are not available on the acquisition of such services.