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Edited version of your written advice
Authorisation Number: 1012856469855
Date of advice: 14 August 2015
Ruling
Subject: GST and commercial premises
Question
Is the sale by the Vendor of the property located at a specified location (the Property) to the Purchaser a taxable supply?
Answer
Yes.
Relevant facts and circumstances
The Vendor is registered for GST.
The Vendor entered into a contract for the sale of property to the Purchaser.
The sale contract provides that for GST purposes, the supply is a taxable supply in full however the terms of the contract provide that the purchaser may apply for a private ruling seeking clarification of the GST treatment of the sale.
The Property was built in 19XX and was designed and constructed for a commercial purpose.
The Property was used for this purpose from the date of construction until 20XX.
The Property was decommissioned at that time and remained vacant until the sale in 20XX.
The Property has not undergone any structural changes in order to change the nature of the premises from its original commercial use.
The Property contains a large garage which was used to house a commercial vehicle and is accessible via a door from a room.
The room contains a number of rooms and various facilities.
The Property also contains a number of buildings previously used to store equipment.
Whilst in commercial use, there were occasions where occupants would sleep at the Property.
The Purchaser of the Property intends to use the premises as residential premises.
Relevant legislative provisions
A New Tax System (Goods and Services Tax) Act 1999
Section 9-5
Section 9-40
Section 40-65
Subsection 40-65(1)
Section 195-1
Reasons for decision
Note: In this reasoning, unless otherwise stated,
• all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)
• reference material(s) referred to are available on the Australian Taxation Office (ATO) website www.ato.gov.au
Section 9-40 provides that you are liable for GST on any taxable supplies that you make.
Section 9-5 provides you make a taxable supply if:
• you make the supply for consideration
• the supply is made in the course or furtherance of an enterprise that you carry on
• the supply is connected with the indirect tax zone (Australia), and
• you are registered, or required to be registered for GST.
However, the supply is not a taxable supply to the extent that it is GST-free or input taxed.
The issue in this case is whether the supply of the Property is an input taxed supply of residential premises. Subsection 40-65(1) provides that a sale of real property is input taxed, but only to the extent that the property is residential premises to be used predominately for residential accommodation (regardless of the term of occupation).
The term 'residential premises' is defined in section 195-1 as land or a building that is occupied as a residence, or for residential accommodation, or is intended and capable of being occupied as a residence or for residential accommodation (regardless of the term of occupation) and includes a floating home.
Goods and Services Tax Ruling GSTR 2012/5 Goods and services tax: residential premises (GSTR 2012/5) outlines the characteristics of residential premises.
Paragraph 9 of GSTR 2012/5 explains that the requirement that the residential premises are to be used predominately for residential accommodation in section 40-65 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 continues by stating that to satisfy the definition of residential premises, premises must provide shelter and basic living facilities.
The Property in this case does contain shelter and basic living facilities. However, paragraph 25 of GSTR 2012/5 states:
Not all premises that possess basic living facilities are residential premises to be used predominantly for residential accommodation. If it is clear from the physical characteristics of the premises that their suitability for living accommodation is ancillary to the premises' prevailing function, the premises are not residential premises to be used predominantly for residential accommodation.
Paragraphs 26 - 39 of GSTR 2012/5 provides examples illustrating this point with paragraphs 84 - 88 providing further explanation.
Example 7 at paragraphs 36-39 of GSTR 2012/5 explains that the use of a building does not change the character of a building from commercial premises to residential premises:
Example 7 - shop
36. Julian leases a building from its owner. It consists of a display area, a storage area, an office, a kitchenette and a toilet. The premises were designed as a shop which is evidenced by the architectural plans held by the lessor. Julian furnishes the premises in order to use it as his residence, but makes no structural changes to it.
37. The building provides shelter and basic living facilities. Although the physical characteristics of the building may be considered similar to characteristics found in a house or apartment, the physical characteristics of the building together with the design plans objectively show that the premises are not residential premises to be used predominantly for residential accommodation. Rather, the characteristics and design plans show that the building is a shop designed to facilitate a retail business.
38. Although Julian's occupation of the shop as a residence means the shop satisfies paragraph (a) of the definition of residential premises in section 195-1, the shop is not residential premises to be used predominantly for residential accommodation. The supply is not an input taxed supply under Division 40 and is a taxable supply under section 9-5.
39. The outcome of this example would differ if Julian had made modifications to the building that changed the physical character of the building from a shop to residential premises to be used predominately for residential accommodation.
In this case, whilst the Property does contain shelter and basic living facilities, it was designed and built for the dominant or prevailing purpose of commercial use. Therefore, the Property is not considered to fall within the definition of 'residential premises' for the purposes of section 40-65.
The sale of the Property will satisfy the positive limbs of section 9-5 and is neither GST-free nor input taxed. Therefore, the sale of the Property will be a taxable supply and the Vendor will be liable for GST on the sale pursuant to section 9-40.