Edited version of your written advice

Authorisation Number: 1012892699522

Date of advice: 9 October 2015

Ruling

Subject: Goods and services tax - Residential premises

Question 1

Are you making an input taxed supply under section 40-65 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) when you sell the property located in Australia (the property)?

Answer

Yes. You are making an input taxed supply under section 40-65 of the GST Act.

The scheme commences on:

1 July 2015

Relevant facts and circumstances

You are a trust registered for GST.

You acquired the property in 200X.

The property is a two storey building on one title. The top floor comprises:

• X bedrooms

• 1 dining room

• 1 living room

• 1 kitchen

• 1 bathroom; and

• 1 laundry

The ground floor comprises:

• 1 office

• X retail showrooms

• 1 workshop

• 1 storage room

When you acquired the property it was being leased to an entity, who, resided upstairs and used the ground floor as business premises. The property was supplied to you as a going concern.

The property is zoned "low density residential" within the Local Environment Plan and the neighbouring properties are residential terrace houses.

While the tenant no longer resides in the top floor they continue to use the ground floor as retail space.

You have not made any modifications to the property in the time that you have owned it.

The property is currently on the market and is advertised as a traditional period home which is currently being used as commercial premises.

You are currently in negotiations with a potential purchaser. The proposed sale would include a condition that there would be a 12 month lease for the ground floor with the current tenant.

To facilitate the sale of the property and ensure that the occupants of the top floor and ground floor can use their portion of the property with minimal disruption, the sale also includes a number of other conditions including discrete parking for each occupant and delineation of common areas.

The proposed conditions will not involve any major modifications to the physical characteristics of the property.

You have supplied photographs of the property which show it to be a typical 2 storey period, residential property with commercial signwriting on the windows of the bottom portion of the building.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 section 9-1

A New Tax System (Goods and Services Tax) Act 1999 section 9-5

A New Tax System (Goods and Services Tax) Act 1999 section 9-80

A New Tax System (Goods and Services Tax) Act 1999 section 40-65

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

Reasons for decision

In this reasoning, please note:

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

• all terms marked by an asterisk are defined terms in the GST Act

• all reference materials, published by the Australian Taxation Office (ATO),

Section 7-1 states that GST is payable on taxable supplies.

Section 9-5 defines a taxable supply to be:

• a supply

• made for consideration

• in the course or furtherance of an enterprise

• where the supply is connected with Australia; and

• you are registered or required to be registered for GST.

However, the supply is not a taxable supply to the extent it is GST-free or input taxed.

On the facts supplied, your supply of the property meets all the requirements of a taxable supply in section 9-5.

Input taxed supply of residential premises

Under section 40-65 the 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 and it is not new residential premises.

Section 195-1 defines residential premises as land or a building that is occupied as a residence or is intended to be occupied, and is capable of being occupied as a residence.

Goods and Services Tax Ruling GSTR 2012/5 Goods and services tax: residential premises (GSTR 2012/5) provides the Tax Office view of the characteristics of residential premises.

Paragraph 6 of GSTR 2012/5 explains that premises, comprising land or a building are residential premises where they are occupied as a residence or for residential accommodation, regardless of the term of occupation.

Paragraph 7 of GSTR 2012/5 explains that under paragraph (b) of the definition of residential premises, premises, comprising land or a building are also residential premises if they are intended to be occupied, and are capable of, being occupied, as a residence or for residential accommodation.

Paragraphs 9 and10 of GSTR 2012/5 further explain that 'residential premises to be used predominantly for residential accommodation (regardless of the term of the intended 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.

Premises that display the 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, premises may be used as a business office, however, may still be considered to be a residential premises based on the fact that it displays the physical characteristics common to 'residential premises'.

As stated in paragraph 15 of GSTR 2012/5, to satisfy the definition of residential premises, premises must provide shelter and basic living facilities. Further, as explained in paragraph 20 of GSTR 2012/5, the premises must be fit for human habitation, which is determined through an objective consideration of the relevant facts and circumstances.

The physical characteristics common to 'residential premises' is that they provide the occupants with sleeping accommodation and at least some of the basic facilities for day to day living. These characteristics will be inherent in the design and fabrication of the premises, which typically include areas for sleeping, eating and bathing. However, these things do not need to be arranged in a manner that is similar to a conventional house or apartment.

The property is intended to be occupied, is capable of being occupied, and has been used as a residence or for residential accommodation. Moreover the property is outwardly similar to other residences in the vicinity.

Although the ground floor of the property is currently being used as a commercial/retail space, as a whole, the property contains all of the attributes of a residence with facilities for sleeping, eating and bathing.

Therefore, it is appropriate to consider whether the fit out of the ground floor is significant enough to change the character of the property so that it is no longer residential premises to be used predominantly for residential accommodation.

Examples 8 and 9 of GSTR 2012/5 provide guidance on residential premises that have been partly converted for business use. Example 8 illustrates that where significant modifications are made to a building or part of a building, that part could change its character from residential to non-residential.

However, your case is similar to Example 9 in GSTR 2012/5. In Example 9, no significant modifications have been made to the property, a change in furniture or fittings is not sufficient to result in that part of the property changing its character to anything other than residential premises.

From the photos and information provided, it is considered that the property is correctly characterised as residential accommodation, and such use is consistent with the property's zoning. Any changes to the furniture or fittings on the ground floor are not sufficient to change the building's character from that of a residence. The property is not new residential premises as you acquired it in its current state in 200X.

Therefore, the sale of the property is an input taxed supply of residential premises.