Edited version of your written advice

Authorisation Number: 1012909306058

Date of advice: 9 November 2015

Ruling

Subject: GST and sale of renovated residential property

Question 1

Did the work undertaken on the house constitute substantial renovations and therefore create new residential premises pursuant to paragraph 40-75(1)(b) of the A New Tax system (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes.

Question 2

Will the sale of the renovated house be a taxable supply under section 9-5 of the GST Act?

Answer

Yes.

Question 3

If the sale of the property is a taxable supply, can you use the margin scheme under Division 75 of the GST Act?

Answer

Yes.

Relevant fact

You are registered for goods and services tax (GST).

You recently purchased a residential X bedroom house and started renovating the entire house after settlement. Utilising the internal space, the X bedroom house was converted into a Y bedroom house.

You provided the following information in regard to the renovation done to the house:

Inside the house

The internal of the house was in poor condition at the time of purchase. A lot of existing damage from wear and tear was repaired. The room layout has mainly stayed the same. The rooms have been repurposed.

The internal layout keeping has been rearranged with the same basic rooms but changing their use. There is a more open plan for the kitchen/dining/lounge by removing a hallway and wall. There is a new kitchen, bathroom, ensuite and laundry.

The lounge room is turned into Z bedrooms and the existing study into a Y bedroom. The master bedroom is where it was. The size of one window has been reduced, an external sliding door was put onto the balcony.

Work carried out inside the house:

• The whole house had to be rewired, and new lighting, air conditioning and TV outlets were installed.

• The plumbing under the house had to be redone however you were able to utilise the existing underground plumbing to services.

• Main bedroom/ master room - The robes were in poor condition and were removed. Extensive damage was found, this was replastered and painted. The existing window was retained and a new robe and carpets were installed.

• Bathroom - bathroom was removed and repaired.

• Walls between bedroom X and laundry - the walls were damaged so were removed and not reinstated.

• Kitchen- kitchen was removed and a new kitchen was installed.

• Flooring was put over existing floorboards.

• The old bedroom window was moved into another room and an external sliding door was installed.

• Walls between kitchen and dining - repaired and reinstated as needed.

• Ceiling timbers between various rooms were extensively damaged.

• Lounge and rumpus -Plasterboard was removed for thorough inspection and some of the damaged timbers were replaced.

• Bedroom - An ensuite and a laundry were created into an old bedroom area and they are made from new timbers as there was existing damage. The existing window was retained in the area.

• New bedrooms - you were able to utilise the existing timbers as there was minimal damage in these areas; however the plasterboard had to be removed so that you could do a thorough inspection. Existing windows were retained in a number of bedrooms with new carpets and robes to the remaining bedrooms.

• A new wall was created to make bedrooms.

• A new hallway created the new bathroom and bedroom.

• A bathroom window was installed into the bathroom.

Outside the house

The external layout is kept as same. There is no extension to the exterior of the building, except for a small lower deck that is less than 20 square metres which is in place over an existing cement area. The existing brick was rendered and roof replaced from tile to metal as tiles were damaged. The same external stair ways and balconies are used but repaired and replaced as necessary.

External work carried on:

• A porch was covered and an access ramp was removed and replaced. A deck was repaired and had new balustrade installed.

• Back stairs were retained with new balustrade and a new small deck was created over an existing concrete slab off the garage.

• The existing garage was retained and new roller door was installed.

• The existing tiles on the roof were found to be cracked and damaged so a tin roof and new gutters were installed.

• The brickwork was rendered to the external walls.

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 paragraph 40-75(1)(b)

A New Tax System (Goods and Services Tax) Act 1999 section 75-5

Reasons for decisions

Question 1

Section 40-75 of the GST Act defines the term 'new residential premises' and includes residential premises that have been created through substantial renovation of a building (paragraph 40-75(1)(b) of the GST Act).

The term 'substantial renovations' is defined in section 195-1 of the GST Act as:

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

The definition of 'substantial renovations' requires consideration of what work has been done to the building since it was acquired by the current owner.

Goods and Services Tax Ruling GSTR 2003/3 provides guidance on when substantial renovations apply in practice.

Paragraph 61 of GSTR 2003/3 provides that, for the purposes of the GST Act, if substantial renovations to a building are to occur then the renovations must satisfy the two following criteria:

• the renovations need to affect the building as a whole; and

• the renovations need to result in the removal or replacement of all or substantially all of the building.

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

Renovations need to affect the building as a whole.

Paragraphs 63, 64 and 66 of GSTR 2003/3 state:

63. Under this heading we discuss the concept of a building in its entirety, works on surrounding land (for example curtilage) and additions to the building.

Building in its entirety

64. Whether substantial renovations have occurred should be based on consideration of the building in its entirety, that is, the building as a whole and not by reference to specific or individual rooms. For renovations to be substantial they must directly affect most rooms in a building. The renovation of only one part of a building, without any work on the remaining parts of the building, would not constitute substantial renovations.

Curtilage

66. Work associated with the renovations, but not directly attributable to the building itself, for example, landscaping and beautification of surrounding land, is not renovations of a building.

In your case the entire house has been affected by the renovations. This condition is satisfied.

Removal or replacement of all or substantially all of the building

The extent to which parts of a building are removed or replaced will determine whether the above criterion is satisfied. The definition of substantial renovations states that it is not necessary for foundations, external walls, interior supporting walls, floors, roof or staircases to be removed or replaced to be substantial. This criterion is satisfied where there is a removal or replacement of a substantial part of the:

• structural components of the building; or

• non-structural components of the building.

Paragraphs 70, 71, 74 and 77 of GSTR 2003/3 state:

70. Structural work may give rise to substantial renovations in its own right. Structural work includes such work as:

• Altering, or replacing of, foundations;

• Replacing, removing or altering of floors or supporting walls, or parts thereof (interior or exterior);

• Lifting or modifying of roofs;

• Replacing existing windows and doors such that it is necessary to alter brickwork (for example replacing a single door with a double sliding door).

71. Structural work is also undertaken in the course of building an extension to a house or adding new bedrooms to a house.

74. Non-structural building work includes:

• Replacing electrical wiring;

• Replacing, removing or altering non-supporting walls, or parts thereof (interior or exterior);

• Plastering or rendering an entire wall or walls;

• Plumbing (e.g. replacing old metal pipes with copper pipes or plastic pipes);

• Removing or replacing kitchen cupboards, bathroom fixtures, etc;

• Removing or replacing air-conditioning or security system.

77. As part of renovations, work is often undertaken which does not impact on the structure of the building but is more in the nature of renewing or refreshing what is already there. We consider work of this nature to be cosmetic. Cosmetic work by itself does not amount to substantial renovations. We consider cosmetic work includes:

• Painting;

• Sanding floors;

• Removing and replacing worn or out of date fittings such as light fittings;

• Replacing curtains or carpets.

Guidance is provided on what we regard as substantial renovations in Examples 8 and 9 at paragraphs 124 to 130 of GSTR 2000/31. For example in Example 8, the removal and replacement of the exterior walls, the removal of some internal walls and the replacement of the flooring and the kitchen in a house are considered as collectively to amount to substantial renovations.

In this case, a substantial part of the structural and non-structural components of the house has been removed or replaced which leads to the conclusion that the work done in the house amounts to substantial renovation of the house.

Accordingly, this condition is satisfied.

Summary

The renovations to the house were substantial renovations The renovated house is therefore new residential premises under paragraph 40-75(1)(b) of the GST Act.

Question 2

Note: Where the term 'Australia' is used in this document, it is referring to the 'indirect tax zone' as defined in subsection 195-1 of the GST Act.

GST is payable on a taxable supply. You make a taxable supply under section 9-5 of the GST Act 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 for GST.

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

All of the above requirements must be satisfied for a supply to be a taxable supply under section 9-5 of the GST Act.

From the information received, you will satisfy paragraphs 9-5(a) to 9-5(d) of the GST Act when you sold the house as:

a) you will make the supply for consideration; and

b) the supply will be made in the course of the property business that you carry on; and

c) the supply will be connected with Australia as the house is located in Australia; and

d) you are registered for GST.

However your supply will not be a taxable supply to the extent that it was GST-free or input taxed.

GST-free supply

From the information received, the sale of the house will not be GST-free under the GST Act.

Input taxed supply

Under subsection 40-65(1) of the GST Act, a 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 (regardless of the term of occupation).

However, under subsection 40-65(2) of the GST Act, the sale is not input taxed to the extent that the residential premises are:

a) commercial residential premises; or

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

As discussed in question 1, the renovated house is new residential premises under paragraph 40-75(1)(b) of the GST Act. Accordingly, the sale of the house would not be input taxed under subsection 40-65(2) of the GST Act.

Summary

The sale of the renovated house will be a taxable supply as all the requirements in section 9-5 of the GST Act will be satisfied.

Question 3

If you sell property as part of your business and you are registered for GST, you may be able to use the margin scheme to work out how much GST you must pay under Division 75 of the GST Act.

Subsection 75-5(1) of the GST Act provides that you may use the margin scheme if the supplier and the recipient have agreed in writing that the margin scheme is to apply to the taxable supply of real property.

Subsection 75-5(1A) of the GST Act provides that the agreement must be made on or before making the supply, or within such further as the Commissioner allows.

Whether you can use the margin scheme depends on how and when you first purchase your property. For GST purposes the date when settlement occurs will be the date that you have purchase the property.

Subsection 75-5(2) of the GST Act provides that the margin scheme does not apply if you acquired the entire freehold interest, stratum unit or long-term lease through a supply that was ineligible for the margin scheme under subsection 75-5(3) of the GST Act.

You can use the margin scheme if you purchased the property before 1 July 2000 or it is purchased after 1 July 2000 from someone that:

• that was not registered or required to be registered for GST

• who sold you existing residential premises

• who sold the property to you as part of a GST-free going concern

• who sold the property using the margin scheme.

You cannot use the margin scheme if, when you first purchase the property the sale to you was fully taxable and the margin scheme was not used. In this case the amount of GST included in the price you paid is one-eleventh of the full purchase price.

In your case you have recently purchased an old existing residential premise and your sale of the renovated residential premises will be a taxable supply under section 9-5 of the GST Act. In this instance you will be able to use the margin scheme provided you have an agreement with the purchaser to use the margin scheme on or before making the supply.

For more information on GST and the margin scheme, refer to the following publications (available at www.ato.gov.au):

• Guide GST and the margin scheme;

• Goods and Services Tax Ruling GSTR 2006/8