Edited version of your written advice

Authorisation Number: 1012917556004

Date of advice: 27 November 2015

Ruling

Subject: GST and mixed supplies of real property

Question

Is your supply of the Property located in Australia, a taxable supply pursuant to section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes, except to the extent that it is input taxed.

Relevant facts and circumstances

You registered for GST as a partnership from 1 July 200X.

You had earlier acquired a property located in Australia (the Property).

The Property comprised two distinct areas. A house, and a commercial area located on the balance of the land. At purchase, the property was valued at $X million. You apportioned the areas based on a square metre (sqm) basis.

Over the period of time you owned the property you made a number of refurbishments to both the residential and commercial areas.

You are now planning to sell the property.

Contentions

You contended that there were two possible apportionment methodologies:

1 The percentage of the sale to qualify for a taxable supply could be determined by the difference between the purchase price and the sale price (Margin scheme), as the property was sold as a residential property in a non-urban zone, however the majority of the property has not been a party to the GST registration which relates primarily to the new building and therefore leaves the apportionment of the increased property value in question.

2 Alternatively, the percentage land use in which the taxable supply was applied could be used. …...

Relevant legislative provisions

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

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

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

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

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

Reasons for decision

In this reasoning, unless otherwise stated,

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

• all reference materials referred to are available on the Australian Taxation Office (ATO) website www.ato.gov.au

• all legislative terms of the GST Act marked with an asterisk are defined in section 195-1 of the GST Act

Question

Section 9-5 provides that you make a taxable supply if:

(a) You make the supply for consideration

(b) The supply is made in the course or furtherance of an enterprise that you carry on

(c) The supply is connected with the indirect tax zone 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.

Your supply of your property meets paragraphs (a) to (d) and is not GST free. Therefore, it will be a taxable supply except to the extent that it is input taxed.

Input taxed supply of residential premises

Section 40-65 provides that 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, the sale is not input taxed to the extent that the residential premises are:

• commercial residential premises, or

• new residential premises.

The term 'residential premises' is defined in section 195-1 to include 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.

Goods and Services Tax Ruling GSTR 2012/5 Goods and services tax: residential premises (GSTR 2012/5) considers how subdivisions 40-B and 40-C apply to residential premises. Paragraph 46 of GSTR 2012/5 provides that:

There is no specific restriction, in the definition of residential premises, on the area of land that can be included with a building. The extent to which land forms part of residential premises to be used predominantly for residential accommodation is a question of fact and degree in each case. A relevant factor in determining this is the extent to which the physical characteristics of the land and building as a whole indicate that the land is to be enjoyed in conjunction with the residential building. The use of the land is not a determining factor in deciding if the land forms part of the residential premises.

The house with the associated facilities meets the definition of residential premises that are not commercial residential premises. Further, they are not new residential premises as you acquired them from the previous owner.

Therefore, the supply of the portion of the property with the house, and associated facilities will be an input taxed supply.

The balance of the property will be a taxable supply.

Mixed and composite supplies

Section 9-80 provides that where a supply is partly taxable and partly non-taxable, the value of the taxable supply is worked out on a proportional basis.

Goods and Services Tax Ruling GSTR 2001/8 Goods and services tax: Apportioning the consideration for a supply that includes taxable and non-taxable parts (GSTR 2001/8) explains how to identify the taxable and non-taxable parts of a supply and the difference between a mixed supply and a composite supply.

Paragraph 16 of GSTR 2001/8 provided that the term 'mixed supply' is used to describe a supply that has to be separated or unbundled as it contains separately identifiable taxable and non-taxable parts that need to be individually recognised. Your supply of the property is a mixed supply and you will need to apportion the sale price between the input taxed supply of the house and the balance of the property.

Paragraphs 25 to 27 of GSTR 2001/8 provide that you can use any reasonable basis to apportion the consideration and calculate the value of the taxable and non-taxable parts of a supply. Whichever method you choose should be supported by your business records.

Paragraph 95 of GSTR 2001/8 provides the following guidance.

95. The method you choose should be based on a consideration of all the circumstances and not because it gives you a particular result. You may need to use different methods, or a combination of methods, for different supplies to ensure the appropriate amount of GST is payable. You need to keep records that explain all transactions and other acts you engage in that are relevant to supplies you make, including supplies that are GST-free and input taxed.⁵³

You proposed two different apportionment methodologies. The Commissioner does not consider these to be reasonable methods as they do not take into account the fact that all of the area that is not input taxed will be a taxable supply. In addition, apportioning the sale price on a sqm basis will not generally lead to a reasonable outcome as different structures on a property, the age of the structure and other matters will lead to different values being associated with the different areas of your property.

Example 15C at paragraph 103F of GSTR 2001/8 gives an example of the supply of a property comprising commercial and residential components. It provides the following guidance:

Example 15C - commercial and residential premises

103F. Hilary is registered for GST. She sells a property that consists of commercial premises and residential premises. The property is on a single title and is currently untenanted, although the commercial part was recently rented for $1,000 per week and the residential part for $500 per week .^55A Hilary may reasonably apportion two thirds of the consideration for the sale (the same proportion the rent for the commercial premises bears to the total rent of $1500) to the commercial part and one third to the residential part to ascertain the value of the taxable part .

To work out the GST payable on the taxable component you may be entitled to use the margin scheme. Division 75 sets out the rules for using the margin scheme.