Edited version of your written advice

Authorisation Number: 1013016883783

Date of advice: 18 May 2016

Ruling

Subject: Residential premises used for commercial purposes

Question

Are you able to claim input tax credits for the construction costs of the premises at
the property under section 11-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?.

Answer

No, you are not able to claim input tax credits for the construction costs of the property under section 11-20 of the GST Act.

This ruling applies for the following periods:

1 July 2014 to 30 June 2015.

Relevant facts and circumstances

You are the trustee for a Superannuation Fund and are registered for GST.

You constructed a building on land owned by the superannuation fund, located in Australia (the property).

The construction costs relating to the building were $X (GST inclusive).

The building consists of a number of bedrooms, bathrooms, and a study.

The building is a house, but has not been used as a residence.

You have leased the building to a tenant as commercial premises, whereby the lessee carries on a business.

The zoning of the property is rural, which permits commercial operations.

You have not made any modifications or substantial renovations to the building to accommodate the commercial business.

There's a small sign advising who occupies the property.

You have provided photographs of the premises which show residential premises, with the only exception being a small sign attached the wall.

Photographs show additions of office furniture such as desks and cabinets.

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 section 11-5

A New Tax System (Goods and Services Tax) Act 1999 paragraph 11-5(b)

A New Tax System (Goods and Services Tax) Act 1999 section 11-15

A New Tax System (Goods and Services Tax) Act 1999 section 11-20

A New Tax System (Goods and Services Tax) Act 1999 section 40-35

A New Tax System (Goods and Services Tax) Act 1999 subsection 40-35(1)

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

A New Tax System (Goods and Services Tax) Act 1999 Division 40

Reasons for decision

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

You are entitled to an input tax credit for any creditable acquisition that you make (refer to section 11-20).

The purchase of real property is a creditable acquisition if the requirements of section 11-5 are met. Section 11-5 stated:

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.

The meaning of 'creditable purpose' as referred to under paragraph 11-5(a) above is provided under section 11-15, which relevantly stated:

             (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

                     (b)  the acquisition is of a private or domestic nature.

…
(Emphasis added)

Section 9-5 provides the requirements for a taxable supply. However, section 9-5 provided that an input taxed supply is not a taxable supply. Supplies are input taxed under Division 40.

In relation to a supply of residential premises to derive residential rent,
section 40-35 relevantly stated:

(1) A supply of premises that is by way of lease, hire or licence (including a renewal or extension of a lease, hire or licence) is input taxed if:

a) The supply is of *residential premises (other than a supply of *commercial residential premises or a supply of accommodation in commercial residential premises provided to an individual by the entity that owns or controls the commercial residential premises)…

Under subsection 40-35(1) the supply of residential property to derive residential rent is input taxed.

The definition of 'residential premises' is provided in section 195-1 and includes land or a building that is 'occupied or 'intended to be occupied, and is capable of being occupied' as a residence or for residential accommodation'.

Goods and Services Tax Ruling, Goods and services tax: residential premises (GSTR 2012/5) provides guidance on when real property is residential premises to be used predominantly for residential accommodation.

Paragraph 7 of GSTR 2012/5 explains that the physical characteristics of the premises will determine whether the property is residential premises for the purposes of subsection 40-35(1). It states that the definition of residential premises 'refers to premises that are designed, built or modified so as to be suitable to be occupied, and capable of being occupied, as a residence or for residential accommodation. This is demonstrated through the physical characteristics of the premises'.

It is the physical characteristics of the property which determines whether it is intended to be occupied, and is capable of being occupied as a residence. The building is a house but for a small sign advising who occupies the property, and the front of the building appears to a regular house. The interior of the building has not had any modifications to make it suitable for use as commercial offices. The kitchen and bathrooms still perform their primary function and there have not been any changes to the layout of the building to adapt it for commercial use.

The property is zoned as rural which permits the property to be utilised as commercial or residential premises.

Paragraphs 44-45 of GSTR 2012/5 provides further guidance on when real property is residential premises, when there are minor fittings done and with the addition of furniture.

Example 9 - the addition of furniture and minor fittings is not sufficient to modify physical characteristics

44. Rebecca is a solicitor. She lives in a terrace house that is not new residential premises, and decides to convert a room at the front of the house into an office for her practice. Rebecca arranges the installation of an electricity point and telephone line for the place in the room where she intends to set-up a printer and facsimile machine. She fits the room out with book shelves, filing cabinets, desk, office chairs, a table for the printer and facsimile machine, and suitable floor coverings. She also has an advertising sign placed outside the front door of her house. Rebecca does not modify any of the other rooms in the house.

45. These changes are not sufficient to modify the physical characteristics of the terrace house into premises other than residential premises to be used predominantly for residential accommodation. The furniture and fittings that Rebecca has brought into the room do not change the physical characteristics of the house itself. Also, the installation of an electricity point and telephone line, and the placement of a sign outside the house, are not sufficient modifications to alter the physical characteristics of the premises so that they are no longer residential premises to be used predominantly for residential accommodation. If Rebecca sells or leases the premises she will be making a wholly input taxed supply under
section 40-65 or section 40-35 respectively.

In Example 9, under paragraph 44 of GSTR 2012/5 illustrates that converting parts of a residence for use as commercial offices does not necessarily result in the essential character of the building changing.

From the information and facts provided, you have not made any modifications or substantial renovations to the house to an extent that your house is no longer residential premises.

Whilst your tenant has added desks and cabinets to the premises the physical characteristics are those of residential premises to be used predominantly for residential accommodation.

Consequently, the lease of the property is input taxed under section 40-35 and the construction costs for the house is not a creditable acquisition as it does not satisfy paragraph 11-5(b).

Accordingly, you are not able to claim input tax credits for the construction costs of the property under section 11-20.